Report Highlights:

The massive surge in imports of cheaper alternative feed ingredients has significantly impacted feed demand for corn in recent years according to official statistics and industry analysts. Post has therefore sharply reduced corn "feed and residual" use for MY 2013/14 through 2015/16. Combined with another record corn crop, post forecasts MY2015/16 ending stocks will reach 117 million tons. The government's recent 10 percent cut in the corn support price should spur domestic corn consumption and reduce demand for imported alternative feed ingredients, such as sorghum. MY2015/16 corn and wheat production are still forecast at a record 225 million tons and 130 million tons respectively. Even after the price cut, domestic corn, wheat and rice prices remain far above international prices.

Executive Summary:

Corn feed and residual is revised lower for MY2013/14, MY2014/15, and MY2015/16 in recognition of the massive surge in imported sorghum, barley, and distillers dried grains with solubles (DDGS). Combined imports of these three commodities reached 25.6 million tons in MY2014/15 as feed mills searched for alternatives to high priced domestic corn. Interviews with experts across the country reveal that this search was more successful than previously reported. Post is has therefore raised the MY2015/16 forecast for ending stocks by over 26 million tons to 117 million tons. This estimate is closer to industry estimates, some of which are as high as 170 million tons.

In response to the increasingly untenable stock situation, the government announced a 10 percent cut in the floor price for corn in September 2015. This is the first time the government has cut the floor price for corn since it was put in place in 2008. The government is also becoming stricter on quality requirements for state purchases, and farmers who can't meet these standards have to sell their corn on the market at a discount. The cut in prices has left farmers struggling to pay high land rents that were set based on the old floor price. The government, faced with increasingly massive corn stocks and rising imports, felt compelled to act despite the impact on farmers. The lower corn prices should help corn feed use recover in MY2015/16 and reduce imports of sorghum and other alternative feed ingredients. As a result, forecast MY2015/16 sorghum imports are lowered four million tons to seven million tons.

Despite the reduced support price, corn remains an attractive option for most growers when compared to alternative crops. Corn, wheat, and rice acreage are all expected to stay relatively stable this planting season. Forecast MY2015/16 corn and wheat production are unchanged at 225 million tons and 130 million tons respectively. Forecast MY2015/16 rice production is lowered slightly to 144.2 million tons on slightly worse expected yields due to weather patterns.

Wheat

Production

MY2015/16 wheat production forecast is unchanged at 130 million tons as government support for wheat remains strong. MY 2014/15 estimated wheat production is also unchanged at 126 million tons.

On October 12th, 2015, the State Administration of Grain announced that the 2016 wheat floor price will remain unchanged at RMB 2,360 per metric ton (roughly twice the MY2015/16 forecast season average price in the United States). This broke a long series of annual increases in the floor price for wheat. Wheat planting is expected to remain strong as the floor price for corn, a competing crop in parts of northern China, was cut by more than ten percent. Farmers often receive prices below the floor price if their product does not meet increasingly strict quality standards, or if they sell their crop outside the set procurement window. The government procurement window varies by province, but generally runs between May 15 and September 30. The average wheat market price dropped to RMB 2,160 right after the government procurement period finished in 2015 as wheat producers competed to sell their crop to processors and dealers. Limits on time and quality for state purchases are gradually making China's wheat price more subject to market forces.

Imports

Forecast MY2015/16 wheat imports are lowered 500,000 tons to two million tons. High domestic production and tight controls on tariff rate quota (TRQ) allotments have limited imports. Estimated MY 2014/15 imports are revised down slightly to 1.89 million tons based on import statistics.

Improving living standards and evolving consumer preferences have increased demand for high quality wheat. Growth in the bakery industry remains strong, driving up demand for specialty flour. Most domestic wheat producers focus on selling in bulk to state reserves rather than satisfying demand for specialty wheat. This has resulted in consistent demand for imported high quality wheat.

Consumption

Total wheat consumption in MY 2015/16 is forecast at 117 million tons, up 500,000 tons, as higher industrial use offsets continued declines in feed use. Wheat feed and residual is forecast to drop to 14 million tons as the recent cut to corn prices is expected to speed up the substitution of corn for wheat in animal feed. Forecast MY 2015/16 food, seed and industrial (FSI) consumption is raised 1.5 million tons to 103 million tons due to increased government subsidies for wheat processors using government stocks.

