Report Highlights:

Corn and rice production are forecast to reach record levels at 226 and 209 million tons in MY 2015/16 respectively. MY 2015/16 wheat production is forecast at a near record 125 million tons. If realized, this will boost China's combined output of these grains to a massive 560 million tons, making it once again the world's largest combined producer of these grains. The record production is the result of high government set prices and subsidies, and has resulted in excess stocks and large fiscal and environmental costs. Imports of corn, wheat and rice are forecast to stay low due to ample domestic production and excess stocks, while imports of lower cost alternative feed imports, such as sorghum, barley, and distiller's dried grains with solubles (DDGS) are expected to continue to expand. Sorghum imports are estimated to have more than doubled in MY 2014/15, with the United States as the largest supplier.

Executive Summary:

Corn and rice production are forecast to reach record levels at 226 and 209 million tons in MY 2015/16 respectively. MY 2015/16 wheat production is forecast at a near record 125 million tons. If realized, this will boost China's combined output of these grains to a massive 560 million tons, making it once again the world's largest combined producer of these grains. The record production is the result of high government set prices and subsidies, and has resulted in excess stocks and large fiscal and environmental costs.

The largest production increase is expected to happen in corn, which is forecast to increase by10.5 million tons in MY 2015/16. Corn area is forecast to grow by two percent as farmers exit soybeans and cotton, both undergoing trial subsidy reform, and instead plant corn to take advantage of high support prices. In contrast, production of sorghum and barley, which receive much less government support, are expected to decline slightly.

Growth in corn feed and residual is expected to slow along with slowing animal production and as feed mills search for lower cost alternatives. Historical wheat consumption statistics are revised based on official statistics and industry reports which suggest a large drop off in wheat feed use in MY 2014/15, although this is balanced by higher food and industrial consumption. Barley and sorghum consumption are forecast to rise in MY 2015/16 on strong demand for lower cost feed ingredients.

Imports of corn, wheat and rice are forecast to stay low due to ample domestic production and excess stocks. Imports of these grains are further weighed down by a change in China's tariff rate quota (TRQ) policy. For the first time, the government is requiring importers purchase these grains from state reserves before they can receive an import quota this year. TRQ fill rates have generally remained below 50 percent. Imports of lower cost alternative feed imports such as sorghum, barley, and DDGS are expected to continue to expand due to demand for lower cost feed ingredients. Sorghum imports are estimated to have more than doubled in MY 2014/15, with the United States as the largest supplier.

Corn and rice ending stocks are both forecast to increase in MY 2015/16, with corn stocks forecast to reach nearly 89 million tons. The government has tried to auction off excess corn stocks, but there have been few buyers due to high prices and inconsistent quality. The temporary reserve price for corn in China is currently around $9.20 per bushel, compared to a season average farm price of $3.55 to $3.85 per bushel for corn in the United States in MY 2014/15. Corn purchased by the state reserves in MY 2014/15 is reported to have higher than average mold content, and there have been media reports of mismanagement of state grain reserves. The government is looking into ways to draw down excessive state reserves, including subsidies to end users and increased supervision of imports.

Wheat

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

24,100

24,100

24,100

Beginning Stocks

53,960

53,960

60,274

44,312

39,976

Production

121,930

121,930

126,000

126,164

125,000

MY Imports

6,773

6,773

1,500

1,100

1,200

TY Imports

6,773

6,773

1,500

1,100

1,200

TY Imp. from U.S.

3,900

4,220

0

140

150

Total Supply

182,663

182,663

187,774

171,576

166,176

MY Exports

889

651

1,000

1,000

1,000

TY Exports

889

651

1,000

1,000

1,000

Feed and Residual

21,000

21,000

23,000

15,000

14,500

FSI Consumption

100,500

116,700

101,000

115,600

115,000

Total Consumption

121,500

137,700

124,000

130,600

129,500

Ending Stocks

60,274

44,312

62,774

39,976

35,676

Total Distribution

182,663

182,663

187,774

171,576

166,176

Yield

5.06

5.06

5.23

5.24

5.19

Production

MY 2015/16 wheat production is forecast to decline slightly to a near record 125 million tons on flat acreage and average yields. The government continues to provide large subsidies to this key crop, including a minimum purchase price (2,360 RMB per ton in 2015) as well as seed and machinery subsidies. However, margins for some alternative crops still exceed those for wheat in parts of the country and wheat acreage is not expected to expand.

