China May Expand Corn Processor Subsidies to Spur Demand on Glut

(Bloomberg) -- China may expand subsidies for its loss-making corn processing industry to boost demand as the government grapples with a domestic glut that’s set to increase when harvesting starts next month, according to analysts.

The corn market is speculating that subsidies of about 300 yuan ($45) to 400 yuan a ton could be offered to processors in Heilongjiang and Jilin provinces, the top corn growers, said Meng Jinhui, an analyst at COFCO Futures Co. A subsidy of 150 yuan a ton was offered by Jilin’s local government in the first half this year, Meng said.

Corn futures in China are near a decade low and starch prices have slumped amid ample domestic supply. The country has already ended its state stockpiling program and is selling grain from reserves and reducing planting to curb the glut. While the government is yet to make a decision on subsidies, the corn processing industry has been making losses since April amid weak demand from users including textile and paper makers, said Fan Chunyan, secretary general at the China Corn Starch Association.

“The move would help spur the industry to raise production capacity and help farmers sell grain”, said Wang Baoquan, analyst with Chicorn, a private consulting firm. Still, any increase in demand may be less than 10 million tons, Wang estimates.

A Jilin government spokesman declined to comment on the possibility of subsidies. Spokesmen for the Heilongjiang government and finance ministry couldn’t be reached on Thursday. Heilongjiang Governor Lu Hao said in July that the province would propose measures to reduce grain stockpiles to the central government, according to the local government website.

China is the world’s second-biggest corn producer and consumer and its harvest, which starts next month, may total 219.5 million tons, according to the China National Grain and Oils Information Center. That will add to stockpiles that Shanghai JC Intelligence Co. estimates exceed 250 million tons. The corn processing industry is set to consume 60.7 million tons of corn in 2016-17, up from 56.4 million tons a year earlier, CNGOIC said last month.

Prices

China is replacing its stockpiling program with direct subsidies for farmers in the northeast. The finance ministry said in July that it will allocate 30 billion yuan in subsidies to corn growers in four provinces.

Without the government’s reserve price, the January-delivery corn contract on Dalian Commodity Exchange may drop to as low as 1,200 yuan per ton, according Lu Tianzhang, an analyst at Zhongzhou Futures Co. The contract closed at 1,437 yuan per ton on Thursday and the most-active contract fell to 1,414 yuan on Sept. 6, the lowest since 2006.

Corn starch for January delivery closed 0.3 percent higher at 1,673 yuan a ton on Thursday, trimming this year’s slump for the most-active contract to 19 percent. Open interest for both starch and corn climbed to records this month.

To contact Bloomberg News staff for this story: Niu Shuping in Beijing at nshuping@bloomberg.net. To contact the editors responsible for this story: Phoebe Sedgman at psedgman2@bloomberg.net, Andrew Hobbs

With assistance from Niu Shuping