Chinese authorities appear set to dismantle the country's years-old reserve-based crop price support mechanism and move toward a more market-based program designed to allow supply and demand to dictate the crop prices received by farmers. Chinese authorities have used the national stockpiling program as a tool to promote widespread grain production within the country by purchasing crops off farmers at a minimum price and storing those reserves for use as a buffer during periods of output shortages.
But a recent string of comments from well-connected Chinese food policy experts suggests Chinese authorities may soon abandon the reserve program in favour of a more market-oriented system, on the assumption that markets should do a better job than rigid policies of making the country's food production chain more efficient.
And certainly the reserve system has room for improvement. While the stocks purchases promoted high levels of grain production by providing price floors for farmers, they have also fuelled persistent food and feed price inflation for consumers by keeping large portions of supply off the market. Yet by committing to a market-based approach the Chinese authorities are risking introducing more volatility into the food production system rather than less, as farmers could well opt to cut back plantings of certain crops should market values slump below the cost of production, or produce too much of another crop if prices are attractive in the run-up to planting season.
The corn and soybean crops are the most obvious candidates for potential acreage shifts, as Chinese corn planted area hit a record high this year just as soy plantings sunk to a record low. As global benchmark corn values have since fallen to their lowest levels in four years, few producers in China or elsewhere are expected to increase planted area to the crop over the near to medium term, and could well look to cut back on corn sowings should prices stay depressed into next season.
And soybeans are likely to be the chief beneficiary of any such switch, as China is the world's top consumer of that oilseed and spends billions of dollars a year on soy imports. Further, growers there are already fairly adept at raising soybeans, even though they have been steadily reducing the crop's footprint in the major grain belt in favour of corn.
Chinese grain consumers are likely to have mixed feelings about the proposed changes to the crop pricing and inventory scheme. On the one hand, less government intervention via the stockpiling system should mean less competition for crop supplies and a potentially more reliable sourcing environment. Furthermore, any phasing out of the country's stockpiles should have a deflationary effect on crop prices as those reserves are dispersed onto the open market. China's major food and feed staples currently remain sharply above global levels
thanks to the artificial support offered by the stockpiling scheme, but should revert toward the global mean upon any removal of the reserve program. Yet the prospect of substantially lower crop values should also cause consumers concern, especially if Chinese growers have no artificial incentive to maintain production levels whenever market prices slip below the costs of production. The country's soybean production trend provides a telling cautionary tale: Domestic soybean production in China dropped by more than 30 percent over the past decade as growers there were encouraged to switch to more lucrative crops such as corn.
Thanks to abundant soybean surpluses in other regions such as North and South America, Chinese traders were able to bridge the resulting supply shortfall via imports, which jumped nearly 180 percent over the past decade and meet roughly 80-85 percent of China's annual needs.
But while those massive import quantities helped insulate domestic soybean users from the impact of a drop-off in local output, Chinese traders will not be able to repeat that feat in the corn market due to China's far larger corn tonnage requirements. Indeed, China's annual corn usage needs are nearly twice as large as total global corn trade, so Chinese purchasers would struggle to fill any meaningful shortfall in production via the import market.
In fact, China's massive corn needs are a major reason why the country's inventory scheme was established in the first place, and the country's large corn holdings remain a significant safety net for large industrial users of the grain even though local market prices remain above the international average. So, given the potential for a steep drop-off in corn production should the inventory scheme be scrapped, users need to consider whether they will be better off fending for themselves amid a more market-oriented production environment or under the current inflation-causing reserve system.
In any event, all crop users in the country should brace for more crop price volatility as the new plans are charted out and discussed, as even the mere contemplation of an adjustment to such a key component of the Chinese food industry is likely to have widespread repercussions at the market level.