MY 2014/15 wheat production is estimated at 126,164 million tons based on official statistics. A survey conducted by the Ministry of Agriculture (MOA) in March 2015 found yields to be 3.4 percent higher than the previous year due to favorable weather.

Consumption

Wheat consumption in MY 2015/16 is forecast to contract slightly to 129.5 million tons on weakening industrial and feed demand as a result of the economic slowdown. The China National Grain and Oils Information Center (CNGOIC) estimates that industrial wheat consumption, which includes liquor, ethanol, maltose, and soy sauce production among other products, will drop 1.3 million tons in MY 2014/15. The slight dip in consumption is likely to be temporary, and wheat demand is expected to grow as China continues to develop and urbanize. Approximately 250 million rural residents are expected to move to cities over the next several decades as this trend continues and as the government carries out planned reforms to the Hukou residence system. In particular, demand for premium quality and specialty wheat is expected to remain strong in 2015/16 MY and to continue to grow as consumers demand more high end and specialty products.

MY 2015/16 wheat feed consumption is forecast at 14.5 million tons, down 500,000 tons from MY 2014/15. Industry sources report the use of wheat in feed has been limited over the past two years as wheat has become more expensive than corn. Other feed ingredients, such as imported DDGS and sorghum are even cheaper. High levels of corn stocks are expected to keep driving corn prices further below wheat prices, limiting wheat feed use in the near future.

Estimated MY 2013/14 and 2014/15 food, seed and industrial consumption are revised upwards substantially to 116.7 and 115.6 million tons respectively based on CNGOIC consumption estimates. MY 2014/15 feed and residual consumption is revised down 8 million tons, also on official statistics. The lower feed and residual statistic is consistent with reports from industry sources that suggest a substantial drop off in wheat feed use in MY 2014/15. These historical revisions increase estimated overall wheat consumption and lower stocks. The stocks to use ratio, while lowered, is still forecast to remain above the world average.

Trade

MY 2015/16 wheat imports are forecast at 1.2 million tons, up 100,000 tons from 2014/15 on higher demand for premium quality wheat. The Chinese government still pays a flat price for all average quality wheat regardless of protein level and the wheat is generally mixed together, resulting in inconsistent quality. Therefore, imports play an important role in servicing demand for premium quality and specialty wheat. The government is expected to tightly restrict overall wheat imports in MY 2014/15 and 2015/16 as production and stocks remain high. Wheat imports are still limited by a 9.64 million ton TRQ, of which only 10 percent are allocated to the private sector. In some years the government has used public sector quotas to import wheat for feed use, but it is not expected to do so in 2015 or 2016 due to high corn stocks. The new policy of making private sector quota allocations predicated on purchases of grain from state reserves is also making it more difficult and expensive to import wheat.

Estimated MY 2014/15 wheat imports are revised down 400,000 tons to 1.1 million tons on import trends, government restrictions on the issuance of public and private sector TRQs, and lower feed use. Domestic wheat production and stocks are ample for food use, and the government is prioritizing the use of corn for feed.

The United States is the largest supplier of wheat to China, followed by Australia and Canada. However, trade contacts report that strict inspection and quarantine measures for Tilletia controversa (TCK ) and Karnal bunt (KB) continue to discourage imports of U.S. winter wheat varieties from affected areas. In 2004 the Ministry of Health implemented a requirement limiting mycotoxin deoxynivalenol (DON) levels in wheat to 1.0 part per million (ppm). This is one of the strictest standards in the world and the tightest requirement among Asian markets.

Exports are forecast to remain stable at one million tons in MY 2015/16. Traditional export destinations include North Korea, South Korea, and Hong Kong.

Marketing

Since 2004, domestic wheat production has been purchased and stored by state grain companies under the government's minimum purchase price program. The minimum procurement price for non-durum wheat increased to 2,360 RMB in 2014, up 120 RMB/ton from 2013. This equals roughly $10.35 per bushel at current exchange rates, compared to an average season farm price of $6 to $6.10 per bushel in the United States in MY 2014/15. For the first time in recent years, the government chose not to raise the wheat procurement price in 2015. Farmers are not expected to increase wheat planting given flat prices and rising production costs.

