Wednesday, May 27, 2015

Chinese Dairy: Balance or Wipe-Out?


Chinese officials are obsessed with self-sufficiency because they don't believe in equilibrium. They view the market as an inherently unstable mechanism in which the winner takes all. In their binary view of imports and domestic products, once imports gain a foothold, they will inevitably take over the market and completely drive out domestic producers. Therefore, this thinking dictates that China must block imports or isolate them from the domestic market by confining them to special economic zones, export-processing, or state-trading monopolies. This linear, binary thinking is an impediment to finding an equilibrium between imported and domestic supplies of food that is surely China's future.

Two views of the way forward in agricultural markets are contrasted this month in (1) a speech by a top policy advisor and (2) an essay about the dairy industry that appeared in a Chinese livestock industry journal.

A speech to an international agribusiness conference in Beijing this month by Han Jun, China's no. 2 rural policy advisor, voiced anxieties about pressure on Chinese agricultural producers from lower-priced imported commodities. He assured his audience that import quotas would maintain self-sufficiency in cereal grains, but he worried that commodities not protected by quotas are facing serious pressure.

The knife-edge, all-or-nothing view of trade was reflected in Han's concern that China's dairy industry is "near the point of life or death." Its costs exceed those of imported milk, the industry is still under the shadow of the melamine incident, and faces pressure from even more imports as the European Union gives up production quotas and a free trade agreement with New Zealand will lower barriers to milk from that country, Han said.

A more nuanced article in a livestock industry journal on "restructuring for development" in China's dairy industry recognizes the complexities of the industry and outlines a possible future scenario in which imports and domestic milk will share the market.

The article sees conflicts between domestic and imported milk, between processors and farmers, and between overseas and domestic investment in dairy production. The author estimates that the 1.8-million-metric-tons of dairy imports--mostly milk powder--during 2014 constituted one-third of China's milk supply when converted to fluid milk-equivalent. At average output of 6,000 kg per cow, he estimates that imports are equivalent to 2.3 million lactating dairy cows. He notes that nearly all dairy products, yogurt, baked goods, and confections in China use imported milk powder for at least part of their raw material. The writer sees a lack of cooperation between farmers and processing companies who fight over shares of a fixed pie.
The article acknowledges that it will take time for China's dairy industry to become competitive. Small and medium-scale farms--the "backbone" and future of China's dairy industry according to the writer--need time to raise productivity and hence reduce unit costs to become internationally-competitive. Developing quality feed resources, disease prevention, and an effective breeding system needs time. The article describes the construction of large-scale farms in recent years as a "detour" that exacerbated the conflicts between farmers and processors.While the author doesn't mention it, the surge of (subsidized) imported dairy cattle may also be a sign of panic a short-sighted measure.
Farmers need to strengthen management, develop high-protein forages, and use other measures to reduce costs. Processors should provide a stable outlet for farmers' milk. The government and industry association should coordinate the process, says the livestock industry article.

The writer doesn't see a problem with overseas investment by Chinese dairy companies. He thinks it's necessary for the companies to do whatever is necessary to remain internationally competitive since the health of processors is critical to the entire Chinese dairy industry's health, including that of farms. Besides, the author points out that investment in the Chinese dairy industry is also quite robust.

The article outlines a segmented dairy market for China's future. Domestic farms should acknowledge that they do not have a cost advantage vis a vis imported milk. Instead, domestic milk producers should differentiate their product to emphasize its freshness and nutrition. The author suggests that Chinese milk producers concentrate on serving local markets with low-temperature (pasteurized?) fresh milk at premium prices while leaving the room-temperature (UHT?) market to imports.

This nuanced view of the dairy industry's future contrasts with the monochrome thinking of Chinese officials who seem unable to comprehend the complexities of the world. Chinese officials cling to a groupthink that views agricultural commodities as uniform, generic products produced by 200 million identical farmers. They generally fail to recognize that there are substitutes for commodities. In this simplistic view of the world, a slight cost advantage for imports means that  they will completely dominate the Chinese market. Therefore, the Chinese official insists that Chinese farmers and companies must be sheltered behind a wall of quotas and other trade barriers with endless subsidies as a lifeline.