Estimated MY2014/15 feed and residual is revised down one million tons to 16 million tons on continued weakness in wheat feed use. Domestic wheat prices have generally staid above corn prices since October 2014, limiting demand for feed wheat. MY2014/15 FSI is also revised down 0.5 million tons due to the economic slowdown and weaker the expiration of government subsidies for wheat processors in some provinces. Provincial governments pay subsidies to wheat processors ranging from RMB 10 to 30 per metric ton depending on the province and the processors size and capacity. In addition to direct subsidies, some processors are also able to receive tax credits or loans from local governments. According to industry reports, over half of wheat processors would operate at a loss without these subsidies.

Flour production has been contracting in recent years according to government statistics, and competition between processors has been intense. In 2014, flour processors in China on average made less than RMB 20 per metric ton on flour. While large flour processors have generally been able to stay profitable by taking advantage of economies of scale, many small and medium sized companies have struggled with losses and face possible closure. This is expected to drive increased consolidation in this sector.

Stock

MY2015/16 wheat stocks are forecast at 92.25 million tons on higher production and weakening feed consumption. MY 2014/15 wheat stocks are estimated at 76.25 million tons, up 1.68 million tons due to continued weakness in wheat feeding. Wheat stocks are believed to have grown rapidly following record production in recent years.

Wheat (1,000 tons; 1,000 Ha)

Wheat

2013/2014

2014/2015

2015/2016

Market Begin Year

Jul 2013

Jul 2014

Jul 2015

China

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Area Harvested

24,117

24,117

24,064

24,064

24,150

24,150

Beginning Stocks

53,960

53,960

65,274

65,274

74,567

76,252

Production

121,930

121,930

126,170

126,170

130,000

130,000

MY Imports

6,773

6,773

1,926

1,895

2,500

2,000

TY Imports

6,773

6,773

1,926

1,895

2,500

2,000

TY Imp. from U.S.

3,965

3,900

326

326

0

350

Total Supply

182,663

182,663

193,370

193,339

207,067

208,252

MY Exports

889

889

803

587

1,000

1,000

TY Exports

889

889

803

587

1,000

1,000

Feed and Residual

16,000

16,000

17,000

16,000

15,000

14,000

FSI Consumption

100,500

100,500

101,000

100,500

101,500

103,000

Total Consumption

116,500

116,500

118,000

116,500

116,500

117,000

Ending Stocks

65,274

65,274

74,567

76,252

89,567

90,252

Total Distribution

182,663

182,663

193,370

193,339

207,067

208,252

Yield

5.0558

5.0558

5.2431

5.2431

5.3830

5.3830

Corn

Production

Forecast MY2015/16 corn production is unchanged at a record 225 million tons. Estimated MY2014/15 production is revised up 1.3 million tons to 217 million tons due to slight higher yields and increased acreage. Farmers have aggressively expanded corn production in response to corn support prices that are roughly double the U.S. corn price and subsidy reforms that made cotton and soybeans less profitable. The support policies have also had the side effect of encouraging heavy utilization of chemical fertilizers and discouraging crop rotations.

High prices have boosted production and suppressed demand, resulting in excess stocks. The government responded to this challenge by announcing on September 18, 2015 that it will cut the support price for corn to RMB 2,000 per metric ton. This is the first time the floor price for corn has been reduced since it was first instituted in 2008 at RMB 1,500 per ton. In MY2014/15 the support price reached a historical peak of RMB 2,250. The lower floor price is having a significant impact on farmers and will reportedly cause some farmers to operate at a loss, particularly small farmers and farmers who rented land based on the higher support price.

The State Administration of Grain has also tightened quality requirements for state purchases. Industry experts expect the State Administration of Grain to purchase at most 40 to 50 million tons of corn during the MY 2015/16 procurement period running from November 1, 2015 to April 30, 2016. This is roughly half of what they purchased last year. Corn that cannot be sold to the government has to be discounted and sold directly to local mills or dealers at a market driven price. High corn supplies and tighter quality controls pushed the market price for corn in October 2015 down to RMB 1,760 per ton in some locations.

While corn growers are frustrated by the lowered floor price, corn remains an attractive option for most growers when compared to alternative crops. The return on corn is still roughly RMB 1,600 per hectare higher than for soybeans even after the corn price was cut. As a result, corn acreage is not expected to go down in MY 2015/16.

