Policy distortions explain why both maize reserves and imports are rising at the same time, and why the costs of this programme are spiralling. The government is subsidising inefficient maize production by placing the harvest into the reserves – where it rots – while Chinese farmers feed their animals cheap imported maize substitutes instead.
The Ministry of Agriculture says it is looking at market-based pricing mechanisms. Domestic maize production would fall if costs were cut or guarantees abolished, while demand would jump if quotas were introduced on substitutes. Both changes would widen the maize deficit and reverse the recent expansion of reserves, bringing future imports forward.
It could take a couple of years to adjust reserves sufficiently to scrap import quotas, but given the context, China could act as one of several catalysts to lift the sector.
There have been two excellent harvests back to back and agricultural commodity prices have fallen steadily in the past three years. Prices are at marginal cost for some of the most efficient producers in the world and, unlike oil, there are short lead times and no large sunk costs or international politics to consider.
If farmers don’t think they will make a profit on a bit of ground, they won’t plant it. The supply response takes a year, and that response has begun.
We are at a floor in agricultural commodity prices and only a small change or disruption could bring the sector to life again. Production is as volatile as the weather. Consumers and investors have become complacent about low food prices and this complacency provides opportunities for active investors.
Hugo Rogers is a manager on the structural opportunities team at Liontrust