In actuality, an equilibrium is reached before  all countries have a range of producers with different types and grades of products and differing productivity and costs. As China's imports increase and prices fall, high-cost producers will leave the sector, leaving the most efficient ones still in business. The market price is determined by the marginal producer, not the average. At some point, the marginal Chinese dairy producer will be competitive with the marginal producer overseas. Chinese producers can tailor their products and marketing to make the most of their advantage.

China needs to abandon the groupthink paranoia of communist party officials, be patient, and think about a future where domestic products and imports coexist on the shelves of China's supermarkets.

Monday, May 18, 2015

China's Livestock Subsidies for 2015

China's livestock industry is set to receive central government support for policies to subsidize acquisition of breeding stock, construction of large-scale farms, subsidized insurance, manure treatment, free vaccinations, compensation for culling animals, aid for disposing of diseased carcasses and subsidies for village veterinarians.

Most of the 2015 livestock programs reflect a decade-long campaign to reshape the livestock sector into a "modern" industry launched during the 11th five-year plan. By 2005, the sprawling, chaotic sector composed of hundreds of millions of "backyard" producers had become subject to cyclical swings in prices and disease epidemics, including a serious avian influenza outbreak at the time. Chinese officials made "livestock modernization" a theme of the five-year plan for 2005-10. The programs gained more impetus from an epidemic of "blue ear" disease combined with a mass-culling of sows in 2006-07 that sent pork prices soaring and the dairy industry's melamine adulteration crisis that came to light in 2008.
Much of the support is channeled through government officials and companies, and much of it is targeted at hogs. One of the two largest components is 3.5 billion yuan ($570 million) in financial "awards" for major hog-producing counties to help local officials finance construction of modernized farms, subsidies for insurance premiums, subsidized loans for pig farms and pork processors, and costs of disease control activities. The aid for hog counties is designed to incentivize local officials to expand local production and supply pork outside the county. Counties are chosen to be one of the approximately 500 recipients of aid based on a formula that weighs three statistical indicators: number of hogs sold out of the county (50% weight), number of hogs slaughtered (25%), number of hogs in inventory (25%). Counties producing more hogs have a better chance of getting the aid. (It also gives county officials incentive to pad their statistics.)

The largest livestock program subsidizes construction or refurbishment of large-scale livestock farms or livestock production "zones" (养殖小区) where multiple farmers keep their animals in a single location that resembles a large-scale farms. Funds can be used for roads, water, and electricity for farms, manure treatment, disease control, milking facilities, and quality testing labs.

Normally, most of the large-livestock-farm subsidies finance hog farms, but this year hog farms will temporarily be excluded from the subsidy--presumably because the hog sector is suffering from excess capacity and officials are shutting down hog farms to control pollution from manure. In 2014, hog farms accounted for 2.5 billion yuan ($405 million) of the 3.8 billion yuan ($618 million) budgeted for large-farm subsidies. That leaves 1.3 billion yuan in subsidies for large dairy farms/zones (1 billion yuan in 2014) and beef and sheep zones in 7 western provinces (300 million yuan in 2014) in 2015.

China's third major livestock program, with spending of 1.2 billion yuan ($195 million) in 2014, is a subsidy to encourage use of improved breeds that began in 2005. It mainly subsidizes artificial insemination of swine and dairy cattle, but it has been expanded to include beef cattle, sheep, and Tibetan yaks. The subsidy for sows is up to 40 yuan per year per sow (10 yuan per attempt, up to four per year). The subsidy for cattle is 30 yuan per insemination for Holstein and Jersey cattle, 20 yuan for other dairy breeds, and 10 yuan for beef cattle. Improved-breed subsidies are 800 yuan per animals for a sheep ram and 2000 yuan for a yak bull. This year a new subsidy of 5000 yuan for dairy cow embryos has been introduced.

Disease prevention and control is probably the most important livestock program. This includes free compulsory immunizations for high-priority diseases, compensation for culling animals infected or exposed to key diseases, and aid for disposal of diseased carcasses. Compulsory immunizations include those for highly pathogenic avian influenza, foot and mouth disease, classical swine fever, highly pathogenic "blue ear disease" (PRRS), and a sheep disease (peste des petits ruminants). The Ministry of Agriculture and provincial governments procure vaccines from manufacturers via a bidding process and distribute them to local veterinary stations.

