Thursday, April 9, 2015

China Cracks Down on Agricultural Smuggling

According to news from Guangzhou, customs authorities there have broken up a beef smuggling ring that is suspected of illegally bringing 1351 loads of meat valued at 560 million yuan since 2014.

The gang allegedly bought frozen beef from the United States, Brazil, India, and Pakistan, and smuggled it into China by either evading customs, falsely reporting, or concealing the meat. The beef was cut up, packaged and then sold in Chongqing, Nanjing and Shanghai.The investigation involved 230 officers in Guangzhou, Shenzhen, and Foshan. They arrested 28 people as of April 7 and seized 24 metric tons of meat.

The beef case is part of the China customs "green wind" crackdown on agricultural products smuggling that began in 2014. Anti-smuggling efforts were also highlighted in the 2015 "Number one document" issued by the communist party central committee. Officials claim to have cracked 13,316 cases valued at nearly 45 billion yuan. The number of cases is reported to be up 32% from the year before. The largest number of cases involve rice smuggling.

China agricultural smuggling cases intercepted in 2014

Cases Value

Number Million yuan Metric
All cases 13,316 44,898
Rice 467 1,255 210,100
Meat 96 2,010 122,000
Sugar 5 96 983
Cotton 52 2,500 164,100
Others: Wheat, corn, peanuts, edible oil, leather, feed

In March, Guangxi customs officials reported breaking up a ring suspected of smuggling 5614 metric tons of corn from Vietnam since last year. The gang was led by a man named Lu who purchased corn from a business associate in Vietnam, hired drivers to pick up the corn and truck it over the border at an unguarded crossing. The corn was brought to a warehouse in Nanning and then shipped to other parts of China.
Last September, Kunming customs authorities arrested six suspects from two gangs suspected of smuggling a total of 85,000 tons of corn from Burma into China by driving trucks over the border late at night.
This diagram describes smuggling routes for rice and corn from two cities on the Vietnam border to Nanning, the Guangxi provincial capital. A gang led by people named Shi, Huang, and Cai are suspected of smuggling 3000 tons of rice. Mr. Kong is suspected of leading a gang that smuggled 1600 tons of corn.

Smuggling is rampant because Chinese prices are much higher than the price of imported commodities. Imports of many commodities are restricted by quotas or bans. In its February report on farm commodity markets, the Ministry of Agriculture included the chart below showing the domestic price of long grain rice (blue line) and imported rice (pink) since 2009. The price of imported rice has been 25-35% less than the Chinese price since the 2013 harvest.

The MOA data show that Chinese wheat, corn, and soybeans all exceeded import prices by 30% or more.

Tuesday, April 7, 2015

Xinjiang: Switch From Cotton to Hay

With a surplus of cotton and falling prices, Chinese officials have cut their target price for this year's cotton crop and are urging farmers in the major production region to shift cotton acreage to wheat or hay.

The 2015 target price for cotton in Xinjiang Autonomous Region has been set at 19,100 yuan/metric ton. This is the target for the crop to be planted this spring and harvested in fall of 2015. 

The subsidy is based on the difference between the target price and the market price. As of April 3, 2015, market prices for cotton lint in Xinjiang ranged from 12,950 to 14,200 yuan--depending on the grade--far below the target price.

The target price for the 2014 Xinjiang cotton crop was higher, at 19,800 yuan. The subsidy for the 2014 crop has just been distributed and totaled 450.5 yuan per mu (about $441 per acre).

Agricultural officials in Xinjiang say the target price pilot program allows market supply and demand to be the main guide for setting the cotton price. However, the officials are giving the market some assistance by issuing a guidance plan calling for cotton farmers to reduce cotton area planted this spring by 4,665,000 mu (769,000 acres). They recommend shifting land to spring wheat or hay in low-yielding or drought-prone regions.

The guidance appears to be an implementation of a structural adjustment campaign launched by the Ministry of Agriculture earlier this year. According to the communist party secretary of Xinjiang's agriculture department, the "temporary reserve" policy that supported cotton prices during 2011-2013 "stabilized" cotton area but it kept some low-yielding areas in production. Now they want to "improve" the crop structure in the region.

The party secretary said farmers giving up cotton (and presumably giving up the fat subsidy) have two choices: plant spring wheat or hay. Those who plant spring wheat are assured they will get the "general input subsidy" and "improved seed" subsidy for wheat plus a subsidy for water-conserving irrigation. The shift to hay is part of a plan to develop a hay-livestock industry (this was an emphasis of the Ministry's structural adjustment plan). Xinjiang officials plan to increase area planted in hay by 10 million mu (1.65 million acres) over five years. A detailed plan for the hay industry is in preparation.