China committed to a 9.64 million TRQ, with an in-quota tariff of one percent. However, Only 10 percent of the TRQ is allocated to non-state trading enterprise (STE) participants. The public sector portion of the TRQ is tightly controlled by the government and large portions of it often go unfilled.

Stocks

Wheat stocks are forecast to decline by 3.3 million tons in MY2015/16 to 35.7 million tons as the government restricts imports in order to draw down large state reserves. MY 2014/15 and MY 2013/14 ending stocks are revised downward due to historical revisions to consumption based on CNGOIC estimates.

Corn

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

37,000

37,000

37,700

Beginning Stocks

67,570

67,570

77,315

77,257

79,737

Production

218,490

218,490

215,500

215,500

226,000

MY Imports

3,277

3,277

3,000

3,000

3,000

TY Imports

3,277

3,277

3,000

3,000

3,000

TY Imp. from U.S.

2,386

2,386

0

103

100

Total Supply

289,337

289,337

295,815

295,757

308,737

MY Exports

22

80

100

20

20

TY Exports

22

80

100

20

20

Feed and Residual

154,000

154,000

158,000

158,000

160,000

FSI Consumption

58,000

58,000

58,000

58,000

60,000

Total Consumption

212,000

212,000

216,000

216,000

220,000

Ending Stocks

77,315

77,257

79,715

79,737

88,717

Total Distribution

289,337

289,337

295,815

295,757

308,737

Yield

6.02

6.02

5.82

5.82

5.99

Production

MY 2015/16 corn production is forecast to reach a record 226 million tons based on average yields and a two percent expansion in acreage. Trial subsidy reforms in cotton and soybeans have resulted large numbers of farmers cutting acreage in these crops in favor of high government guaranteed prices for corn. The forecast expansion in acreage is supported by the latest government conducted survey of planting intentions, which also showed a roughly two percent increase in acreage.

While there is some continued dryness in Northeast corn production areas, yields are still forecast to return to average in MY 2015/16. MY 2014/15 production is estimated unchanged at 215.5 million tons, down three million tons from MY 2013/14 due to a moderate drought in the Northeast. Continued planting of corn after corn with limited crop rotation has resulted in degraded soil and increased pest pressure in parts of China, although farmers have so far been able to compensate for this by heavy use of chemical fertilizers and pesticides.

The government has announced it will continue its temporary reserve program for corn, which has boosted domestic prices above international levels and led to excess government reserves. There has been discussion in China of dropping the temporary reserve program for corn in favor of the target price system currently being tested on cotton and soybeans. However, government sources report that the target price pilot program has been very expensive and difficult to administer, and that it will be difficult to apply this system to corn. The current subsidy system for corn is not likely to change within the next two to three years.

Feed and Residual

MY 2015/16 feed and residual is forecast at 160 million tons, up two million tons from MY 2014/15, as feed demand slows. High feed costs and a slowing economy have hurt meat production and demand. Meat demand is not expected to undergo a strong recovery until 2016. Industry experts report that the market slowdown is driving smaller inefficient meat producers out of business, reinforcing the trend in the meat industry towards large integrated producers.

The Ministry of Agriculture reported CY 2014 industrial feed production at 191.5 million tons, down one percent from the previous year due to lower compound and concentrate feed production. Swine and poultry producers have responded to rising production costs by turning to lower cost feed premixes in recent years. Institutional producers normally use compound feed, while smaller household operations typically utilize concentrate.

Feed Production in China by Type (million tons)

Total

Compound

Concentrate

Premix

2009

148

115

26.9

5.9

2010

162

130

26.5

5.8

2011

181

149

25.4

6.1

2012

194

164

24.7

6.2

2013

193

163

24

6.3

2014

192

161

24

6.3

Growth % in 2011

11.5%

15.0%

-4.0%

4.5%

Growth % in 2012

7.7%

9.7%

-3.0%

2.4%

Growth % in 2013

-1.8%

-1.2%

-6.8%

1.7%

Growth % in 2014

-1.0%

-1.2%

0.1%

-0.6%

Source: Ministry of Agriculture

Food, Seed and Industrial Use

MY 2015/16 food, seed and industrial (FSI) use is forecast at 60 million tons, up roughly two percent from the previous year on higher industrial use. After two years of depression in the corn industrial market, business margins are starting to improve. Corn prices have started to fall and the central and local governments have introduced new subsidies for industrial corn use to address excess corn stocks. According to industry reports, corn processors with a capacity of more than 100,000 tons per year will be offered a 200 yuan ($32) per ton subsidy. Policy makers are discussing promoting industrial corn use as a way to address excess government stocks, particularly those stocks that have mold damage or that are otherwise unfit for food or feed consumption.