Compensation for culling for disease control covers animals exposed to the same diseases that are the focus of free immunizations plus dairy cattle that are TB-positive or infected with brucellosis.

The disposal of diseased hog carcasses became a priority after the 2013 incident of floating pigs in Shanghai's Huangpu River. The butchering and sale of meat from dead hogs is another major food safety and public health concern. Farmers get 80 yuan to dispose of dead swine properly by burying them or depositing them in a pit where chemicals break down the carcass. Previously, this aid was only given to farms producing 50 or more hogs per year. This year, small backyard farmers are also eligible. Designated slaughterhouses can also get compensation for disposing of diseased hog carcasses. They can get 800 yuan per head in compensation for a diseased carcass, plus 80 yuan to dispose of it (instead of butchering it).

There is no report of expenditure on disease control programs. They are jointly funded by central and local authorities. The central government gives aid to local governments to fund disease control because many rural governments strapped for cash or with other priorities failed to fund local veterinarians or inspectors. The central government gives local governments 780 million yuan to fund salaries and other expenses of local veterinary stations (there are only a few private veterinarians who mainly serve large farms). The local share of expenditures for some disease control programs may be financed by funds from hog county awards or large farm programs.

Last month a vice minister of agriculture gave a speech describing China's progress in livestock insurance since it was first offered for reproductive sows in 2007. Since then, subsidized insurance has been expanded to cover dairy cattle, fattening hogs in some provinces, yaks, and Tibetan sheep. In Chengdu and Chongqing there are pilot insurance programs for broiler chickens, laying hens, ducks, and rabbits. The vice minister said the insurance now covers 121 million animals and income from insurance premiums is 4.9 billion yuan. Like other livestock programs, the subsidies are shared by central, provincial, and local governments.

The insurance mainly covers loss from disease and natural disasters. Price index insurance for hog producers in several pilot regions is an experimental approach to helping farmers bear market risk. In one city in Zhejiang, insurance indemnity payments are given only when farmers have confirmed that carcasses have been properly disposed of, an experimental measure to prevent diseased animals from entering the food supply.

No expenditure on subsidies for insurance programs was reported. Part of the county award funds can be used to cover subsidies for insurance, but the vice minister said tight budgets in livestock counties undermined local officials' enthusiasm for insurance programs and led to late indemnity payments. The vice minister said that livestock insurance is in its exploratory stage, most farmers don't understand insurance, tend to rely on luck, and enthusiasm for participation is dampened by the shortfall between indemnities and value of animals and by late payments on claims. Insurance companies have a hard time verifying the number of insured animals and claims, and they lack employees who understand the livestock business.

The sow subsidy of 100 yuan per head is missing from the list of this year's livestock policies. The sow subsidy is opaque and is often not given in years when the hog industry has excess capacity and low prices.

Many local governments have their own programs. Kedong County in Heilongjiang has subsidies to encourage development of large-scale dairy farms. Farmers there get a subsidy of 0.30 yuan (4.8 U.S. cents) per kg of milk sold, 10 yuan per mu for planting corn for silage, a subsidy for building silos of 50 yuan per cubic meter, half  the cost of installing automated feeding equipment, and 300,000 yuan for building manure treatment facilities.

Zhong County in Chongqing Municipality reports subsidizing 33 livestock projects this year. They include seven artificial insemination stations for beef cattle, four ecological livestock projects, four standardized beef farms, a rehabilitated rabbit farm and expansions of two rabbit farms, a new large-scale hog farm, expansions and refurbishments of 8 other hog farms, 3 industry chain projects that include processing plants, a corn silage project and two pasture projects, and wastewater treatment facilities for four beef farms. The 33 projects are expected to involve investment of 21 million yuan and are eligible for aid applications of 10.4 million yuan (US$1.7 million).

While the livestock industry sounds like its getting a lot of money, it's a tiny proportion of the industry's value added. Grain subsidies are more than ten times subsidies for livestock, but the value of grain production is only about half the value of livestock output.

Saturday, May 16, 2015

"New Normal" for China's Livestock Industry

Just as the broader Chinese economy has entered a "new normal" phase of less-rapid growth and structural change, the livestock industry has also entered a "new normal" that is changing the structure of consumption, production, and marketing of livestock products. China Animal Husbandry and Veterinary News laid out these changes in a recent article.

