Thursday, September 29, 2016

China Ag Imports Deflate

China imported $73.2 billion of agricultural products during the first eight months of 2016--but that total was down 7.2 percent from the same period last year. The volumes of some grain and edible oil imports was down 20-to-30 percent, but pork and beef imports continue to surge due to high prices in China.

The Ministry of Agriculture's analysis of the import data shows that grain imports during January-August 2016 totaled 15.9 million metric tons, down 30.8% from the same period in 2015. Imports of rice and wheat rose 18.9%, while imports of corn dropped 32.2%. Imports of corn substitutes dropped even faster: barley was down 59.2%, sorghum was down 29%, DDGS was down 44.1%, and cassava was down 28.7%. Cotton imports continued to shrink by 34.6%. Sugar imports were down 31.2%.

China agricultural imports, January-August 2016
Commodity Imports Change from last year
1000 metric tons Percent
Wheat 2,451 18.9
Rice 2,347 18.9
Corn 2,961 -32.2
Barley 3,027 -59.2
Sorghum 4,982 -29.0
DDGS 2,426 -44.1
Cassava 5,325 -28.7
Cotton 844 -34.6
Sugar 2,115 -31.2
Soybeans 53,993 3.1
Rapeseed 2,764 -11.5
Palm oil 2,601 -30.3
Rapeseed oil 453 -14.8
Sunflower oil 651 44.3
Soy oil 379 -21.5
Pork 1,138 160.0
Swine offal 953 85.3
Beef 400 47.6
Lamb/mutton 173 7.0
Milk powder 627 18.6

Soybean imports were one of the few commodities to post a gain in imports, but the increase was modest, at 3.1%. Sunflower oil imports were up too, as importers ramped up imports from Russia to supplement purchases from Ukraine. Rapeseed imports were down, as were imports of other edible oils. MOA does not mention a four-fold increase in peanuts from the United States and Senegal (430,000 metric tons this year). Nor do they mention 700,000 metric tons of sesame seed imports from Africa (up 19 percent).

China has whipsawed the global market by importing massive volumes and subsequently cutting them off. Cotton was the first commodity where this happened (see chart below). China's imports soared during 2011/12 as imports poured in to replace domestic cotton sucked into State reserves at high support prices. China piled up huge reserves through this process until 2014/15 when they eliminated the cotton price support, allowed the domestic cotton price to plummet and choked off cotton imports by shrinking the import quota.

A similar pattern is underway for corn, with a twist. Corn prices at least double those in the United States created huge incentive to import, but corn imports were tightly controlled by an import quota. Instead, Chinese mills and processors imported substitutes for corn that had no import quota limits--sorghum, barley, cassava, and DDGS. Now Chinese authorities are allowing their domestic corn price to plummet--as they did for cotton prices in 2014/15--and they are force-feeding their corn reserves to domestic producers. Antidumping duties on DDGS are helping to tamp down imports. In 2015, the government canceled the rapeseed support price and has been trying to offload old reserves of rapeseed oil. This month, they have been selling off old soybean reserves which may slow imports in later months. The peanut imports may prove temporary--many localities are targeting increases in peanut plantings as part of the structural adjustment program that will shift land out of corn production to alleviate the country's corn glut.

Wheat and rice prices are still being maintained at high levels--for now. The scarcity of wheat in the Chinese market this spring (because so much wheat is in government reserves) and widespread quality problems with this summer's wheat harvest bumped up this year's wheat imports. The government bought up early rice over the summer and has just launched its price support program for the fall rice crop. The amount of wheat and rice going into government stockpiles this year exceeds the volume imported.

China's imports of livestock products are increasing because domestic prices are high, and most of the world has abundant and cheap meat and dairy products available. Unlike the cotton and grain imports, the meat and milk imports may be a permanent fixture--there are no price supports for meats, there are no massive meat reserves, and China does not have the capacity to ramp up meat and milk production.

Unlike previous pork-price surges in China, record-high pork prices since last year have not prompted a rebound in domestic pork output. Thus, prices remain stubbornly high, creating great opportunities for exporters in Europe and the Americas. Beef prices in China stopped rising when authorities started opening their market to bovine meat several years ago. After removing the ban on Brazilian beef last year, that country has become the leading source of China's beef imports in 2016. China's lamb prices have fallen this year. Lamb imports are not as large as beef imports and grew only 7 percent this year.

