China may continue to reduce the temporary storage price of corn in 2016 / 17

The Chinese government plans to lower the purchase price of domestic corn for the second year in a row in an effort to boost stagnant demand in the crisis-hit processing industry and drain huge corn stocks, according to industry insiders.

China's corn prices are the most expensive in the world, making it difficult for the domestic processing industry to maintain. The government is preparing to cut corn purchase prices by another 10% to 1800 yuan a tonne, or about $282 a tonne, in 2016. The government had already announced a 10% cut in corn purchase prices for 2015-16 (October to September).

China is the second largest consumer of corn in the world. Processors use corn to produce feed, sweeteners and ethanol. The reduction in the purchase price of corn will also affect the demand for diets such as sorghum, corn dregs and barley. Considering the large inventory and the domestic corn price is still much higher than the import cost, the government needs to lower the corn price, the relevant analysts said.

Industry insiders say the government may also provide freight subsidies to feed processors in the southern sales area that buy corn in the northeast. They did not say when the government would provide subsidies. The government is likely to announce a new purchase price early next year, according to three industry people. Corn sowing in China began in March.

The cut in Chinese corn prices has helped to curb demand from domestic processors for overseas corn, putting pressure on international corn prices. China is the second largest consumer of corn in the world. Analysts say imports of corn and corn substitutes will be lower than we had expected and could be 50% or more lower than last year.

The Chinese government has had to phase out corn harvesting and storage projects because domestic corn stocks could soar to 200m tonnes by April 2016, equivalent to China's annual consumption. The collection and storage program is designed to protect farmers' income, but it has also led to high prices of domestic corn and losses for processors and deep processors. As much as 60% of deep processing capacity has been shut down in the past three years, according to sources.

In September, China lowered its corn purchase price for the first time since 2008. Deep processing enterprises in Northeast China have also received subsidies for the acquisition of domestic corn. These measures help narrow the 20 per cent price gap between domestic and imported corn, but it is still not enough to deplete stocks or encourage feed processors and sweeteners to invest more.

However, at least one company has benefited from the fall in raw material prices. Officials at Dacheng biochemical, Asia's largest corn processing company, said last week that the company had begun to restore idle corn sweetener and lysine production lines. By the end of November, the lysine production plant in Jilin will be at full capacity with an annual capacity of 500000 tons.

But sluggish demand in the aquaculture industry could constrain efforts to boost many corn processors. The stocks of some poultry farmers are recovering from the bird flu epidemic, and the slaughter of pigs in China has depleted their stocks. Analysts say corn demand will not return to a record 120 million tons in 2012 any time soon.