Over the last two-plus years, China's central communist party authorities have pricked a "bubble" of excessive and wasteful livestock product consumption by ordering officials to cut back on banquets, special cafeterias, and gifts.

New supply and demand relationships have become apparent over the past two years. Hogs and chickens are in excess supply with prices declining, but China has structural shortages of beef and sheep meat which may persist in the future. A new change since last year, said the Animal Husbandry News, is a slight decline in the price of mutton after years of increase. The News says there are complex factors behind this, including an outbreak of a small ruminant disease, pressure from imported lamb, and the decline in consumption due to the crackdown on banqueting.

Production capacity is adjusting in response to changes. The hog industry is shedding capacity as backyard farmers quit rapidly. Some mining and real estate companies that began raising hogs in recent years mismanaged the farms which now lay idle. Even companies with many years of experience in the hog industry have curbed their expansions.

The livestock industry is squeezed by rising production costs and downward pressure on prices from cheaper imported meat and milk. Prices of most of China's livestock products now exceed prices in the international market. The article considers the pressure from imported pork, beef, mutton, and milk to be "extremely serious" and will threaten the domestic industry's survival "unless regulatory measures are taken."

Within China, hog production is shifting regionally from south to north. The south has more limited resources (presumably they are referring to availability of land, feed and perhaps labor), and many local governments there have declared limits or bans on raising livestock as an environmental protection measure. Northern provinces have better access to domestic corn. A number of big companies have shifted production to northern provinces.

Crop and livestock production are becoming more closely linked (this is a mantra of the Ministry of Agriculture this year). Traditionally, the location of livestock production was largely decoupled from crop resources--most animals were raised in the south and about 40% of corn is raised in the northeast.  This is changing as commercial feed becomes dominant and is pushed forward by cost pressures on livestock producers.

Access to land is becoming more challenging for livestock farmers. The News article says that land has historically been under collective ownership, but now rights to the land have increasingly been returned to villagers. This makes it harder to consolidate a large parcel of land since a livestock farmer would now have to arrange to rent from dozens or hundreds of land-holders. There are also increasingly strict regulations on shifting land zoned for grain production to other uses.

Marketing of livestock products is also changing as direct sales, electronic exchanges, futures markets, and e-commerce develop rapidly. The younger generation of consumers will be accustomed to these new methods, permanently changing the marketing of meat and milk products.

Consumers are paying more attention to nutrition and safety. The Animal Husbandry News authors think this will favor poultry over pork, since it has less cholesterol and greater nutritional value. Demands for quality and safety are growing.

Finally, the article asserts that the "new normal" demands an unspecified adjustment of government policy support for the livestock industry. While the emphasis on helping farmers must not be changed, the Animal Husbandry News author urges officials to evaluate policies in light of experience and requirements of the "new normal" to add value and offer new options.

Sunday, May 10, 2015

Feed Industry Outfoxes Beijing

An April 2015 study tour of feed and livestock producers in Guangdong Province reveals how the industry's discovery of imported sorghum undermined Beijing's attempt to enforce high Chinese corn prices by banning corn imports. The flexibility and inventiveness of industry on China's southern coast contrasts with the sclerotic inside-the-box thinking at communist party headquarters in the northern capital.

A survey team organized by COFCO's futures market research unit with support from Dalian Commodity Exchange spent 7 days visiting feed, livestock, oilseed-processing, ports and trading companies in ten regions of Guangdong Province. Guangdong is one of China's two largest feed-milling provinces, the largest importer of feed ingredients, and a major producer and consumer of livestock and aquaculture products.  (A more detailed rundown of the visits is here.)

The survey team estimated that sales of feed are overall down about 10% in the first quarter of 2015 in China. Sales of pig feed are down 20% to 30% as a result of serious losses in the industry since last year. Poultry feed sales are expected to grow 10% to 20% as the sector recovers from last year's avian influenza outbreak. The poultry industry is still not back to its 2013 output level. Aquaculture sectors are expected to rebound in response to strong demand. In 2014, production in fish ponds was disrupted by typhoons.