The MOA statistics don't mention poultry imports, but other statistics show a 41-percent increase in 2016. China's domestic broiler chicken production is constrained by the ban on imports of U.S. and French birds which deprives their industry of "white-feather" grandparent breeding stock.

The MOA statistics also fail to mention a 25-percent increase in imports of alfalfa hay (to 1.1 million metric tons). This reflects another supply constraint--there aren't enough quality forage crops in the country to support a massive herd of dairy cattle.

Tuesday, September 27, 2016

China's Meat Makeover

China is a big meat-eater but it's due for an upgrade, according to a speech by the vice chairman of China's Meat Association earlier this month. The Ministry of Agriculture also has big plans for reshaping the country's vast network of pig pens.

Earlier this month Chen Wei, an official with China's Meat Association, described China as big meat-producing country and a big market that accounts for a third of the world's meat, including half of the world's pork. (Statistics from the UN's Food and Agriculture Organization suggest China's share of meat is 27 percent). This share exceeds China's 18-percent share of the world's population, implying that the country's per capita consumption exceeds the world average.

Meat association official speaks in front of Smithfield banner in Beijing.

Mr. Chen expects China's consumption of meat to outpace its production over the next five years. He estimates that China's net imports of meat will grow to about 10 million metric tons by 2020, which will be roughly half of global meat trade.

Chen anticipates some changes in China's meat industry. The proportion of pork--now over 60 percent of meat produced and consumed in China--will fall and the beef and lamb share will increase. The industry will shift away from freshly-slaughtered meat toward more chilled and frozen meat. There will be more cooked and processed meat products. Chen sees more quality differentiation in Chinese meat products, including logos that indicate safety, grades and other attributes, and willingness to pay premium prices for quality.

Mr. Chen expects more western-style meat products to be consumed in China.  Chen praised Shuanghui (now known as WH Group in English) for playing a guiding role as an advance guard of chilled meat marketing and offering purely western-style products. He celebrated the completion of a new Shuanghui processing plant in Zhengzhou and expressed hope that other Chinese companies will follow Shuanghui's example.

Chen's speech was given at a signing ceremony for a strategic cooperation agreement between Shuanghui--purveyors of Smithfield hams in China--with, a prominent e-commerce platform. This followed a similar tie-up between China's largest e-commerce company Alibaba and the country's largest feed company, New Hope Group, which has announced its intentions to get into the pork business in a big way.

China's hog-farming sector is also due for a makeover. In April, the Ministry of Agriculture issued a five-year plan for the hog industry that called for "stable growth." The targeted output for 2020 is 57.6 million metric tons, just 1.6-percent more than the output in 2014. This is glacial compared to 4-percent growth rates that were customary since the 1990s and even faster growth during the 1980s. (Pork production fell 3 percent during 2015, but this was not mentioned in the plan). The hog plan calls for a regional shift in production, utilization of hog waste, and a new focus on technology and management to raise productivity.

China hog industry five-year plan objectives
Item Unit 2014 2020
Pork output MMT 56.7 57.6
Slaughter by "scale" farms
(500 head/yr or more)
Percent 42 52
Slaughtered by scale enterprises Percent 68 75
Slaughter rate Percent 155 160
Commercial hogs per sow
(for scale farms)
Head 15 19
Labor productivity Hogs/person 650 1000
Feed conversion Ratio 2.8:1 2.7:1
Manure utilization rate Percent 50 >75