Estimated MY 2014/15 FSI consumption is unchanged at 58 million tons. High corn prices and weak profits for industrial corn users have suppressed FSI consumption, although as discussed above this dynamic is beginning to change.

Trade

MY 2015/16 corn imports are forecast to remain flat at three million tons. High domestic corn stocks have caused the government to promote the consumption of domestic corn and to restrict imports. Estimated MY 2014/15 corn imports are unchanged at three million tons. As part of its effort to promote domestic corn consumption, the government increased the subsidy for qualified end users in southern coastal provinces to purchase corn (and rice) from the northeast to 220 yuan in MY 2014/15 from 150 yuan in 2013/14. This program is currently set to expire in June 2015.

Although China granted import approval for Syngenta Agrisure Viptera (MIR 162) in December 2014, importers continue to worry about the risk of biotech-related trade disruptions. Currently very few exporters or imports are willing to accept the financial risk of a corn shipment being rejected due to unapproved biotech traits. As a result, most importers are currently sourcing corn from Ukraine despite higher costs and less consistent quality. U.S. corn exports to China are not likely to recover significantly in 2015/16 due to high domestic stocks and the perceived risk of importing U.S. corn.

The move away from the United States as China's main supplier of imported corn is consistent with the government's strategy to "optimize import sources" by diversifying suppliers. Quarantine officials have reportedly made it a priority to complete import protocols with alternative suppliers of key products. Chile, Germany, and Myanmar were recently added as countries eligible to export corn to China.

Countries Allowed to Export Grains to China (new additions in bold)

Wheat

Australia, Canada, France, Kazakhstan, Hungary, United Kingdom, United States, Serbia, Mongolia, Denmark, Mexico, Israel

Corn

Thailand, United States, Peru, Laos, Argentina, Ukraine,Bulgaria and Brazil, Chile, Germany, Myanmar

Barley

Australia, Canada, Denmark, France and Argentina,Mongolia and Ukraine, Finland

Source: AQSIQ Official Notice updated in Apr 26, 2014

Marketing

The government raised the temporary reserve program price for corn in September 2014 to 2,250 RMB per ton. Corn prices in Heilongjiang, Jilin, Liaoning, and Inner Mongolia are still high at around 2260 RMB per ton. MY 2014/15 temporary reserve purchases in northeast China have already reached 131 million tons according to CNGOIC, up 8.7 million tons from MY 2013/14.

Corn prices rose in early 2015, primarily as a result of large scale purchases by SinoGrain. This grain is then re-auctioned to the public, but sales have been low. While this drove up prices in production areas in the Northeast, prices in Southeast China remained flat due to competition from lower priced imported sorghum as an alternative feed. If the government is to successfully reduce excess stocks, it will likely need to either increase subsidies for end users or allow prices to fall.

Industry sources report higher than normal levels of mold damage and aflatoxin in corn purchased by the government in MY 2014/15. According to industry reports, corn with mold content between 5 and 20 percent will undergo further testing before being sold to feed mills, while corn with mold content exceeding 20 percent will be used for ethanol production. Provincial governments are looking at investing in equipment to separate out moldy kernels and are reportedly considering subsidizing the sale of moldy corn.

Stocks

Record forecast production in MY 2015/16 and slowing consumption growth are expected to drive MY 2015/16 ending stocks up to almost 89 million tons, equivalent to approximately forty percent of consumption. The continued growth in corn stocks is straining government storage facilities. The buildup in stocks is also making it difficult to rotate stocks, and inadequate and antiquated storage facilities are leading to deteriorating quality. Adding to these challenges, there have been reports of corruption and mismanagement at SinoGrain, a state owned company charged with managing government reserves.

The government has tried to auction off excess corn stocks, but there have been few buyers due to high prices and inconsistent quality. Recent auctions have had a closing rate of only seven percent despite the change in TRQ policy to require importers to first purchase from state reserves.