The composition of feed materials has been adjusted in complicated ways. In 2014, Guangdong feed mills and livestock producers began to use imported sorghum to replace domestic corn in feed formulations. This substitution was prompted first by the high cost of domestic corn. Imported energy-type feeds are 300-to-400 yuan/ton cheaper than domestic corn. When the MIR162 ban cut off corn imports last year, companies began exploring use of sorghum as a substitute for corn. They began using sorghum to replace about 10% to 20% of domestic corn in feed formulations. Now the substitution is up to 50%. Some duck and pig farms now have eliminated domestic corn from their feed rations. Some feed mills are using Ukrainian corn to replace Chinese corn.

The survey team says the sorghum substitution is still in an exploratory stage. When the team conducted a similar survey last year, they heard a lot of concerns about the effect of sorghum on feed quality but this year no one mentioned it. There is still some concern that sorghum turns the feed red, an attribute that livestock producers dislike. However, the sorghum is said to have a lower degree of toxins than domestic corn (probably mycotoxins) which reduces problems with diarrhea in animals.

With lower overall demand and sorghum replacement of corn, a corn trader estimated that shipments of domestic corn from the northeastern region are down 50% this year. This prevents authorities from whittling down their huge corn stockpile in the northeast.

Imported barley is said to mainly replace domestic wheat bran in feed formulations. This is consistent with other reports that say low prices for wheat bran have reduced net returns for flour mills.

Despite declining overall feed sales, the demand for soybean meal--made from cheap imported soybeans--has been robust due to its price advantage over other high-protein meals from rapeseed, cottonseed and peanuts. The proportion of soybean meal used in feed was said to increase 30% in 2014. Rebounds in the poultry and aquaculture sectors are boosting demand for soybean meal--both use a high proportion of soybean meal in their feeds.

The hog sector has complex dynamics. Overall, three years of declining hog prices have disrupted cash flow and forced many producers to cut back on production. Hog numbers are estimated to be down 30% this year. The team visited three hog producers representing large (20,000 head), medium (6,000 head) and small (500 head) farms. The team found that the medium-size farm had to scale back due to cash flow problems. However, the large farm was able to maintain its cash flow and was actually expanding its operation. The small farm was operated by a husband and wife with no hired labor expense, so they were able to make a small profit despite low hog prices and they plan to expand by 20%. The small farm achieved a good ratio of 22 to 24 pigs per sow per year.

Normally, Guangdong Province is deficit in pork and depends on neighboring provinces like Hunan, Sichuan, and Guangxi to meet its demand. Now Guangdong's hog industry has lower production costs than neighboring provinces--presumably because Guangdong producers have access to cheaper imported feed materials. Now hogs are more expensive in Hunan and other neighboring provinces, so the flow of hogs into Guangdong has slowed.

Saturday, May 9, 2015

China Scrutinizes Imported Sorghum

As shipments of imported sorghum soar, inspectors at Chinese ports are carefully scrutinizing the grain for problems. Inspection and quarantine authorities say they have stepped up inspections and testing to prevent new pathogens and weeds from entering the country, but more cynical observers might suspect that the inspections are a disguised trade barrier.

A May 4, 2015 article entitled "The 'Hidden Killer' in American Sorghum" announced the discovery of a pathogen that causes "grape vine blight" in a 49,000-metric-ton shipment of U.S. sorghum at a port in Shenzhen. The article originated with China's inspection and quarantine authority and has been re-posted on a number of Chinese web sites. The pathogen, phoma glomerata, is said to have a wide range of possible hosts, could threaten "hundreds of plants," and could inflict "incalculable" losses on China's environment and agricultural production, according to the article.

Phoma glomerata was previously detected by port inspectors in a shipment of soybeans arriving at Shanghai's port in 2013 and in fruit saplings from Italy at Ningbo in 2012. Those detections did not cause much of a stir.
Inspecting a sorghum shipment at Yangjiang port in Guangdong. 

The Shenzhen authorities demanded that trucks and warehouses take precautions to prevent the spread of pathogens from the sorghum in transit to 13 feed mills in three provinces. They ordered that the sorghum be kept separate from other materials in centralized warehouses, that transportation equipment and storage facilities be disinfected, and that residual materials from processing the sorghum be destroyed.