The hog plan delineated regions with differing potential for hog production growth. Regions now producing about three-fourths of pork will have no growth or slow growth. Faster growth will be targeted to fringe regions in the northeast, northwest, and southwest that produce relatively little pork now. The shifting of pork production into the hinterland requires upgrade of the slaughter industry linked with cold-chain marketing and logistics to supply densely-populated cities from a distance.
  • There will be no growth in pork output in densely-populated cities of Beijing, Tianjin, Shanghai and a swathe of southeastern and south-central China criss-crossed by rivers, lakes, and canals (Jiangsu, Zhejiang, Fujian, Anhui, Jiangxi, Hubei, Hunan Provinces) where pollution is a major concern. This region accounts for 38.6 percent of production now. 
  • 1-percent annual growth is targeted for the "key production region" which includes grain-abundant regions of north China (Hebei, Shandong, Henan), less-developed southwestern pork-producing areas (Chongqing, Sichuan) and the far south (Guangxi, Hainan). This region also produces about 38 percent of pork now.
  • 1-to-2-percent annual growth is targeted for "potential growth regions" in the grain-rich northeastern provinces, Inner Mongolia, and poor southwestern provinces (Yunnan and Guizhou). This region now accounts for 18.6% of pork output.
  • 4-to-6-percent growth is targeted for "appropriate development regions" in northwestern (Shaanxi, Shanxi, Gansu) and far western regions (Ningxia, Xinjiang, Tibet, Qinghai). These regions lack water resources and have a weak foundation for pork production (they have large Muslim and pastoral-oriented ethnic groups that do not traditionally eat pork). This region accounts for only 4.8% of production now.
Improvement of the hog breeding industry is a major emphasis for the 2016-2020 plan. The plan aims to break the industry's dependence on continual influx of breeding stock. Instead, the plan foresees localization of breeds by crossing imported stock with local Chinese breeds. A second emphasis is on supporting breeding farms that preserve purebred local Chinese breeds (analogous to a seed bank). 

The plan aims for "basic self-sufficiency" in pork, but it raises concerns about rising imports of pork. The writers of the plan attribute surging imports to high unit costs which are 40-percent higher than those in the U.S. The plan emphasizes improvements in technology and management to raise productivity.

The hog development plan emphasizes use of the international market for acquisition of breeding resources. It promises support for a strategy that combines "bringing in" and "going out" by bringing in quality breeding resources and advanced technology from developed countries. "Going out" implies more companies will make overseas acquisitions, with a priority on obtaining swine breeding technology and know-how. Other areas for international cooperation and exchange are research on feed, management and waste treatment to raising general production capacity and improve the industry's international competitiveness. 

Saturday, September 24, 2016

China Corn Price: How Low Can It Go?

Prices are falling as another big corn crop is harvested in China this month. This year there will be no floor under the price to catch it when it falls.

A Futures Daily reporter visited Henan, Hebei, and Shandong Provinces to investigate corn market conditions. The corn crop looks big, the quality is good, and dry weather at harvest time has been favorable for bringing in the crop. Supplies in the market are already plentiful because the government has been auctioning large volumes of corn from reserves over the past two months. The newly-harvested crop will add to the supply pressure.

The Futures Daily reporter learned from a trader in Henan Province's Minquan County that the local price is .76 yuan/500g (1520 yuan/metric ton, 13-15% moisture). He thought the corn price could fall to 0.7 yuan (1400 yuan/mt) as a greater volume of corn comes on the market. A government warehouse manager in Hebei Province told the reporter that some people say the price could fall to 0.65 yuan/500g (1300 yuan/mt), the lowest price in ten years.

On September 22, the average purchase price for new corn in Binzhou of Shandong Province was 1500 yuan/metric ton, down 22 percent from a year ago. The Xiwang Company--a prominent starch processor--was paying 1600 yuan, down 40 yuan from the day before.

Another futures market news report said prices for the first corn coming on the market in the northeastern province of Liaoning are in the range of .65 to .68 yuan/500g (30% moisture, 1300-1360 yuan/mt). Some people think the price for wet corn could fall as low as 900 yuan/mt when large volumes come on the market from the biggest producing provinces in the northeast.

The prices at ports in northeastern China's Liaoning Province for last year's corn (14% moisture) are 1750-1780 yuan/mt. The September 23 Dalian Futures price for corn delivered in November was 1530 yuan/mt, and the price for corn delivered in January or March 2016 was 1420 yuan/mt, confirming that market participants expect prices to decline as new corn comes on the market.

On September 22, China's Grain Bureau released its "Northeastern Corn Purchase Policy" which affirms that the corn price will be determined by supply and demand in 2016. The policy called for diverse operators to go into the market to purchase corn, ordered banks to supply credit, and urged local governments to give loan guarantees to corn purchasers. The document ordered local officials to ensure storage, transport, and marketing channels were available to move grain to other regions, and to make sure farmers have access to drying equipment and facilities to ensure the quality of corn. Local officials were reminded of their responsibility to assure food security.