Rice

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

30,310

Beginning Stocks

46,826

46,826

46,814

46,699

47,099

Milled Production

142,530

142,530

144,500

144,500

146,300

Rough Production

203,614

203,614

206,429

206,429

209,000

Milling Rate (.9999)

7,000

7,000

7,000

7,000

7,000

MY Imports

4,015

3,900

4,400

4,300

4,300

TY Imports

4,168

3,800

4,500

4,200

4,200

TY Imp. from U.S.

0

0

0

0

0

Total Supply

193,371

193,256

195,714

195,499

197,699

MY Exports

257

257

400

400

350

TY Exports

393

300

400

400

350

Consumption and Residual

146,300

146,300

148,400

148,000

151,000

Ending Stocks

46,814

46,699

46,914

47,099

46,349

Total Distribution

193,371

193,256

195,714

195,499

196,649

Yield (Rough)

6.72

6.72

6.81

6.81

6.89

Production

MY 2015/16 rough rice production is forecast at 209 million tons, up slightly from MY 2014/15 as the government continues to prioritize and support rice production as part of its food security strategy. Estimated MY 2014/15 rough rice production is unchanged at 206 million tons on average yields and stable area. While the rice crop in parts of Anhui province was damaged by rice blast, this is not expected to significantly impact overall rice production.

Consumption

MY 2015/16 consumption is forecast to rise two percent to reach 151 million tons due to population growth and increased industrial consumption. Estimated MY 2013/14 consumption is unchanged at 148 million tons.

Trade

Rice imports are forecast to remain stable in MY 2015/16. The government has increased enforcement efforts in southwest China to crackdown on smuggled rice. At the same time, affluent consumers are increasingly seeking high quality imported rice in response to reports of heavy metals and high pesticide residues in some locally produced rice. The government continues to closely regulate and monitor rice imports as part of its food security strategy to maintain self-sufficiency in this politically sensitive crop.

Estimated MY 2014/15 rice imports are lowered 100,000 tons on import trends. High government support prices keep domestic rice prices above those of neighboring Thailand, Vietnam and Pakistan. However, the government has tightened TRQ controls in an attempt to protect domestic farmers from cheaper imports, including preventing the TRQ for japonica rice to be used to import less expensive indica rice.

Marketing

China is the world's largest producer and consumer of rice, and rice accounts for more than a third of China's total grain production. The government continued to provide a floor price for japonica and indica rice in major producing provinces in MY 2014/15 to encourage production. Rice purchased under the floor price will be auctioned later in the marketing year. Industry contacts report that japonica rice purchases under the program totaled 10.5 million tons in MY 2014/15, or 20.36 percent of total output. The government is offering end users in southern coastal provinces a 140 RMB per ton subsidy to purchase rice (and corn) from the northeast. However, according to industry reports this subsidy will be halted later this year due to the diminishing competitiveness of North-East indica rice.

Stocks

MY 2015/16 rice ending stocks are forecast at 46.3 million tons, down a half million tons from MY 2014/15 as consumption continues to expand and the government takes steps to control imports. MY 2014/15 ending stocks are unchanged at 47 million tons. Storage capacity in major rice producing provinces, such as Heilongjiang (for japonica) and Hunan (for indica), are reportedly near capacity with government purchases under the price support program.

Barley

Barley China

2013/2014

2014/2015

2015/2016

Market Begin Year

Oct-13

Oct 2014

Oct-15

China

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Area Harvested

450

450

450

440

420

Beginning Stocks

343

343

434

413

413

Production

1,500

1,500

1,550

1,500

1,400

MY Imports

4,891

4,891

6,000

6,000

7,000

TY Imports

4,891

4,891

6,000

6,000

7,000

TY Imp. from U.S.

0

0

0

3

0

Total Supply

6,734

6,734

7,984

7,913

8,813

MY Exports

0

0

0

0

0

TY Exports

0

0

0

0

0

Feed and Residual

2,400

2,400

3,500

3,500

4,200

FSI Consumption

3,900

3,900

4,100

4,000

4,200

Total Consumption

6,300

6,300

7,600

7,500

8,400

Ending Stocks

434

434

384

413

413

Total Distribution

6,734

6,734

7,984

7,913

8,965

Yield

3.33

3.33

3.44

3.41

3.33

Production

China's MY 2015/16 barley production is forecast to decline to 1.4 million tons on lower acreage. Estimated MY 2014/15 barley production is revised down slightly to 1.5 million tons based on official estimates showing lower acreage and production in Jiangsu province. Unlike corn, wheat and rice, barley does not receive significant government support or subsidies. As a result, farmers in some provinces, such as Jiangsu, are switching to alternative higher margin crops.

