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BEIJING, April 1 (Reuters) - China's plan to let the market set corn prices is bad news for international grain exporters, but should boost the country's struggling corn processors that use the grain in products ranging from food additives to paper and textiles.
New demand from corn processing companies, as well as the feed and ethanol industries, will be vital to help China start cutting the 250 million tonnes of corn reserves built up under stockpiling policies, or more than the country can consume in a year.
In its biggest grain reforms in a decade, China said this week it will stop stockpiling corn and halt price support schemes, narrowing the gap between international <0#C:> and local prices <0#DCC:> and encouraging the use of local grain rather than imports of cheaper substitutes, such as sorghum and the ethanol byproduct distillers' grains (DDGS).
Food processors use corn to make starch, syrup and alcohol, but China's corn starch industry has been running losses over the past three years, with more than half of its capacity lying idle.
"It is good news for the industry," said Fan Chunyan, secretary general of the China Corn Starch Association
"More companies would raise production and become profitable and some companies may be able to export their products," said Fan, adding that utilisation rates could recover to about 70 percent, up from as low as 40 percent in recent years.
Corn starch is used to make thousands of products, including the food additives lysine and citric acid, which China once was the world's largest exporter, as well as corn syrup, which can replace natural sugar in the production of soft drinks and cakes.
Major players in the industry include COFCO Co Ltd, Global Bio-chem Technology Group Co. Ltd and the Xiwang Group.
Global agribusinesses Cargill and Wilmar International also run some corn starch joint ventures in China.
The decade-old corn stockpiling policy, which will be scrapped from the autumn, has pushed domestic corn prices up to 50 percent above international prices, saddling feed mills and food processors with higher costs.
"Many plants were dead because of the stockpiling policy. For those which are still alive, definitely there is a chance," an executive at a corn processor in the province of Liaoning told Reuters.
The industry had been suffering losses for many years and his own company's plant had shut, said the executive, who declined to be identified.
Chinese feed mills bought a record volume of foreign feed grains in 2015, which together with corn imports, replaced more than 42 million tonnes of domestic corn production, about a quarter of annual consumption.
Beijing controls quotas on low-tariff corn imports, which encourages users in China to seek out lower priced substitutes once the quotas have been reached.
Cheap imports of cassava and cassava starch have largely been used instead of domestic corn in refineries, whose main products include ethanol and corn syrup. Chinese imports of cassava hit nearly 10 million tonnes in 2015.
"With the drop in domestic corn prices, soft-drink makers will increase their use of corn syrup to help cut costs," said Lief Chiang, an analyst with Rabobank.
The policy change will also slash feed costs for China's pig industry and boost profits of ethanol producers.
"The feed grain price drop would prolong the high breeding margins for hog breeders, which are now recovering their herds, while for the corn processing industry, some products can be competitive globally," said Chiang.
China's appetite for cheap U.S. ethanol could also wane this year as domestic companies increase production, said an official at the China Alcohol Industry Association. China imported a record volume of ethanol in 2015 due to expensive domestic corn.
"A drop in raw material prices would increase ethanol output and imports would shrink," said the official, who declined to be identified.
"China may be able to export ethanol to other countries, including South Korea and Southeast Asia, and compete with the United States and Brazil," the official added. (Editing by Richard Pullin and Ed Davies)