The removal of the northeastern corn price floor this year benefits processors by lowering their cost of raw materials. Earlier in September, one commentator said there is a rumor that the government is preparing to give a subsidy to starch processors in Jilin and Heilongjiang Provinces to encourage more corn use. The rumored subsidy would be 100-130 yuan from the central government and 200-260 yuan/mt from local governments for each metric ton of corn used. The commentator estimates that corn use by these processors would rise to 20.4 mmt this year from last year's 18.3 mmt. He also anticipates that the removal of the price floor will benefit starch producers in the northeast by lowering their raw material cost vis-a-vis their competitors in Shandong, Hebei, and Henan Provinces.

With prices expected to fall, traders are "standing on the sidelines," and processors are only buying as they need corn. The Futures Daily reporter was told that farmers eager to return to their off-farm jobs may be eager to sell their corn as soon as possible.

Tuesday, September 20, 2016

Weakness in China's Ag Sector During August

China's agricultural sector was relatively weak during August 2016, according a monthly report on rural economic conditions by the Ministry of Agriculture. Agricultural prices are generally weak, livestock numbers are stagnant or declining, and growth in  rural migrant wages is slowing. The MOA report warns that pressure from slowing economic growth and pressure on businesses dims the outlook for the rural economy.

China's agricultural prices rebounded in August from July, but they were still lower than a year ago. The index of wholesale prices for agricultural prices was down 4.3 percent from the same period last year, and the "market basket" price index (vegetables, fruit, meat, milk) was down 4.9 percent from a year ago. The two indexes increased 2.5 percent and 3 percent, respectively, from July to August.

The MOA report warns of further downward pressure on farm prices as the fall harvest approaches. The early rice crop harvested this summer was estimated by the National Bureau of Statistics at 32.775 million metric tons, down 2.7 percent from last year due to lower planted area. The fall grain harvest conditions are overall favorable, despite some effects of flooding and isolated drought conditions in some areas. The pest situation is overall stable. MOA warns that corn and rice prices could both decline under pressure from big harvests this fall.

Livestock prices are generally weak in China. Beef prices were down 5 percent from the same period last year, lamb prices were down 6 percent, and milk prices were down 4.8 percent from a year ago. Pork prices peaked in June and are still at an historically high level, but they are now declining. The average live hog price peaked at 20.8 yuan/kg in June, and fell 10 percent by the last week in August. The pork price fell 5.1 percent over two months. Hog producers are enjoying high net returns, but they are cautious about expanding, according to the MOA report. The sow inventory is down 3.5 percent from last year. MOA's monitoring shows the number of hogs being slaughtered is still low. Dairy cattle inventories are down 10.2% from a year ago, which MOA attributes to low milk prices and pressure from imported milk powder. Egg prices rebounded after a string of five monthly declines. Returns to laying hens rebounded and farmers are expanding flocks again.

Agricultural imports were down and exports were up, narrowing China's agricultural trade deficit during August. The volume of cereal grain imports during January-July plummeted 30 percent from the same period last year. Imports of corn and corn substitutes were down 40 percent. Cotton imports for January-July were down 38 percent and sugar imports were down 37 percent. Soybean imports totaled 46.3 mmt for January-July, up 3.7 percent from the same period last year.

China's imports of meat and milk were up, prompted by cheaper prices of imports. The volume of pork imports more than doubled, and beef imports were up 50.8 percent, and milk powder imports were up 30 percent for January-July versus a year ago. China's exports of vegetable, fruit, and fish were up in value terms.

Monday, September 19, 2016

$450 Billion For China's Agricultural Modernization

The Agricultural Development Bank of China (ADBC) agreed to bankroll the Ministry of Agriculture's five-year rural policy blitz by committing to provide no less than 3 trillion yuan ($450 billion) in loans for agricultural modernization during 2016-2020. The funds were committed in a "strategic agreement" signed with the Ministry of Agriculture September 18, 2016.

