BEIJING (Reuters) - China plans to scrap its corn stockpiling scheme and allow markets to set prices for the grain, pushing to boost efficiency on its farms and to narrow a gap between local and international prices that has sparked a surge of cheaper imports.

A harvester unloads corn to a cargo truck at a farm in Gaocheng, Hebei province, China, in this September 30, 2015 file picture. REUTERS/Kim Kyung-Hoon/Files

The government will instead subsidize corn growers and encourage commercial firms to buy grain from farmers at market prices, the State Administration of Grain said in a statement on Tuesday.

The new policy, which marks the biggest reform in China’s grains sector for a decade, is aimed at improving quality and efficiency in its agricultural sector as part of the country’s “supply-side reform”.

But it could prove costly for Beijing, potentially leaving it with huge financial losses as falling prices devalue massive stockpiles that hold over half the world’s corn supplies.

And as domestic prices <0#DCC:> start to shift in line with international markets <0#C:>, Chinese demand for imports of corn and corn substitutes such as sorghum, feed-grade barley and distillers’ grains is expected to tank, hitting major suppliers such as the United States and Australia.

“We hope the new reform would let the market play more of a role in the formation of prices,” Liu Xiaonan, a deputy director with the National Development and Reform Commission (NDRC), was quoted as saying in the statement.

The new policy will take effect in the world’s No.2 corn consumer from the 2016/17 marketing year that starts in October.

“Imports after autumn would be very difficult and could come to a halt,” said Li Qiang, an analyst with commodity advisory Shanghai JC Intelligence Co Ltd (JCI).

“Given the market-oriented reform of domestic corn prices, it is possible that China would be able to export both corn and corn products.”

Beijing’s nine-year-old stockpiling system, designed to support its huge rural workforce, has artificially lifted corn prices around 30-to 50-percent above global markets, triggering a record volume of imports of corn and corn substitutes in 2015.

Government officials signaled the policy change last month. Chen Xiwen, deputy director with the Communist Party’s Central Rural Working Leading Group said the move would make domestic corn prices cheap enough to deter imports.

The step was also flagged over the weekend by local television, and has already driven down domestic corn prices.

The new crop corn contract on the Dalian Commodity Exchange shed about 2 percent in the Tuesday morning session after falling over 3 percent the day before.

MASSIVE STATE SALES LOOM?

After years of stockpiling coupled with weakening domestic demand, the government has been saddled with about 250 million tonnes of corn in its reserves, more than the country can consume in a whole year, with the quality of the stored grain deteriorating.

The government is likely to sell more than 40 million tonnes from stockpiles this year, possibly starting from next month, with prices potentially below market price, said JCI’s Li.

“Traders will be watching developments closely as the sell down of Chinese reserves will impact demand for U.S. corn,” said Tobin Gorey, director of agricultural strategy at Commonwealth Bank of Australia.

Government hopes that the policy will cut corn production could be dashed in the short term, however, as many farmers have already purchased seeds ahead of the planting season that starts next month, analysts said.

“Farmers may not reduce acreage as much as the government expects. Corn could still be in surplus during the autumn harvest,” said an analyst with an official think-tank, who declined to be identified due to the sensitivity of the issue.

China has already abolished stockpiling in cotton, soybeans and rapeseed, and the Tuesday statement said it would also look into reforming wheat and rice, the two remaining staple food commodities subject to minimum purchase prices set by the government.