The Big Read: A crossroad for China’s corn market

In recent years, China has gone from a relatively small player in the international corn market to be the world’s biggest importer, bringing in 29.5 million tons during the 20/21 marketing year. This volume easily eclipsed the previous leaders Japan (15.5m tons) and Mexico (16.5m tons).

China just harvested its largest ever corn crop at 273 million tons in 2021. This raises the question, where is all this corn going? China’s government has made it clear that self-sufficiency in grain is a top priority, so why isn’t the country self-sufficient?

Support price, or price ceiling?

In the years leading up to 2016, the Chinese government was an active player in the domestic corn market, buying corn from farmers at a minimum support price to ensure stable income for farmers.

The government would buy up large amounts of the crop at a predetermined support price and then periodically auction it off to commercial buyers throughout the year.

Over time, this support price kept climbing.

International corn prices were often dramatically cheaper than domestic prices within China. However, this arbitrage wasn’t easily solved because China imposes a quota on how much corn could be imported each year.

As part of China’s WTO accession, the country was allowed to limit corn imports to 7.2 million tons annually and allocate those quotas to different buyers each year.

Prices in China can be dramatically higher than those in the US, but unless importers can get a government-granted quota, they can’t import corn.

Sidestepping the quota

While feed companies couldn’t import corn, there were many other items not covered in the terms of China’s WTO accession agreement, such as distiller dried grains (DDGS, a by-product of ethanol production commonly used in animal feed), barley, sorghum, and cassava.

Enterprising feed companies started importing these products in vast quantities, creating a roundabout arbitrage to sidestep the limits on corn imports.

Demand boom

In 2016, China made a U-turn policy and eliminated price supports for corn and suspended the temporary reserve stockpiling program.

Corn prices and imports of alternatives sank.

However, this created a new issue. There were massive stockpiles of corn to digest. There was a big push to promote corn processing industries. Corn consumption for food, seed, and industrial consumption (FSI) more than doubled in the past decade from 47 million tons in 2009/10 to 85 millions tons in 2019/20, making China the second largest consumer of corn for FSI behind the US.

Export of by-products surge

Looking at exports of corn-derived products, there is a clear uptrend that aligns with the increase in corn use for FSI.

While these products are generally derived from corn, it’s not possible to discern from export statistics what feedstock was used to generate these products. Hence, despite the fact that ethanol accounts for a significant volume, ethanol exports were excluded in the analysis as many ethanol plants use cassava as a feedstock instead of corn.

Not only has China’s corn FSI demand increased substantially over the past decade, but much of this demand is also for direct exports.

Burden for self-sufficiency?

If China didn’t have these industries producing those products for export, the country would be much more self-sufficient in grain and might not need to be the world’s largest corn importer. So why is this happening?

China’s government is often perceived by people outside of China a monolith with clear and specific priorities, such as grain security, but the reality is obviously much more complex. Certainly China’s government cares about self-sufficiency in grain, and this large corn processing industry makes that goal harder to achieve. But this corn processing industry has other upsides.

The top three provinces that comprise China’s Dongbei region (Liaoning, Jilin, Heilongjiang) are an area commonly referred to as China’s Rust Belt. This formerly industrial area is now sparsely populated and its economic growth has lagged behind faster-growing eastern coastal provinces.

Even today, foreigners moving to Dongbei are given extra points on their visa applications in an effort to attract talent to the area.

Exports of just four corn-derived products exceeded US $2billion last year

Previously, the corn crop grown in this area was immediately shipped to other provinces to produce animal feed. That generates very little ‘value added’ economic activity.

Now a much larger share of the crop stays in the region to supply local corn processing industry, and the output is mostly exported to other countries.

The upside is obvious – economic growth, retention of skilled workers, tax income, and foreign exchange inflows. Last year the exports of these four corn-derived products exceeded US $2billion.

In a broad sense, corn demand for the processing industry adds burden to China’s self-sufficiency goal, but it redistributes economic activities, jobs and tax revenue to regions that have lagged economically.

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