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Updated: China Reformed Domestic Corn Policy, But “Headaches” Persist for U.S.

Wall Street Journal writer Lucy Craymer reported today that, “China’s effort to overhaul its bloated corn sector has sent local prices to their lowest levels in 10 years—and left animal-feed imports from the U.S. more expensive for Chinese livestock farmers.

“China has been trying to auction down its stockpile—the largest in the world—amid the latest step in reforming its agricultural sector: The government this spring scrapped a minimum-price support program for corn started in 2007-08. That program, in which the government bought corn to keep prices above a certain level, had proved so popular that farmers grew more. The stockpile soared, doubling in size between 2009 and now.

The combination—holding weekly auctions of corn and removing a floor for prices—has driven down China’s corn prices in recent months.”

The Journal article noted that, “Beyond China, the changes are pressuring what last year was a more-than $10 billion imported animal-feed market, much of which originates from the U.S. and has been popular with Chinese livestock farmers because it was cheaper than local corn.

“One such U.S. product in particular could suffer: a byproduct from the making of ethanol known as distiller’s dried grains with solubles (DDGS), more than half of whose sales last year were in China. Now U.S.-produced DDGS must compete with the cheaper Chinese corn. Adding to the pressure, DDGS on Sep. 26 was hit by a 33.8% duty by the Chinese government after the U.S. was cited for dumping the product. The U.S. was then slapped with a second tax of between 10% to 10.7% a week later.”

Ms. Craymer added that, “But China’s corn prices, propped up for so many years, still have a long way to drop before they would start to compare to international ones: The most widely traded corn futures contract on the Chicago Board of Trade this week was around US$137 a metric ton—about 34% less than prices for the most-traded Chinese corn contract.

“The prices of corn vary, naturally, according to whether the corn is from a new harvest or from earlier ones, which usually end up as animal feed or ethanol. But a look at prices on China’s Dalian Commodity Exchange shows how much prices have fallen from when the price-support mechanism was abandoned: Last Friday, the most recently available price in China, the January corn contract closed at 1,392 yuan—about $208—a metric ton. That was down 12% from March 29 when the price floor was removed.

“Adding to pressure on the Chinese government: new corn from the 2016 harvest is now entering the market.”

Recall that the United States last month launched a challenge at the World Trade Organization regarding China’s price supports for domestic wheat, corn and rice.

More specifically, Reuters writers Karl Plume and Tom Polansek reported last month that, “U.S. wheat farmers, struggling to make money as prices sink and global supplies swell, could be the main beneficiaries if Washington wins a case it brought last week against China over an estimated $100 billion in domestic grain market supports.

“On Tuesday, U.S. trade officials said they would file a case at the World Trade Organization (WTO) against China over allegations that aggressive pricing supports prompted Chinese farmers to overproduce corn, wheat and rice, fuelling a global crop glut and depressing world prices.”

The Reuters article noted that, “While the U.S. allegations cover corn and rice as well as wheat, China has already reformed its corn policy and rice exports were never a major part of U.S. agricultural income.”

UPDATE: The Wall Street Journal editorial board indicated in an item posted on Thursday evening (“China’s Corn Mountain“) that, “Corn prices in China fell more than 20% in the past year, the result of Beijing’s decision to cancel a major subsidy program. That’s good news for farmers as well as consumers, but Beijing still wastes money by the bushel keeping prices of other grains high.”

The Journal added that, “Beijing got smart in March and switched to a policy of ‘market-oriented purchase and subsidy.’ The market will set the price of corn, and farmers will receive cash payments based on acreage. The price of corn could fall another 30% to the global level.

“The problem of what to do with a mountain of rotting corn remains. State trading companies plan to export some of it, but the U.S. government estimates that China will have to write off $10 billion of spoiled grain.

“The disastrous corn policy shows again that China hurt itself by listening to the alarmism of Malthusian prophet Lester Brown, who periodically claims that China faces famine. The best way to make Chinese agriculture efficient is to expose it to international competition. Next on the chopping block should be wheat and rice support prices that the U.S. claims cost nearly $100 billion more than World Trade Organization rules allow.”