© Reuters

Signs of a shortage of quality corn in China have cast doubt on the state of the country’s grain reserves, which on paper make up the lion’s share of global stocks.

China in March discontinued a minimum price policy through which the state bought corn at above-market prices. The policy had distorted global markets and resulted in an overhang of expensive grain stuffed into state reserves.

Expectations of that excess supply flowing out of Chinese reserves have depressed prices and resulted in a drop in planted acreage this year in the country’s north-east corn belt. But an uptick in imports and tightness in domestic spot markets is instead raising suspicions that much of the stored grain is of insufficient quality to meet demand from a growing livestock industry.

“We are pretty sure that a lot of the corn is of poor quality,” Fred Gale, senior economist at the US Department of Agriculture, said.

China’s state corn reserves stand at 109m tonnes, or slightly more than half of global reserves, according to USDA estimates. Estimates by domestic corn analysts reach 250m tonnes, taking into account reported purchases by “temporary” grain reserves some of which feed into the state system.

The temporary reserves are at the heart of the problem. Mandated to even out price swings — by purchasing grain at harvest time at state-set minimum prices and then reselling to end-users such as feed mills, corn starch processors and ethanol refineries — the temporary reserves ended up stockpiling grain when the inflated minimum price meant they would sell at a loss. Instead, they collected subsidies of about Rmb100 per tonne per year for storing the grain.

In early July, domestic spot corn prices approached the state reserves’ minimum price of Rmb2,000/tonne before retreating, providing a brief opening for temporary reserve warehouse managers to unload some more recent purchases that still meet quality specifications. “If they stay at Rmb2,000 then we can sell smoothly,” one warehouse official said.

FT calculations indicate that recent state auctions of 2012 corn at best earned the state about Rmb65 per tonne and in some cases represented losses of up to Rmb365 per tonne, after taking into account storage subsidies.

Recent state auctions of corn up to four years old have been limited to industrial processors, in an implicit acknowledgment that the corn is unfit for consumption. The USDA estimates that at least 20m tonnes of corn falls into this category. Chinese media have reported about mouldy or unsuitable grain purchased by corrupt reserves officials.

Similar problems afflict wheat, rice and cotton reserves, industry sources said.

“The quality coming out of the reserves is very bad,” said an executive at a private feed company in Sichuan, China’s largest pig-breeding province. “The next couple of months before the September harvest will be tight.”

Demand for quality corn from the livestock industry has driven record corn imports of more than 1m tonnes in both April and May, mostly from the US and Ukraine. It has supported demand for corn substitutes such as sorghum and mash left over from distilling beer or spirits.

In another sign of China’s long-term grain supply concerns, during a state visit last month by Russian president Vladimir Putin the two countries committed to invest $185m in grain elevators and a terminal in Russia to support future grain purchases by Chinese state-owned grain trader COFCO.

Additional reporting by Michelle Winglee

Twitter: @HornbyLucy

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