Trade

MY 2015/16 imports are forecast at a record seven million tons due to growing feed demand. Estimated MY 2014/15 imports are unchanged at six million tons, also a record. High domestic corn prices have pushed feed mills to search for cheaper alternatives, including imported barley.

China is already the world largest malting barley importer. Beer production is expected to grow as China continues to develop and urbanize, further expanding the market for malting barley imports.

Australia is China's dominant supplier, providing 71 percent of imports in 2014, followed by France (14 percent) and Canada (11 percent). Ukraine gained market access in late 2013, and became China's fourth largest barley supplier in 2014. Feed mills report they will consider purchasing barley for feed use if it is price competitive compared with the other feed sources, such as corn, sorghum, and DDGs.

Consumption

Barley consumption is forecast to reach a record 8.4 million tons in MY 2015/16 due to continued rapid growth in feed use and as beer production returns to growth. For the first time, feed consumption is forecast to reach parity with food, seed and industrial consumption with both forecasts at 4.2 million tons.

Estimated MY 2013/14 barley consumption is revised down 100,000 tons to 7.5 million tons due to a slump in beer production. China has been the world's largest beer producer and consumer for 12 years. Beer consumption has reached 34 liters per capita, slightly over the world average of 33 liters. Beer production declined 3.9 percent in 2014 to 49 billion liters. Industry reports note that higher malting barley import prices have increased production costs and impacted production. However, beer consumption remains strong and production is expected to recover in MY 2015/16. Growing incomes will continue to support beer consumption, and the government anti-corruption campaign has accelerated the trend of consumers moving away from hard liquor and towards alternatives such as beer.

Sorghum

Sorghum

2013/2014

2014/2015

2015/2016

Market Begin Year

Oct 2013

Oct 2014

Oct-15

China

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Area Harvested

650

650

670

650

650

Beginning Stocks

326

326

376

376

451

Production

2,700

2,700

2,700

2,600

2,600

MY Imports

4,161

4,161

8,500

8,500

9,000

TY Imports

4,161

4,161

8,500

8,500

9,000

TY Imp. from U.S.

4,879

3,812

8,000

Total Supply

7,187

7,187

11,576

11,476

12,051

MY Exports

11

11

25

25

30

TY Exports

11

11

25

25

30

Feed and Residual

4,800

4,800

9,100

9,000

9,300

FSI Consumption

2,000

2,000

2,000

2,000

1,900

Total Consumption

6,800

6,800

11,100

11,000

11,200

Ending Stocks

376

376

451

451

821

Total Distribution

7,187

7,187

11,576

11,476

12,051

Yield

4.15

4.15

4.03

4.00

4.00

Production

MY 2015/16 sorghum production is forecast to remain stable at 2.6 million tons. Sorghum receives far less policy support and subsidies than do corn, wheat, and rice. Estimated MY 2014/15 sorghum production is revised down 100,000 tons to 2.6 million tons as farmers switch to more profitable alternative crops.

Consumption

MY 2015/16 sorghum consumption is forecast at a record 11.2 million tons based on strong feed demand. High corn prices have pushed feed mills to search for alternative ingredients such as sorghum, while changes in how the government administers TRQs for corn, wheat and rice has made importation of these grains more difficult. MY 2014/14 sorghum consumption is estimated at 11 million tons on strong feed demand.

Food, seed and industrial consumption is forecast to decline slightly in MY 2015/16 to 1.9 million tons. CY 2014 domestic hard liquor production decreased 2.2 percent from 2013, in part due to the anti-corruption campaign. This represents a large slowdown from 2012 when hard liquor production grew 18 percent. Industry experts believe the slowdown in liquor demand could last several years. Lower liquor production hurts demand for high quality domestic sorghum.