Sunday, April 5, 2015

Wheat Quota Spins Profit for COFCO

COFCO, China's State-owned agribusiness giant, gets more wheat-import quota than the rest of the industry combined. With imported wheat 30-percent cheaper than Chinese wheat, COFCO's favored access to imports make easy money that offsets losses on the company's other operations.

According to news in March, COFCO had been given 1.5 million metric tons of wheat import quota so far this year, more than the 900,000-mt combined total distributed to private-sector companies.

China has had record wheat harvests in the last few years, but it has a shortfall of the types of wheat needed to make western-style breads and baked goods. These products are in strong demand, but Chinese farmers are not producing these types of wheat in adequate quantities. Last month industry people said Chinese traders had purchased 300,000 mt of no.2 high protein white wheat from Canada and 100,000 mt of Australian prime hard wheat.

Wheat can only be imported by traders awarded a share of the government's 9.6-mmt annual import quota determined by its WTO commitments, but most of the quota is reserved for COFCO. According to the company's web site, COFCO has exclusive rights to handle the 90 percent of China's wheat import quota reserved for state-trading. The remaining 10 percent of the quota is divided up among all other applicants.

For example, in Henan Province's Hengyang Prefecture only one flour mill got an 83-ton allocation of wheat import quota.

The price of quality wheat has soared far above global prices. The news report illustrated the price gap as of mid-March 2015. The FOB price for hard red spring wheat at U.S. Gulf ports was equal to US$ 220 per ton. Freight to China was quoted at $31 per ton. Adding duties and taxes, the total cost of imported wheat would be about $286. By comparison, the price of quality China-produced wheat at Shenzhen ports was $492 per ton.

Another recent article about COFCO reports that its near-exclusive import rights contribute significantly to its bottom line. This article quotes industry insiders who say COFCO has a cost advantage over other flour-millers due to its privileged access to import quota. The industry insiders estimate that COFCO earns 200-to-400 yuan per ton on 1 million metric tons of wheat imports annually. (The numbers above suggest that earnings this year are much larger.) They say COFCO uses these profits to offset losses incurred in milling grain.

According to its annual financial report, COFCO made a modest profit of HK$ 80 million on flour-milling during 2014. The numbers above suggest that all the profit came from importing cheap wheat. COFCO lost HK$ 200 million on rice-milling during 2014. COFCO does better in flour-milling than in rice- milling because it has bought a number of mills with popular flour brands. The article says brands are not as valuable in the rice industry.

Both industries have huge excess capacity with only 30 percent of capacity utilized. Many wheat mills only operate for a few months after the harvest. It points out that the government's intervention in grain markets has made Chinese grain prices the highest in the world, cutting into the bottom line of millers. The article suggests that flour-milling margins will be even narrower in 2015. One factor is a plunging price of wheat bran byproducts (used for feed).

Thursday, April 2, 2015

High Corn Seed Prices Reflect Disdain for Soybeans in China

Prices are soaring for a type of corn seed suited for planting in cold climates, an indicator that corn is continuing to displace soybeans in China's far-north agricultural fringe.

A report from China's Grain and Oils News says that the price of Demeiya No. 1 corn seed has doubled from 675 yuan per bag to 1375 yuan in some areas of Heihe, a region of Heilongjiang Province that borders Russia. Each bag contains 50,000 seeds, said to be enough to plant 7.5 mu. Demeiya No. 2 and No. 3 seeds are sold by weight, and their price has risen from 18.5 yuan/500g to 22.5 yuan/500g.

Demeiya is a variety of corn developed by German seed company KWS to grow in northern climates where the growing season is short. The seed was introduced in China as result of a link-up between KWS and Kenfeng Seed, a company linked to the State farm system in Heilongjiang Province which controls large tracts of land along the border with Russia. Demeiya seed was introduced in the early 2000s, passed provincial seed evaluations in 2004 and has been marketed widely since 2007. More on Demeiya in this 2012 post.

Traditionally, only soybeans could be grown in these frigid areas near the top of the globe. The Demeiya varieties have allowed farmers to switch to corn all the way up to the Russian border.