Few specifics were announced. The two parties agreed to deepen rural reform, push forward stronger policies that benefit farmers and agriculture, upgrade agriculture, raise the efficiency and sustainability of agricultural development, in order to effectively accelerate agricultural modernization. Priorities were as follows:

  • maintain national food security
  • construct high-standard fields
  • improve in agricultural structure
  • promote innovation in agricultural science and technology and modernize the seed industry 
  • foster new-type farm operators
  • push forward sustainable agricultural development
  • accelerate agricultural “going global” 
  • promote rural industry integration 
  • advance antipoverty projects 
  • advance reforms of the state farm "reclamation" system
The ADBC's lending has already been going through the roof. The bank has not released an annual report for 2015 (normally the report is released in April, so it is now five months late). 

A January 2016 article revealed numbers for ADBC's 2015 lending boom learned from "knowledgeable people." ADBC issued loans valued at 1.69 trillion yuan during 2015. Its outstanding balance of loans at the end of 2015 was 3.44 trillion yuan, up 21.5% from the previous year.

Traditionally, the biggest chunk of ADBC's lending was for procurement of grain, oils, and cotton for government reserves. That lending has ballooned as the government's floor price programs soared out of control. During 2015, ADBC lent 667.8 billion yuan ($100 billion) to finance procurement of 270 million metric tons of grain, representing a record 43% of grain financed by the government. The ADBC financed 2.36 million metric tons of cotton for government reserves, but that was half the volume financed in 2013 when the floor price for cotton was still in effect. Authorities have been selling their reserves at a loss--it is unclear who is paying for the losses and the interest on the loans. ADBC claimed to have a nonperforming loan rate of 0.81% at the end of 2015.

ADBC already ramped up lending by diversifying its lending to include various rural development initiatives during 2015: 
  • "Bridge loans" for State water projects totaled 35 billion yuan, 
  • medium-long-term loans for water projects totaled 150 billion yuan during 2015 according to "knowledgeable people." The water infrastructure loans more than tripled in value. 
  • "New-type urbanization"--which involves slum clearance and residential housing construction for rural-urban migrants--totaled 409.2 billion yuan, up 55%. 
  • Construction of rural roads 79.9 billion yuan, up 103%
  • A plan to move 5.18 million people out of 412 poor rural regions will eventually be supported by 270 billion yuan in 21-year loans (81 billion yuan was lent in 2015).

Saturday, September 17, 2016

Liaoning Corn Subsidy 120-180 yuan per mu

More details about China's new subsidy for corn farmers were revealed by Liaoning Provincial authorities this month. The subsidy is slated to be given for the next three years. The payment will vary from county to county, is expected to be in the range of 120-to-180 yuan per mu, and cash will be distributed to farmers by October 31, 2016. The details are based on propaganda articles released earlier this month. According to one microblog, the province has not released the actual documents online.

The corn producer subsidy will be paid to farmers in the provinces Liaoning, Jilin, Heilongjiang, and Inner Mongolia. The subsidy will be based on the area of land they plant in corn.

The central government has allocated funds to the four provinces. The provinces then divide up the funds among prefectures and then to counties. The payment in each county will vary depending on the ratio of funds to area planted in corn. Liaoning's Agriculture Department estimates that the subsidy payment will vary from 120 to 180 yuan per mu ($109-$163 per acre), with an average of 150 yuan per mu ($137 per acre).

Farmers submit an application for the subsidy to their village committee who should verify the farmer's eligibility. The applications are compiled and passed up to the township government and then the county and prefecture agriculture departments. The township and county authorities must verify the area planted in corn in 2016 by September 30 (the deadline will be June 30 in 2017 and 2018). They must issue payments to farmers through electronic bank accounts by October 31 (the deadline will be September 30 in 2017 and 2018). Officials are not allowed to withhold, deduct, or misappropriate the funds.

Rural families, family farms, farmer cooperatives, and agricultural enterprises who grow corn are eligible for the subsidy. Corn has to be planted on approved cultivated land. Land retired through "grain for green" (退耕土地), land that has not been approved for reclamation, and land requisitioned by the government with compensation is not eligible for the corn subsidy.