Trade

MY 2015/16 imports are forecast at 9 million tons as sorghum is expected to remain price competitive compared to domestic corn even as corn prices have dropped. Estimated MY 2014/15 sorghum imports are unchanged at 8.5 million tons on strong feed demand. Contacts report that importers have already signed contracts for large volumes of sorghum to be delivered later this year. More than 98 percent of sorghum imports currently come from the United States.

These estimates and forecasts are based on the current trading environment and are subject to change. The Chinese government has begun to pay close attention to the rapid increase in sorghum imports, and some policy makers reportedly believe these imports make it harder for the government to dispose of its large corn stocks. Import officials have recently begun to enhance inspections and traders are voicing concern that the government may be getting ready to take more concerted action to limit imports.

Farmers and traders may want to take measures to mitigate risk of trade disruptions and related price volatility in sorghum.

DDGS and Cassava Imports

DDGS imports have reached a record of 5.4 million tons in 2014, up 38 percent from the previous year. DDGS is a byproduct of ethanol production that can be used in animal feed. It has become popular in China as a price competitive and high protein alternative to corn, and is used primarily in swine and poultry feed. DDGS is not subject to quotas. However, DDGS imports dropped dramatically in the last quarter of 2014 as trade was disrupted due to detections of a biotech corn variety (MIR 162) that was not yet approved in China. This variety was approved by the Ministry of Agriculture in December 2014 and imports have begun to recover.

Cassava imports reached a record 8.65 million tons in CY 2014, up 18 percent from the previous year. Industry sources estimate that 60 percent of imported cassava is used for ethanol production and the rest is used in animal feed. Cassava imports are expected to continue to expand in 2015.

Policy

The government has begun to realize that current inefficient agricultural support policies have caused overproduction, elevated prices far above international levels, and resulted in excessive stockpiles and environmental degradation. Whereas past government rhetoric primarily emphasized increased production, official statements now note the need to give equal priority to quality and sustainability. Some policy makers have also begun to point out that China's limited land and water resources will make it difficult to increase feed production enough to meet the growing demand for animal products from its burgeoning urban middle class.

At the same time, policy makers fear, given rising production costs, farmers will switch to non-grain crops or let their land lie fallow if the government does not maintain high prices. Small inefficient farms and rising land and labor costs have caused the cost of production of many crops in China to rise above international price levels. The average farm size in China is only around 1.5 acres, compared to over 400 acres in the United States. Farm labor costs are expected to rise further as workers continue to move to cities in search of higher wages and the rural labor pool tightens. Heavy use and dependence on chemical fertilizers and pesticides has also driven up production costs.

The central government is now exploring options for reform to address these problems. On February 1, 2015, the Chinese Communist Party issued a "No. 1 Document" outlining China's new agricultural strategy. The 2015 No. 1 Document moved away from hard self-sufficiency targets, saying only that the self-sufficiency level for major grain varieties should be "scientifically defined." However, the government continues to see self-sufficiency in rice and wheat as essential to China's food security and it maintains the floor price system for these crops.

Government Subsidies

China provides a range of subsidies to promote grain production, including direct payments to farmers, subsidies for purchasing farm machinery, and price support programs. China's domestic agricultural support has in recent years focused on maintaining high internal prices through government purchases in order to boost farmer income and encourage production. This has created a widening gap between international and domestic prices and left the government with excess stocks in many commodities that it cannot sell without incurring large losses. These policies have also attracted imports even during times of record domestic production. The government has launched trial subsidy reforms for soybeans and cotton, but contacts report that these have had mixed results. The government is not expected to expand these subsidy reform trials to wheat, rice or corn in the near future.

Government rhetoric on grain production has begun to change. While past statements focused on celebrating sustained production growth in grains, the government is now calling for a shift in focus to improving sustainability, efficiency and quality rather than simply chasing higher production. Officials have said that 85 percent grain self-sufficiency in 2020 would be in line with food security goals. However, the government has not yet changed high support prices for grains and farmers continue to switch acreage into corn from other crops.