The rising prices for Demeiya seed reflect both an increase in demand and limited supplies of the seed. People from Kenfeng Seed Co. told the reporter that officials in Heilongjiang had recommended cutting back on corn area this year because the supply of Demeiya seed was expected to be down. However, farmers in northern regions of Heilongjiang like Heihe and Bei'an are eager to plant corn, so demand is robust.

The seed is sold through two main channels: seed shops operated by Kenfeng Co. and dealers who buy the seed under contract. The company says they set the price in their shops and have not raised it, but many of the shops are out of stock. The contractors could sell the seed to others at marked-up prices. Kenfeng company officials said it was "not convenient" to give reasons for the soaring prices. An official from Heilongjiang Province's seed bureau attributed the rise in price to strong demand for the seed.

The rising Demeiya seed prices are a reflection of Chinese policies that are squeezing out soybeans and creating a massive corn stockpile. Chinese officials are supporting their corn prices at a high level and restricting corn imports. They gave up trying to support soybean prices last year. Since there are no limits on soybean imports, supporting domestic soybean prices left the government as the only buyer of the expensive beans while cheaper imported beans dominated commercial channels. This year, the support price for soybeans has been abandoned and market prices are plummeting due to massive global supplies of soybeans.

There is a "target price" subsidy for soybeans but indications are that the program is not working well. As of March 5, farmers in Heilongjiang had sold just 1.6 mmt of soybeans this year, down 60 percent from last year. Reported prices paid by traders are in the range of 4100-4200 yuan/mt, but oilseed crushers are reportedly paying 3800-3900 yuan/mt for soybeans in Heilongjiang. Imported soybeans cost less than 3000 yuan. Domestic soybeans are mostly being used for food processing, while the crushing market becomes even more dominated by imports. According to the target price program, farmers should get a subsidy based on the difference between the market price and the target price of 4800 yuan/mt. However, no one is sure how the program will operate and farmers are not confident they will get a subsidy.

A March 30 soybean market report estimates that soybean area could fall another 30 percent in major soybean-producing areas of Jiamusi and Heihe.

Meanwhile, The Wall Street Journal reports that U.S. farmers are shifting their planting in the opposite direction: from corn to soybeans. Chinese policies are certainly playing a role in the decisions of U.S. farmers this spring. Soybean exports to China are booming and corn exports have slowed to a trickle.

China's domestic policies are gradually pricing its soybean crop out of the market, encouraging unimpeded imports to dominate the soybean market. Corn prices are sustained at a high level and corn imports are limited by import quotas and the threat of GMO rejections. The northeastern provinces are becoming a giant corn and rice mono-crop--most of the corn going into government reserve bins.

If market forces were allowed to operate, China's surplus of corn would push Chinese corn prices down and reduce area planted in corn this year. Instead, authorities are preventing prices from falling and encouraging an even bigger corn crop this year.

Saturday, March 28, 2015

China's Soaring Land Rents and Subsidies

China's strategy of consolidating farms into fewer, larger operations is running into a problem: soaring land rents are eating up the profits of large-scale farmers. This is prompting demands for high grain prices and more and better farm subsidies.

In Jiangsu's Gaoyou Municipality, officials have been encouraging the scaling-up of farming for a number of years by registering land rights and setting up township exchanges where lessors and lessees can find one another. The number of larger-scale farms has increased, but farmers have found that net earnings did not increase as fast as the scale of their operations.

Mr. Jiang planted 100 mu (16.5 acres) in 2011 and earned 60,000 yuan from planting a winter wheat crop followed by rice in the summer.  In 2013 he doubled the size of his farm business by renting another 100 mu, but his net income was still just over 60,000 yuan. In 2014, he doubled his farm again by renting another 200 mu--now he's up to 400 mu (about 66 acres)--but his net income fell to 48,800 yuan (about $7,870).

Farmer Jiang's gross income went up due to higher prices and improved yields for his wheat and rice. His spending on fertilizer, pesticides went up marginally, but land rent soared from 400 yuan per mu to 1100 yuan (about $1075 per acre). He spent equal amounts for inputs and for land rent in 2014.

The rent in Gaoyou county is about four times the average rent for Iowa farmland in 2014 of $260 per acre.

Another villager, Mr. Zhou, reported a similar experience. He said he more-than-tripled the size of his farm but his income only doubled. He said the grain price went up 20 percent in three years but his land rent went up 175 percent. Mr. Zhou complains that he pays ever-rising expenses, but all the farm subsidies are paid to the villagers he rents the land from.