Consumption

High domestic corn prices in recent years have caused feed mills to search aggressively for alternative feed ingredients. This has led to a surge in imports of sorghum, barley, DDGS, and other alternative feed ingredients over the last three years. As a result, corn feed consumption has fallen in recent years as reported by the China National Grain and Oils Information Center (CNGOIC) under the State Administration of Grain. These statistics do not include wastage or losses (residual). Industry reports also support lower corn feed use.

CNGOIC Estimates

MY12/13

MY13/14

MY14/15

MY15/16

Corn feed use (million tons)

112.5

111.5

100

106

Percent change

-1%

-10%

6%

In order to better reflect the drop in corn feed use, feed and residual is revised lower for three marketing years. MY 2013/14 corn feed and residual is revised down four million tons to 150 million tons; MY 2014/15 feed and residual is revised down 17 million tons to 140 million tons, and; forecast MY2015/16 feed and residual is revised down eight million tons to 149 million tons. The forecast recovery in feed and residual in MY2015/16 is a result of falling domestic corn prices. The Chinese swine industry, helped by lower corn prices and higher pork prices, is also forecast to recover slightly in MY 2015/16 despite the economic slowdown.

Corn Feed and Residual Revision

2013/14

2014/15

2015/16 (Forecast)

USDA Official Feed and Residual

154,000

157,000

157,000

Adjustment

-4,000

-17,000

-8,000

Adjusted Feed and Residual

150,000

140,000

149,000

The Chinese government, in an attempt to meet self-sufficiency targets, has intervened extensively in grain production, pricing and trade. The main method the government has used to maintain grain production is through a floor price, which is designed to ensure famer's income by supporting grain prices when the market prices drop below a certain level (floor). The government had, until this year, steadily increased the floor prices for corn and wheat every year despite falling international prices. This policy has resulted in excess production and growing imports over the past five years.

Corn imports have been restricted by measures limiting the issuance and use of tariff-rate quotas and by China's slow biotechnology approval process. Faced with limited access to imported corn and high domestic corn prices, feed mills chose to instead import alternative feed grains. Combined imports of barley, sorghum, and DDGS skyrocketed from 5.6 million tons in MY2012/13 to 25.6 million tons in MY2014/15. Domestic industry analysts report that these imports have had a major impact on the feed corn market.

Alternative feed Import

MY2012/13

MY2013/14

MY2014/15

MY2015/16 (Forecast)

Sorghum

630

4,160

10,162

7,000

Barley

2,183

4,890

9,859

6,500

DDGS

2,832

6,648

5,612

5,000

Total

5,645

15,698

25,633

18,500

Industrial use is revised higher for MY2015/16 and MY2014/15 as the government is increasing subsidies to corn processors to dispose of excess corn stocks. As a result, forecast MY2015/16 FSI consumption is raised two million tons to 64 million tons and estimated MY2014/15 FSI is raised two million tons to 62 million tons. Provinces in the northeast have issued new policies that further raise increase the amount and duration of subsidies to corn processors in order to help dispose of excess reserves. Jilin, Heilongjiang, and Inner Mongolia have raised the direct cash subsidy to processors to $25 to $55 per ton from the existing subsidy of $24 to $32 dollar per ton if the corn is purchased from state grain auctions. The eligible period was also extended to December 31, 2015 from October 31, 2015. Industry experts expect the program to be extended again next year.

Imports

Forecast MY2015/16 corn imports are unchanged at 3 million tons, only slightly higher than the private-sector TRQ allotment. MY 2014/15 imports are estimated at 5.7 million tons, also unchanged, three quarters of which came from Ukraine. Falling corn prices and excess domestic stocks are expected to limit corn imports next year.

Stocks

The historical revisions to feed and residual statistics discussed above have led post to raise the MY2015/16 ending stocks forecast by 26.34 million tons to 116.95 million tons. There are no public official statistics on stocks. Some industry estimates of ending stocks are as high as 170 million tons. However, there are also widespread reports that a portion of current corn stocks suffer from significant mold damage. There are also reports of some unofficial sales or withdrawals from state reserves, although it's unclear how widespread this was. MY 2014/15 ending stocks and MY2013/14 endings stocks are revised upward to 102 million tons and 81.3 million tons respectively, also due to historical revisions in feed and residual.

While stocks are forecast to continue to rise in MY2015/16, the speed of the increase is expected to slow. Stocks may plateau or begin to gradually fall in MY2016/17 if the government allows corn prices to continue to fall and sustains subsidies for corn consumption. The government has been increasing investments in storage capacity to deal with the high stock levels, although storage capacity remains tight. This has caused the government to limit reserve purchases by more strictly enforcing quality requirements, which has in turn caused corn prices to fall more rapidly.