Government Grain Support Programs (in RMB)

Year

Direct

Seed

Machinery

Fuel/fertilizer

Total

Payment

Subsidy

Subsidy

Subsidy

2014

15.1 bn

N/A

23.75 bn

107.1 bn

2013

15.1 bn

N/A

21.75 bn

107.1 bn

143.95 bn

2012

15.1 bn

N/A

20 bn

107.8 bn

142.9 bn

2011

15.1 bn

22 bn

17.5 bn

86 bn

140.60 bn

2010

15.1 bn

20.4 bn

14.49 bn

83.5 bn

133.49 bn

2009

15.1 bn

19.85 bn

13 bn

75.6 bn

123.45 bn

2008

15.1 bn

12.07 bn

4 bn

63.8 bn

102.86 bn

Source: Chinese government websites and state media

Price Support Programs

The government annually raises grain procurement prices to encourage farmers to plant key staple crops, such as rice, wheat and corn. This provides a minimum purchase price to farmers when local state-run enterprises purchase their crops on behalf of the government. Procurement prices for rice, wheat and corn will for the most part remain unchanged in 2015. This is a departure from previous years when prices were steadily raised.

Government Procurement Prices (RMB/ton)

2010

2011

2012

2013

2014

2015

Purchase Period

Rice

Early Indica (unmilled)

1,860

2,040

2,400

2,640

2,700

2,700

July-Sept

Japonica (unmilled)

2,100

2,560

2,800

3,000

3,100

3,103

Nov-Feb

Wheat

White Wheat

1,800

1,900

2,040

2,240

2,360

2,381

May- Sept

Red Wheat

1,720

1,960

2,040

2,240

2,360

2,360

May- Sept

Wheat Average Floor Price

1,760

1,960

2,040

2,240

2,360

2,360

May-Sept

Corn

Corn Average Floor Price

1,800

1,980

2,120

2,240

2,250

2,250

Dec –April

Grain Tariff Rate Quota

China maintains TRQs for wheat, corn and rice. While fixed quotas have not changed since 2004, the government does allocate additional grain quotas as it deems necessary. Quota amounts are set separately for private industry and public entities. The government has used state quotas to import wheat, rice and corn for state reserves in previous marketing years.

The National Development and Reform Commission (NDRC) announced the 2015 TRQ for wheat, rice and corn in December 2014. The total quantities are shown below. The TRQ fill rates for corn, wheat and rice has fluctuated significantly, but has generally remained below 50 percent.

2015 Grain Tariff Rate Quota Allocation in Tons)

Commodity

TRQ

Private Share

State Enterprise Share

Tariff rate within TRQ

Tariff rate out of TRQ

Wheat

9,636,000

10%

90%

1%

65%

Corn

7,200,000

40%

60%

1%

65%

Rice (short and long grain)

5,320,000

50%

50%

1%

65%

NDRC has reportedly tied the allocation of import quotas for rice, corn and wheat in 2015 to purchases from government reserves for the first time. This news was widely and consistently reported by industry associations and news outlets. Companies in seven main consuming regions (Beijing, Shanghai, Tianjin, Zhejiang, Fujian, Guangdong and Hainan) and four ethanol producers (COFCO Zhaodong, Jilin Fuel Ethanol, Anhui Fengyuan and Henan Tianguan) are eligible to bid for 1.2 times the amount of grain they purchase from state reserves. All other companies are limited to bidding on the amount of grain they purchase from state reserves.

On January 6-8, 2015 NDRC auctioned import quotas for two million tons of wheat, five million tons of corn, four million tons of indica rice and four million tons of japonica rice. According to industry sources, less than 1.8 million of the 5 million tons of corn quotas put up for auction was sold despite the large difference between domestic and international corn prices. Rice auctions also performed poorly. Authorities announced that unsold quotas would be put back up for auction.

On April 24, 2015 NDRC commenced a second auction for import quotas totaling 1.1 million tons of corn, 1.75 million tons of indica rice, three million tons of japonica rice and 2.4 million tons of wheat. The average closing rate as of April 24, 2015 was 35 percent for corn, 25 percent for corn, two percent for indica rice, and six percent for japonica rice. Industry experts expect the final closing rate to be low given the high prices and inconsistent quality.

China historical TRQ Quote (in '000 Mt)

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Corn

5,850

6,525

7,200

7,200

7,200

7,200

7,200

7,200

7,200

7,200

7,200

7,200

Rice

3,990

4,655

5,320

5,320

5,320

5,320

5,320

5,320

5,320

5,320

5,320

5,320

Wheat

8,468

9,052

9,636

9,636

9,636

9,636

9,636

9,636

9,636

9,636

9,636

9,636