The May 2015 article reveals that the detection of phoma glomerata is the result of a nation-wide campaign to scrutinize imported feed grains launched this year. According to the article, the scrutiny was prompted by the surge in sorghum imports which totaled 1.36 million metric tons in January and February, a six-fold increase from the same period last year. The article warns that imported feed grains have a high risk of transmitting hazards that can spread widely throughout the country to small feed mills.

Bureaus of inspection and quarantine (known as CIQs in China) at several other locations have published similar reports with similar language, indicating that this is a nationally-coordinated campaign.

Tianjin's CIQ reported testing 141 samples taken from shipments of sorghum, corn and other grain during the first quarter of 2015. They reported that 71 of the samples had weeds and other harmful organisms that were destroyed. The Tianjin authorities reported that they are targeting their scrutiny based on information about particular grains, country sources, and historical interception of pathogens, weeds, and other problems. They have stepped up lab testing for pathogens, agricultural residues, heavy metals, and genetically modified materials. They are scrutinizing transportation, storage, and processing facilities to look for risks of contaminated grain leaking into the surrounding environment.

Zhenjiang's CIQ reported intercepting 60 kinds of harmful organisms in 351 samples taken from 14,000 metric tons of imported feed grains in March 2015. They found a number of weeds, including ragweed, pigweed, "false sorghum," wild French oats, a type of sunflower, xanthifolia, and trifidia.

Yangjiang port in Guangdong reported finding no major pathogen risk in the first-ever shipment of imported sorghum arriving at the port this month.

In July 2014 authorities issued a similar document that ordered inspectors to closely inspect and test imported sorghum and barley.

Is this heightened scrutiny of sorghum really intended to address potential risks of pathogens and invasive weeds? Or is it being orchestrated as a disguised barrier to slow down imports? It's hard to tell.

The news articles all use similar jargon about risk analysis, indicating that someone at the top of the inspection and quarantine bureaucracy has dictated that all CIQs use risk analysis methods probably acquired from some training course given by an international organization or foreign counterpart. To be fair, the sudden surge of imports does pose a risk of transmitting new weeds and other organisms to China. Over the  years, trade and immigrations brought the United States invasive weeds like Russian thistle and kudzu, chestnut blight, and other species that severely affected crops and ecological balance. China is on guard against similar invasions as it receives a swelling tide of agricultural imports.

However, the timing of the crackdown is suspicious. Chinese grain officials are trying to sell off a huge stockpile of corn they have accumulated from three consecutive years of big surpluses, including over 83 million tons of corn from last fall's harvest. The availability of cheap imported sorghum undermines the government's ability to sell off their corn stockpile which has been estimated to be as large as 150 million metric tons. The urgency of disposing of the stockpile has become even greater as yet another record corn harvest is expected in 2015.

An investigation of feed demand in Guangdong Province last month by a group of Chinese futures market analysts illustrates the problem. The group learned that last year feed mills began to import sorghum to replace about 30% of the domestic corn they normally use in feed formulations. This year, the substitution rate was believed to be as high as 50%. Some duck feed formulations have eliminated corn. Feed millers said imported grains are 400-500 yuan cheaper per ton than domestic corn. Ironically, another advantage cited by the Chinese buyers was a lower level of toxins in the imported grain compared with domestic Chinese corn.

If Chinese inspection and quarantine authorities are sincerely trying to control hazards, they had better communicate with their foreign counterparts to resolve the problem. If they fall into their usual mode of going incommunicado or dribbling out cryptic answers to inquiries--as they did with last year's MIR162 incident--their foreign counterparts will be inclined to conclude that this is yet another disguised trade barrier. China's use of funguses and opaque bureaucracy to manipulate imports is slowly poisoning its trade relations with agricultural exporting countries.

Tuesday, May 5, 2015

China's Migrant Workforce Growth Slows

While China's economy and living standards appear to be approaching first-world levels, the economy still relies on a rootless army of migrants from the countryside. The flood of migrants has slowed and is getting older, but wages still rose nearly 10 percent during 2014.
 
The annual survey of rural workers by China's National Bureau of Statistics reports that 274 million rural people had nonfarm employment in 2014. Most of those workers--168 million--were migrants who left their place of official residence in the countryside to find work. Separately, the Bureau reported that the "floating population" (people who live in a city other than the place where they are officially registered) was 253 million--18 percent of the population.