Another problem is the short-term year-to-year contracts for land rentals. Rents are raised annually and farmers can never be sure whether they will retain plots of land from one year to the next. With such insecurity, farmers who rent land cannot make any investments or improvements in the soil.

Labor is still a problem for large farmers too. While some tasks can be mechanized, others still require a lot of labor. Most of the young people in Gaoyou County have left the countryside, so wages are rising and there only old people left to do the work.

Drying and marketing the grain is another problem. Small-scale farmers often dry their grain on courtyards, roadsides, basketball courts, etc., but this is problematic for farmers with huge volumes of grain. When there is rain at harvest time, farmers may have to sell damp or even moldy grain at a steep discount.

The article recommends more government intervention and subsidies. It calls for the government to monitor land rents and place limits on them. The article recommends giving subsidies to the tenants who till the land rather than the villagers who rent land to them.

Some provinces are already giving out such subsidies. Shandong Province is giving a subsidy of 40 yuan per mu for farmers who plant at least 300 mu of wheat, rice, and corn this year. In Guangdong's Zhongshan municipality, rice farms of at least 100 mu can get a subsidy of 250 yuan per mu (adding this to other subsidies, total payments are now up to 493 yuan/mu). Zhejiang Province gives a subsidy of 80  yuan per mu for farms of 50 mu or larger. Sichuan's subsidy varies from 20 yuan per mu for a 30-mu farm to 100 yuan per mu for a 500-mu farm. Anhui's Nanling County has a pilot program to give subsidies up to 300  yuan per mu for large farmers who have a contract to rent land for at least 5 years.

The article further calls for paying out subsidies based on the volume of grain they sell to state-owned grain reserves in order to give farmers stronger incentives and ensure that government reserves are replenished. According to the article, this type of subsidy is used in other parts of Jiangsu (and it is used in a number of other provinces as well). They also call for increased use of production contracts that specify varieties of grain to be grown as a way to increase the production of types of grain that are in short supply.

By the end of the article it is apparent that it was written by China's grain bureaucracy. The article goes on to call for subsidies for state-owned grain enterprises and an increased role for them to ensure that farmers can sell their grain smoothly. The enterprises need money to rebuild dilapidated granaries and buy grain-drying equipment. They need to go out to farms to buy grain at the farmer's door (private grain traders already do this--without subsidies, somehow).

It turns out that large-scale farmers have to pay for their land, and the villagers who rent it to them are demanding ever-higher rents. This means grain prices have to go higher to cover rising costs. Prices can't go any higher because China already has the world's highest commodity prices and imports are pouring in to take advantage of the price-gap. This means farmers demand higher subsidies. No more decoupled subsidies that act as an entitlement to the rural masses--China is increasingly talking about tying subsidies to production and sale of specific commodities.

China's narrative of poor peasants needing subsidies to compete with big American farmers is crumbling fast. China once took land from the "greedy landlords" and gave it to the "poor peasants." Now the peasants are the ones demanding big rents. Chinese farming is morphing into farm businesses just like those in developed countries and the subsidy system will soon be an impenetrable alphabet soup of acreage bases, deficiency payments, and Olympic averages. If only George Orwell were here to see this real-life "Animal Farm" taking shape.

Sunday, March 22, 2015

China Pushes Sustainable Ag Plan

China's State Council endorsed a "National Agricultural Sustainable Development Plan" that calls for controls on agricultural nonpoint pollution, preventing loss of farmland, and raising labor productivity in farming.

The Minister of Agriculture immediately got to work by telling his staff to formulate a strategy for implementing the core directive summarized as "one control, two reductions, three bases."

One control = strict control of the volume of water used for agriculture.
Two reductions = reduce chemical fertilizer and pesticide use.
Three bases = better utilize three basic resources: plastic mulch, crop straw/stalks, animal manure.

The Ministry of Agriculture launched a "zero growth" campaign for chemical fertilizer and pesticides. Currently, use of these two chemicals is growing about 1.3 percent annually. They plan to slow the growth to 1 percent in the next few years and achieve zero growth by 2020. It is estimated that about a third of chemical fertilizer applied is utilized by plants; they want to raise the utilization rate to 40% by 2020. They also hope to raise the utilization rate of pesticides from 35% to 40%.

A rural researcher at China's Academy of Social Sciences said that agriculture contributes more to water and air pollution than other sources, but its contribution is often unrecognized. The plan targets the chief pollution sources: fertilizer runoff, pesticide contamination of soil and water, smoke from burning crop straw, animal manure, and discarded plastic sheeting used as mulch and for greenhouses.