Corn (1,000 tons; 1,000 Ha)

Corn

2013/2014

2014/2015

2015/2016

Market Begin Year

Oct 2013

Oct 2014

Oct 2015

China

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Area Harvested

36,318

36,318

37,070

37,100

37,850

37,850

Beginning Stocks

67,570

67,570

77,315

81,315

81,660

102,000

Production

218,490

218,490

215,670

217,000

225,000

225,000

MY Imports

3,277

3,277

5,700

5,700

3,000

3,000

TY Imports

3,277

3,277

5,700

5,700

3,000

3,000

TY Imp. from U.S.

2,386

0

0

466

0

70

Total Supply

289,337

289,337

298,685

304,015

309,660

330,000

MY Exports

22

22

25

15

50

50

TY Exports

22

22

25

15

50

50

Feed and Residual

154,000

150,000

157,000

140,000

157,000

149,000

FSI Consumption

58,000

58,000

60,000

62,000

62,000

64,000

Total Consumption

212,000

208,000

217,000

202,000

219,000

213,000

Ending Stocks

77,315

81,315

81,660

102,000

90,610

116,950

Total Distribution

289,337

289,337

298,685

304,015

309,660

330,000

Yield

6.0160

6.0160

5.8179

5.8491

5.9400

5.9445

Rice

Production

Forecast MY2015/16 rough rice production is revised slightly lower to 206 million tons due to less optimistic yield projections. Industry analysts expect rice yields to be negatively impacted by El Nino weather, with the potential for both droughts and flooding in rice growing regions in southern and central China. Estimated MY 2014/15 rice production is unchanged at 206.4 million tons. The government is paying RMB 2,700 per metric ton for indicia rice and RMB 3,100 per metric ton for japonica rice in 2015, unchanged from 2014. The 2015 government procurement period starts October 10, 2015 and ends February 29, 2016.

Imports

Forecast MY 2015/16 imports are unchanged at 4.7 million tons. Imports are expected to remain competitive due to domestic prices in China. MY2014/15 imports are estimated unchanged at 4.3 million tons based on exporter statistics. Vietnam and Thailand are still the main exporters of rice to China due to their competitive prices and short distance to China. The Thai government has also been actively promoting rice exports to China. Rice imports from Pakistan also rose rapidly in 2015. The United States does not yet have market access for rice to China.

Consumption

Forecast MY2015/16 consumption is revised slightly lower to 150 million tons. High prices, inconsistent quality of state rice reserves, and changing consumption patterns have all contributed to sluggish consumption growth. CNGOIC forecasts that industrial and feed demand will decline 9 and 4 percent respectively in MY2015/16, and that food demand will decline by 2 percent. MY 2014/15 consumption is also revised down 1.4 million tons to 147 million tons for the reasons mentioned above. High prices and mixed quality resulted in lower feed use in MY2014/15. The poor quality of state reserves has also meant that the government has had trouble finding buyers for state reserves when competitively priced imported rice is available on the market.

Stocks

Forecast MY2015/16 and MY2014/15 ending stocks are revised up 1.4 million tons and 1.1 million tons respectively on lower consumption. State silos have struggled to find buyers due to high prices and inconsistent quality, making it difficult for them to unload stocks. Despite these challenges, there are no reports or indications that the State Administration of Grain plans to reduce prices in upcoming auctions.

Rice (1,000 tons; 1,000 Ha)

Rice, Milled

2013/2014

2014/2015

2015/2016

Market Begin Year

Jul 2013

Jul 2014

Jul 2015

China

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Area Harvested

30,312

30,312

30,310

30,310

30,350

30,200

Beginning Stocks

46,826

46,826

46,811

46,811

46,800

48,200

Milled Production

142,530

142,530

144,500

144,500

145,500

144,200

Rough Production

203,614

203,614

206,429

206,429

207,857

206,000

Milling Rate (.9999)

7,000

7,000

7,000

7,000

7,000

7,000

MY Imports

4,015

4,015

4,315

4,315

4,700

4,700

TY Imports

4,168

4,168

4,500

4,500

4,700

4,700

TY Imp. from U.S.