The 168 million migrants equal more than a fourth of China's workforce: 28% of the 778 million people reported employed in China during 2014. Of the migrants, 36 million have made a permanent move, and 132 million maintain their residence in the countryside. 79 million worked in a different province from their registered residence.

Most of the migrants work in small cities and towns. Only 42 million worked in megacities like Beijing and Shanghai or in provincial capitals, while 59 million worked in prefecture-level cities (地级市), and 58 million worked in "small towns" (小城镇).

The growth in the migrant workforce is slowing. The Bureau's report says that the number of migrant workers grew 1.3% in 2014. This is about a third of the torrid 5.5-percent pace during 2010, half the 3% growth during 2011 and 2012, and slower than the 1.7% growth in 2013. The number of rural people employed near their home has grown at a faster pace than migrants in the last three years, but growth in this group also slowed to 2.8% during 2014.

Wages are relatively low, but still growing rapidly. The average monthly earnings of rural nonfarm workers were 2864 yuan ($464) in 2014, up 9.8% from the previous year. With CPI growth of 2 percent, that translates to a 7.8% growth in real wages. This is less than half the rate of growth in 2010-11, but faster than during the recovery year of 2009 and still robust wage-growth for a slowing economy.
Note: annual growth in income for rural nonfarm workers
from annual China National Bureau of Statistics surveys.

Rural workers live a bare bones existence and don't consume much. Their average monthly living expenditure was only 944 yuan ($153), which implies that they saved two-thirds of their income. Nearly half of their expenditures were for housing. About 27% received housing from employers in dorms or temporary structures on construction sites, and 36% rented housing. Only 1% of migrants working away from their residence owned a home, but 49% of those working in a "small town" owned their home. 

More than half of rural people are employed in manufacturing (31%) and construction (22%) sectors. Construction wages averaged $534 per month, and manufacturing wages averaged $459. Wages in both sectors grew over 11% during 2014.
Source: National Bureau of Statistics survey.

83% of rural workers were employed by someone else; only 17% were self-employed. (This excludes self-employed farmers.)

The rural migrant work force is gradually getting older. The share of rural nonfarm workers ages 30 or younger fell from 42% in 2010 to 33% in 2014. The share age 50 or older rose from 13% to 17% over those years.

About 60 percent of rural employees have a junior middle school education (8 years), while 17 percent have completed high school, and 7% have a vocational degree or other higher education.

Few workers receive technical training. 32% received nonagricultural technical training and less than 10% received agricultural technical training. Agricultural training is especially rare among the youngest rural workers.
Source: analysis of National Bureau of Statistics surveys.

Monday, May 4, 2015

Scale Farming: China Feeling Its Way

Chinese officialdom has decided to make a great leap to scale farming without privatizing land. The stated goal of letting the market have a "decisive role" in resource allocation is undermined by banning development of a market to allocate land, the most important resource in farming. The result is a "market failure" which means Chinese officials step in to play a central role in brokering and subsidizing deals to consolidate land and launch new-style scale-farmers.

A sprawling list of 50 farm policies published by China's Ministry of Agriculture last month included new policies aimed at new-style scale farmers--specialized grain producers, "family farms," alliances of farmers, farmer cooperatives, and farming companies. This year, China allocated RMB 23.4 billion (about $3.8 billion) for new-style scale farmers in addition to its usual direct payments, seed, input, and machinery subsidies.

The MOA list also revealed that bureaucracy is a constraint on large-scale farms. It turns out that large farms need large areas of land to dry grain and to store machinery and inputs. Apparently farms have trouble getting approval from the Ministry of Land Resources to use land zoned as cropland for these purposes. MOA called for finding ways to streamline approval for these land uses and coordinating the roles of the agricultural and land ministries in the process.

On May 4, MOA followed up with a call to research ways to clarify villagers' land rights to facilitate transfer of land to form scale farms. Chinese officialdom is creating a convoluted system of multiple types of nebulous rights for three types of rural land; mortgages and loan guarantees for those rights that are sort of like collateralized debt obligations; and impenetrable formulas for distributing increases in land value to the State, the collective and the individual. A lot of "research" is needed to make sure barely-educated villagers who spend their time watching kung fu movies, amateur singing shows, and soap operas thoroughly understand this gobbledygook.