The article revealed that Liaoning Province is also giving a nearly-equal 150 yuan-per-mu subsidy to farmers who stopped growing corn this year. This subsidy payment reportedly will be issued at the same time as the corn producers' subsidy. This subsidy is part of a provincial structural adjustment plan announced in March that aims to reduce corn area by 2 million mu and shift cropping patterns in the various regions of the province. Liaoning will install "infrastructure agriculture" in its drought-prone northwest; expand small grains and peanuts in hilly parts of the northwestern region; focus on flower, medicinal crops, and berries in cold mountainous areas; expand "scale" livestock farming in central and western regions, guiding farmers to plant corn for silage and forage crops; rice and soybeans will be promoted in river valleys.

Wednesday, September 14, 2016

Chinese Invective on U.S. Grain Subsidy Complaint

Chinese nationalist netizens responded to a complaint about China's farm subsidies with invective about "shameless" American conspiracies.

On September 13, U.S. Secretary of Agriculture Tom Vilsack and U.S. Trade Representative Michael Froman announced an enforcement action to challenge China's use of market price support for rice, wheat, and corn. A Chinese Commerce Ministry statement said support for agriculture is common international practice.

As of today, Chinese netizens had posted 17 uniformly caustic comments about American intentions in response to a brief article reporting the U.S. action on the web site of Global Times, a nationalist-leaning newspaper published by the Chinese government.

Here are the unvarnished opinions of Chinese observers and propagandists:
  • "Grain is the most basic need. American dogs can control China by controlling its grain more easily than by using force."
  • "China's farmers are in the weakest position. America's complaint about the State's protection price policy is disgusting in the extreme."
  • "America is like a rabid dog biting China's trade."
  • "It is well known that America's subsidies are the highest in the world. Protection price procurement of grain is the nation's main policy for maintaining grain production. America wants to shake the country's foundation."
  • "Ha, ha. America laughs at the misery of Chinese common people while not letting the Chiense government help them. Ha, ha. America is really too shameless."
  • "The American government has nothing better to do than continually looking for an excuse to suppress China. Afraid of being surpassed by China, its most insidious threat. Of course, I believe China can deal with the problem."
  • "Can't a thorough investigation of GMOs be done?"
  • "China has never had a surplus of grain production. America has always dumped wheat, corn, and soybeans. China should assess anti-dumping duties on the Americans."
  • "'No stability without an army, no security without grain.' In the struggle against American imperialism we should take up the secret weapon of our forefather Mao Zedong. With this cruel trick the Americans plan to shake our nation’s grain as the foundation of security."
  • "America is the country that stirs up the [poop] in the world!!!"
  • "Good people being bullied. Adding to crimes."
  • "American tactics are: First, use market rules to undermine the competitiveness of China’s agricultural production and allow low-priced American grain to enter the Chinese market. This takes the initiative away from China’s grain and forces China’s government to give in. Second, American grain companies seize the top position in China’s market and raise the grain price, creating social turmoil in China within 10 to 20 years, then forcing the Chinese government to obey the commands of the Americans. Third, how can we deal with the American devils’ conspiracy to change the bad situation? Already 40% of our grain seed industry market has been monopolized by American companies when we were not paying attention. Hope building a brick house is not a bad idea."
  • "Our country’s Ministry of Agriculture has a problem, American transgenic food entered China, creating low-price pressure on incentives to produce grain, shaking the foundation of the country, while transgenic grain also affects the health of Chinese people; China’s Ministry of Agriculture has been defeated by the Americans."
  • "Please don’t interfere with China’s internal affairs. Do you have time to pay attention to your Hillary’s health?"
  • "Can China slap antidumping duties on American apples? American dogs have no shame."
  • "Americans are too @#$% shameless, saying that China’s agricultural subsidies are more than America’s; they are conspirators."
  • "Does China have any actual strength? Westerners previously set up cannons on the shore to plunder Asian countries. Now without killing a single person, without firing a gun or a cannon, they make China into their source for low-price industrial raw materials and laborers, dumping high value added products this what we want China to be?"
  • "To what degree do we have to patiently appease them before we speak boldly? Who is the protectionist here? A government that can’t preserve the interests of its people must step down."
Three comments use variants of the phrase "shake the foundation of the country," which also appeared in the Ministry of Commerce's statement. This is apparently the party line. A google search for the Chinese phrase "shake the foundation of the country" (动摇国本) indicates that it previously was used mainly to comment on the effects of corruption in China. Now there is an external threat to divert attention from internal systemic weakness.