0

0

0

0

0

0

Total Supply

193,371

193,371

195,626

195,626

197,000

197,100

MY Exports

260

260

426

426

400

400

TY Exports

393

393

400

400

400

400

Consumption and Residual

146,300

146,300

148,400

147,000

151,000

150,000

Ending Stocks

46,811

46,811

46,800

48,200

45,600

46,700

Total Distribution

193,371

193,371

195,626

195,626

197,000

197,100

Yield (Rough)

6.7173

6.7173

6.8106

6.8106

6.8487

6.8212

Sorghum

Production

MY2015/16 sorghum production is forecast unchanged at 2.6 million tons, as the drop in corn prices is expected to help stabilize sorghum acreage. MY2014/15 sorghum production is revised down slightly to 2.5 million tons, down 0.1 million tons from USDA estimate due to heavy competition from imports. Sorghum production receives little government support, making it less attractive to farmers. Sorghum production is concentrated in the northeast and Inner Mongolia.

Imports

MY2015/16 sorghum imports are forecast to fall to seven million tons. Falling corn prices are expected to sharply reduce demand for alternative feed ingredients, including sorghum barley, and DDGS. Estimated MY2014/15 sorghum imports are unchanged at 10 million tons.

Sorghum is not subject to TRQ restrictions and does not face biotechnology related trade barriers, making it possible to trade relatively freely. However, the government added sorghum, barley, tapioca and DDGS into its Automatic Import License (AIL) Catalogue effective September 1, 2015. All importers who import these four commodities must renew their automatic import license if they have one. For the importers who do not have an AIL, the application process is becoming more complicated and time consuming. The majority of importers renewed their licenses by the end of October 2015.

Large amounts of sorghum and barley shipments have arrived in Chinese ports as new crop contracts are fulfilled, causing both barley and sorghum imports to reach one million metric tons respectively in September 2015 alone. Many importers are holding very high levels of stocks and are struggling to cope with the rapid drop in corn prices. Chinese feed buyer are carefully watching the market and slowing down their procurements schedule for the next year, waiting to see if corn prices fall farther.

Consumption

MY 2015/16 consumption is forecast sharply lower at seven million tons as feed use drops in the face of falling corn prices. Food and industrial consumption is expected to remain flat due to weak demand for traditional sorghum based spirits (bai jiu). Biofuel producers currently favor importing cassava over sorghum as a feedstock, limiting growth in industrial consumption.

Stocks

Forecast MY 2015/16 ending stocks are revised up 100,000 metric tons to 626,000 metric tons as feed demand slows due to falling corn prices. Estimated MY2014/15 ending stocks are revised down 100,000 metric tons to 251,000 tons as feed mills quickly consumed relatively cheap sorghum prior to the fall in corn prices.

Distillers Dried Grains with Solubles (DDGS)

Chinese media, such as Sina Finance, China Feed Info and China livestock forum, have reported that Chinese ethanol producers are rumored to have recently petitioned the Ministry of Commerce for anti-dumping (AD) and countervailing duties (CVD) against U.S. DDGS. As of this time the Ministry of Commerce has not issued any official announcement regarding any such potential case and the U.S. Embassy has not received any notification from the Ministry of Commerce regarding any such potential or existing case. In China there is no specific deadline for the Ministry of Commerce to respond to an industry AD or CVD petition.

Sorghum (1,000 tons; 1,000 Ha)

Sorghum

2013/2014

2014/2015

2015/2016

Market Begin Year

Oct 2013

Oct 2014

Oct 2015

China

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Area Harvested

650

650

610

590

610

610

Beginning Stocks

326

326

376

376

351

251

Production

2,700

2,700

2,600

2,500

2,600

2,600

MY Imports

4,161

4,161

10,000

10,000

11,000

7,000

TY Imports

4,161

4,161

10,000

10,000

11,000

7,000

TY Imp. from U.S.

4,879

4,879

0

8,000

0

6,000

Total Supply

7,187

7,187

12,976

12,876

13,951

9,851

MY Exports

11

11

25

25

25

25

TY Exports

11

11

25

25

25

25

Feed and Residual

4,800

4,800

10,500

10,500

11,200

7,000

FSI Consumption

2,000

2,000

2,100

2,100

2,200

2,200

Total Consumption

6,800

6,800

12,600

12,600

13,400

9,200

Ending Stocks

376

376

351

251

526

626

Total Distribution

7,187

7,187

12,976

12,876

13,951

9,851

Yield

4.1538

4.1538

4.2623

4.2373

4.2623

4.2623