November 3, 2016
by Jeff Wilson
The mountain of unused corn in China is getting a little less massive. After unusual weather damaged crops and the government ended some price supports, the world’s second-largest grower is seeing production plunge by the most in 16 years.
While domestic stockpiles of the grain remain twice as large as five years ago, the harvest probably will shrink 7.3 percent to 208.1 million metric tons, the biggest drop since 2000, according to SGS SA, a researcher hired by Bloomberg to survey farmers in September and October. That’s bigger than the 5.4% decline forecast by the Chinese Ministry of Agriculture on Oct. 10.
Prospects of a smaller crop, along with new processor subsidies, are reviving Chinese prices that slumped to a 10-year low in September. Corn futures on the Dalian Commodity Exchange surged in October to their biggest monthly gain in a decade. But the country still has far more than it needs, forcing the government to shed inventories, and the rest of the world will boost output by 10% this year, leaving global inventories at an all-time high.
“China is slowly getting rid of excessive corn stocks,” and the smaller crop this year will help, Joe Lardy, the research manager at CHS Hedging Inc. in Inver Grove Heights, Minnesota, said last week in a telephone interview. “It’s just not enough. We need to see a greater switch away from corn to other crops.”
Growers in China, where many farms only cover a few acres, produced a record harvest last year and sent prices in Dalian plunging to 1,382 yuan a ton ($5.18 a bushel) on Sept. 30, down 46% from an all-time high of 2,572 yuan in March 2015. This year, key growing regions saw flooding in early July that left soils too wet, followed by seven weeks of dry weather that stunted yields.
“The drought is very serious this year,” said Fu Yanming, 49, who farms 10 mu (1.6 acres) in Balang Town, located in the northeast Jilin province. “I may make no money at all, or even lose money.” Even after increasing his corn acreage by 42% this year, Fu says his output will drop 12% to 11 tons, and the lower prices mean his revenue will be half what it was in 2015.
Of the seven biggest corn-growing provinces, which accounted for 69% of China’s corn crop last year, only two saw higher output in 2016, according to SGS. The firm dispatched five teams of researchers to gather crop data and interview 318 farmers with fields that averaged 2.2 hectares. About 41% of farms in China are less than 1 hectare.
The region was hit by a “sneaky drought,” said Drew Lerner, the president of World Weather Inc. in Overland Park, Kansas.
After torrential rains flooded southern areas in early July, a dry spell moved from Hebei and Henan northeast into Heilongjiang and western Jilin later in the month, and lasted until early September, potentially damaging plants during key growth periods just after pollination, Lerner said.
Some areas received as little as 25% bof normal rain, leaving soils short or very short of moisture starting in the middle of August, he said. Traders may not have noticed the drought because heat never reached extremes and there were periods of light showers, Lerner said.
Farmers surveyed by SGS boosted planting by 0.1% in 2016, which conflicts with the Agriculture Ministry’s estimate on Oct. 10 that acreage fell 5.5%. In March, the government abandoned price-support system for corn in favor of direct payments to farmers. Details of the new program haven’t been announced. The drop in prices and land rental rates may have resulted in lower plantings, Mark Oulton, the SGS global agriculture market research manager, said from Shanghai.
Drought or untimely rain weren’t the only yield busters. Winds from Typhoon Lionrock and bug infestations also caused damage. About 68% of farmers surveyed described weather conditions as bad, up from 30% a year earlier, SGS reported. Severe insect damage more than doubled to 19% as lower prices left farmers with less cash for chemical treatments. When crops face weather stress, the insect losses increase, Oulton said.
Heilongjiang, the top growing region, saw production drop 17%, SGS said. The declines were more than 10% in Hebei, Inner Mongolia and Henan provinces. Farmers in Jilin, the No. 2 producer, reported a gain of 1.3%, while Liaoning improved 6.8%.
The SGS survey has a 95% confidence level, with a margin of error at 5.66%, Oulton said. Last year, SGS surveyed 321 farmers and predicted a 5.8% drop in output that conflicted with the estimated gain of 4.1% reported by the Ministry of Agriculture and the U.S. Department of Agriculture.
As Chinese output drops, domestic consumption shows no sign of slowing, with increases in all but one year over the past three decades, USDA data show. Prices on the Dalian Exchange remain well above the global benchmark traded in the U.S., the world’s top grower and consumer.
The USDA forecasts Chinese demand will rise 3.9% to a record 226 million tons in the year that began Oct. 1, after gaining 7.7% to an all-time high a year earlier. More than 60% is used to feed livestock as higher incomes allow people to eat more meat, and the rest is used to make starches, fuel and food products.
To ensure sufficient supply and to protect farmer incomes, the government had stockpiled grain, including imports, even as rising output created surpluses since 2011. Before this season’s harvest, stockpiles topped 110.7 million tons, the most since 2000, USDA data show. Some analysts estimate supplies are even more abundant. Shanghai JC Intelligence Co. pegged the grain holding at about 250 million tons. China now wants to reduce its inventory, but that got more difficult as plunging prices threatened the livelihood of farmers.
Last month, the government suspended until May its weekly sales of inventories acquired over the past five years, and some provinces announced subsidies to processors. Prices surged 8.8% in October on Dalian to 1,517 yuan a ton, the biggest monthly advance since January 2006. Futures traded at 1,510 yuan on Tuesday.
Still, the government said last month that the country’s annual corn acreage to shrink 12% by 2020 as it encourages farmers to boost sowing of soybeans by 43%. China is the world’s biggest importer of the oilseed. Farmers surveyed by SGS expect to cut plantings 1.6% in 2017 with the biggest cuts expected in Inner Mongolia, Jilin and Henan provinces.
“Farmers are losing the equivalent of about $1 a bushel growing corn, so it’s not unrealistic to think acreage could fall 5% or 6% next year,” said Troy Lust, a senior risk manager for commercial grain at INTL FCStone Inc. in West Des Moines, Iowa, who has been trading with Chinese firms for 18 years. “I’m surprised it took so long for China to change policies. Policies will continue to ebb and flow to maintain farmer incomes while trying to reduce corn stocks.”
--With assistance from Niu Shuping. To contact the reporter on this story: Jeff Wilson in Chicago at [email protected]
© 2016 Bloomberg L.P
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