The 2015 "Number one document" ordered provincial officials to strictly control loss of cropland and to maintain its fertility. In January, Premier Li Keqiang and two vice-premiers ordered implementation of a permanent cropland designation plan and enforcement of strict penalties for illegally converting cropland to unapproved uses. Last November, the Ministry of Land Resources issued a plan to designate tracts of permanent cropland on the outskirts of 14 cities, including Beijing. It is to be completed by 2016.

Deep-ploughing will be encouraged to improve soil fertility. Water-conserving irrigation will be expanded, and 800 million mu of high-standard agricultural fields will be constructed by 2020.

The plan also calls for promoting new types of "appropriate scale" farming businesses while strengthening the base of family-operated farms to realize the potential of "systemic reform." By operating larger farms, it is hoped that farm workers will have higher productivity.

There's nothing really new in this plan except the zero-growth target for fertilizer and pesticides. All the other measures have been around for years. However, in China policies are just for show until they are endorsed by top officials. The State Council's endorsement is a signal to local officials that they mean business on this now.

Tuesday, March 17, 2015

China Ag Official Defends GMOs

An agricultural official observed that no food is risk-free in the latest barrage launched by Chinese officials in their campaign to reassure the public about the safety of genetically modified foods.

On March 6, 2015, following a meeting of top communist party officials in Beijing, former Vice Minister of Agriculture Niu Dun (he has been selected as China's new representative to the FAO in Rome) explained the Ministry of Agriculture's approach to GMOs in an interview with a Beijing newspaper.

Niu gave three objectives for GMOs: to maintain food security by increasing the volume of crops produced; to improve resistance to drought, low temperature, insects, and disease; and to give foods nutritional value desired by consumers.

On the value to consumers, Niu deftly gave an example calculated to win approval of China's female population (the key food decision-makers in families and perhaps also the leading GMO skeptics). Niu casually speculated that grains and vegetable oils might be engineered to contain increased unsaturated fatty acids that could improve the complexion of skin for China's beauty-conscious women and help them look younger.

Niu then walked his comments back by admitting that the only tangible progress so far is in engineering resistance to insects, disease and weather extremes. He said genetic modification to increase output and quality of crops is just a "pleasant thought" for the future.

When asked about the safety of GMOs, Niu replied, "We have not found any foods or other items that are 100 percent risk-free, so we need a lot of experimentation and data [to evaluate their safety]."

China's support for GMOs reflects speculative concern that China could be left behind if it doesn't keep up with this path-breaking direction in research. Niu described GMOs as a major opportunity and possibility. He urged listeners to take the long view: "Future generations will judge [this] generation's efforts and achievements." Niu said, "All we want is an advanced thing, to maximize advantages, and avoid becoming disadvantaged."

Niu then moved on to the labeling issue. He argued that genetically modified products must be labeled to protect the consumer's "right to know" and "right to choose." Niu asserted that consumers have the right to decide for themselves whether to consume GMOs. No one can force you.

Niu then launched into a confusing response to concerns that GMO-labeling will increase costs, emphasizing that labels are demanded by the law. But he also claims that labeling is a cost voluntarily borne by those who want to produce GMOs. He worries about ensuring that people who want to consume non-GMO foods have the right to do so.

[Using this logic, shouldn't there also be a label to indicate that foods are "non-organic" to protect consumers who only want to consume organic food? That would be absurd since we assume food is not organic unless it is labeled as such.]

The Chinese approach appears to presume that genetically modified crops will be a niche market. Usually GMOs become predominant.

A week after Niu's comments, a delegation from Brazil's seed association came to Beijing to request that China speed up its lengthy approvals for genetically modified crops. According to the article, 93% of Brazil's soybeans and 82% of its corn is genetically modified this year.

Over 90% of U.S. soybeans and corn are genetically modified as well. After China approved genetically modified pest-resistant cotton, it was adopted by nearly all farmers outside of Xinjiang where there are no bug problems. There are rumors that Chinese farmers are already planting genetically modified crops even though they are not approved. The Ministry of Agriculture just announced that they will start testing domestic crops for GMOs.

In February, one of China's top rural policy advisors--and a long-time GMO proponent--pointed out that China imported 71 million metric tons of soybeans in 2014 and probably all of them were genetically modified.

Chinese officials may be interested to know that humans themselves are genetically modified. This week's Economist magazine points out that human beings have at least 145 genes acquired from other species.