A Chinese villager airs harvested wheat in Yuncheng City. Xinhua/Zuma Press
China's grain cupboard is overflowing.
As the harvest looms next month, the country is on track for an 11th year of bumper grain crops. But production is too much, even for the world's most populous nation, with warehouses bursting at the seams and posing a dilemma for policy makers.
Estimates from state media say the government will be sitting on 150 million tons of grains that include three of the most important crops for China: rice, wheat and corn. That is double the 75 million tons last year and adds to an oversupply of these agricultural commodities that is pressuring prices lower.
"Chinese officials always talk about having a big harvest," said Fred Gale, an economist at the U.S. Department of Agriculture. "That sounds like a good thing, as they have been worried about supply keeping up with demand. But now, China seems to be struggling with surpluses of most of their commodities."
The glut of grains is being lauded in a country that grappled with acute food shortages and starvation as recently as a few decades ago. But China is paying far more than necessary to feed its people and it will be forced to sell down its surpluses into a global market already suffering from oversupply, potentially driving down prices further.
The situation has exposed China's inefficient and expensive government subsidy program aimed at keeping farmers' incomes up. The government is struggling with how to protect its rural residents while cutting production of these perishable commodities to save money and keep surpluses down.
The precise size and costs of the subsidy program are hard to come by. Official data show that China buys up one-third of corn production, while an estimate by state media said the government spent $36 billion in the last two years to buy up corn when the market price has fallen below a minimum floor.
"The stockpiles are absolutely ginormous, way out of line with anything that you could justify holding onto on any sort of commercial basis," said Thomas Pugh, an economist at Capital Economics in London. "These are perishable goods, so they will start to deteriorate."
He estimates China holds about 40% of the world's corn stocks. China plans to build storage facilities to hold 50 million metric tons more of grain by 2015 to cope with the excess, according to state media.
About 70% of China's corn consumption goes to feed for livestock as the country's appetite for meat rapidly rises, and the rest is processed into syrups or starches.
It is a particularly vexing problem for China this year, as crop production is also booming in the U.S. and dragging down prices there to near four-year lows, while Chinese prices have remained elevated because of the subsidies. That creates an incentive for Chinese traders to import corn from overseas, exacerbating China's already huge stockpile, said Jikun Huang, director of the government's Center for Chinese Agricultural Policy in Beijing.
The USDA forecast this month that U.S. corn production will exceed 14 billion bushels, far above last year's record harvest.
Corn on China's Dalian Commodity Exchange traded at around 2,390 yuan ($388) a ton as on Monday, compared with corn on the Chicago Board of Trade which traded at about 367 cents a bushel — equivalent to about 890 yuan a ton.
China has tried to curb corn U.S. imports this year, citing the presence of genetically modified strains. But Mr. Huang says traders are getting around it by importing other feed substitutes such as barley and sorghum.
And ridding China of these huge stockpiles isn't easy.
A recent government auction of corn from Heilongjiang province held by the Chinese government went awry, with only a fifth of it sold at the price of 2,200 yuan a ton, "more than twice what U.S. feed mills are paying for corn right now," said the USDA's Mr. Gale.
The government has signaled that it recognizes the problem. State media have said the shortage of storage is a problem and Chinese Premier Li Keqiang has been photographed on visits to grain depots recently.
"In the past we have focused on expanding production and grain quality…now we need reforms for better buying, selling, and storage, to contribute to national security," Mr. Li is quoted as saying on the State Administration of Grain website.
China's surplus couldn't have come at a worse time for U.S. farmers, who are expected by the USDA to harvest a record 14 billion bushels. Corn futures have dropped 15% this year after falling 40% last year, and China's unwillingness to buy U.S. corn will further pressure prices, said Jason Britt, president of brokerage Central States Commodities Inc. in Kansas City, Mo.
Chinese Premier Li Keqiang visits a grain depot in Hunan province. Xinhua/Zuma Press
"China's [lack of buying] has been a contributing factor in these lower prices," he said. "Now, the job of the market is to go down to a level where we find demand.
"It's amazing that China can overlook GMOs when stocks are tight, but when they're trying to protect their domestic farmers or they're in surplus, they can come up with things to mess with us—they're trade barriers, let's just call them what they are."
In January, the government said it would start trial programs in cotton and soybeans—two less-strategically important crops—to end stockpiling, and implement a target price system instead, first for cotton in Xinjiang and soybeans in the northeast, so that commodity prices are more market-driven.
The government will pay farmers the difference when the market price falls below the target price, but the government doesn't buy the commodity in the market to keep prices at a certain level. The idea is to set target prices for agricultural commodities at more market-based levels, which should in turn influence how much farmers decide to produce.
China is also in the process of unwinding its 10 million-ton cotton stockpile since late last year, which means China's appetite for cotton imports is likely to fall in coming years. That has hit cotton prices hard. In the U.S., cotton futures have fallen more than 20% this year.
"The government is moving in the right direction, step by step," said Cherry Zhang, a corn analyst at Shanghai JC Intelligence Co. "But much depends on how the changes for cotton and soybeans pan out in practice."