In an essay in the April 2015 issue of the communist party journal Qiushi, the Ministry of Agriculture's chief economist warned that the leap to scale farming will not happen overnight and must be conducted in accord with local realities and economic laws. He cautioned local officials about unrealistic plans to create 1000-mu (165 acres) or 10,000-mu (1,650 acres) farms. He warned against a common misconception that bigger farms mean bigger profits. In fact, he said, large farms also have higher costs and sometimes lower yields per hectare. The MOA economist was concerned that a polarization was emerging in some areas where super-large farms coexist alongside tiny household farms. He also warned against turning land over to companies that convert the land to nonagricultural uses.

The economist explained several ways that scale-farming can increase productivity. Large, specialized farms reduce labor input by mechanizing, they are more inclined to adopt new crop varieties and utilize extension services, and they can reduce waste of land by eliminating ditches and berms that separate small fields. He claims that scale wheat farms have 30-percent lower pesticide costs and their yields are about 25-kg higher than those for small, scattered farms.

The economist also asserted that local specialization and agglomeration can improve productivity. When farms and agribusinesses are clustered in one location, it becomes easier to pass on technical and market information and to offer extension services and technical training. Agribusiness companies clustered in a region specializing in a particular commodity can get achieve similar synergies and scale. This is the thinking behind China's program to set up "demonstration" or "model" districts specialized in particular commodities with large-scale specialized farms.

The MOA economist envisions a flood of subsidies for the new-style scale farmers. He acknowledges that WTO rules limit the amount of "amber box" subsidies, but he claims China's current amber box subsidies are only 2 percent of the value of production. (He apparently is excluding the huge value of market price support which should be counted.) Moreover, he claims that China's limit on "amber box" subsidies is 17 percent of the value of production. He estimates that China can increase subsidies to grain farmers by RMB 174 billion (about $28 billion) and stay within its WTO spending cap. In fact, the limit is 8.5-percent (and he knows it)...he may be adding together product-specific and non-product-specific limits at 8.5 percent each.

The MOA economist then estimates that scale farmers will be able to earn a net return from producing grain of RMB 500 per mu, plus RMB 130 per mu in subsidies, a net income of RMB 630  per mu (about $620 per acre). He thinks a 100-mu farm in the north and 50-mu in the south will give farmers an income comparable to what they could earn in cities.

This is a generous return compared to what U.S. farmers make. According to USDA estimates, the net cash flow for U.S. wheat growers was $121 per acre in 2014, but U.S. wheat growers lost $67 per acre after accounting for the opportunity cost of their land and labor, depreciation on equipment, taxes and overhead.

How can Chinese farmers make such high returns? First, the MOA "economist" does not seem to have accounted for rental payments. When net income for farmers is high, others will clamor for the land to get a piece of the action, thus driving up land rents. Chinese farmers are paying land rents equal to about $300 to $900 or more per acre. The USDA estimated land rental cost for U.S. wheat growers at $65 per acre in 2014. The high Chinese net returns are based on Chinese wheat prices that are roughly double those in the United States. These high prices are maintained by limiting imports through a restrictive tariff rate quota system. If imports were allowed to flow freely (i.e., if the market was allowed to have a "decisive role"), the fat Chinese returns would be erased by lower prices.

The economist also suffers from grain myopia, a common malady among Chinese officials. He presumes that Chinese scale farms will grow nothing but grain, a crop that produces less than 20 percent of China's agricultural value added and uses more than 70 percent of its agricultural land. If scale farmers are going to pay high rents for land, will they use that land to grow a low-value crop?

Ultimately, China's "decisive role" of the market is an empty slogan. As long as land remains under a convoluted "collective" ownership system (in which Chinese officials are the de facto owners and decisionmakers) and land is designated by officials as cropland, "construction land", or "housing land," the supply of crops produced on the land will ultimately be decided by officials, not the market. Moreover, self-sufficiency in grain will demand high prices enforced by restrictions on imports.

The "decisive role" will be in the invisible hands of government officials for the foreseeable future.