Wednesday, June 22, 2016

China Dairy: Structural Adjustment is Key

Ironically, Chinese communist leaders may be the leading proponents of take-no-prisoners capitalism in the world today. China's dairy industry is an example: officials prescribe structural adjustment through market competition for the industry to escape its depressed state--basically a shake-out of weak players.

Communist party officials adopted a somber tone at a China dairy industry association meeting held earlier this month at a national dairy expo in Qingdao. They described the industry as facing "the most difficult stage since the melamine adulteration incident in 2008." Looking ahead, however, the officials expressed confidence that the discipline of vicious market competition is producing a core of lean, mean companies that will ensure a brighter future for the industry.

Officials speaking at the meeting cited three major problems plaguing the Chinese dairy industry: falling prices, difficulty selling milk, and big losses. The price received by large farms is down 10% from a year ago, and the price is down 15% for smaller farms. Dairy companies have reportedly cut back the volume of purchases by 10% as well. Financial losses by dairy farms were said to be as much as 50%, and spreading more widely.

The problems were attributed to falling consumer demand and pressure from lower-priced imported milk.

Dairy association official--and former vice minister of agriculture--Gao Jibin said this is a really tough time for the industry, even though there is no particular incident like the 2008 infant formula incident causing difficulties. However it's all relative, Gao said, pointing out that other industries are facing tough times as well, as are dairy producers in other countries.

Looking forward, Mr. Gao espoused optimism based on "supply side adjustment"--what others might call "creative destruction." Gao told a reporter, "Innovative reform and transformation through structural adjustment must be the top priorities of China's dairy industry under the 'new normal' [of slower economic growth]."

Gao expressed hope that the industry will transform "from traditional to modern" and "from vulnerable to efficient" during the current economic slowdown and market fluctuations. Supply side reform "respects the market and peoples' needs," he said. Through "survival of the fittest" and "competition in a buyers' market," resources will be concentrated in the hands of the most competitive and innovative companies.

The objective is not an increase in quantity, Gao explained, but rather quality improvement. Supply side reform means upgrading the industry through modern science and technology, bringing in new material and equipment, development concepts, business models, and industry organization.

"The traditional industry structure must be reformed, costs reduced, efficiency improved, and competitiveness increased," Gao said.

Current Vice Minister of Agriculture Yu Kang agreed that improvement of product safety was the core objective in establishment of policy support and supervision systems. He said the production model had been improved with great increases in milk per cow. Yu recited the supply side structural reform and competitiveness mantras. The Vice Minister urged listeners to maintain their confidence and insisted the industry should be guided by consumer demand. The Chinese market for milk appears to have reached a saturation point, with milk-dumping and excess supply. But in the long run, the Vice Minister assured industry participants that consumption would grow along with income and urbanization.

Gao Jibin agreed that China's dairy industry is a most promising industry with huge potential.

There was no mention of the usual knee-jerk prescriptions for hard times--subsidies or barriers to imports.

Apparently contradicting the "survival of the fittest" narrative offered by Mr. Gao, the article in China Livestock Industry magazine proclaimed that China's dairy industry is at a "new point of departure" of "harmonious development."

The article described the China Dairy Industry Association as an organization that serves as a "bridge to build relations between the communist party and government with companies, technicians, farmers, and consumers" designed to organize, coordinate and implement support policies.

Sunday, June 19, 2016

China Launches Soybean High-Yield Projects

Agricultural officials in China will launch a series of soybean technique demonstration sites as part of their broader structural adjustment initiative. Agricultural extension officials will introduce techniques designed to raise soybean yields and reduce use of chemical fertilizer and herbicides. The program will budget 5.6 million yuan ($860,000) to fund dozens of 2000-mu (310 acre) sites in the country's frigid northeast and the Yellow River-Huai region of eastern China.

The "green high-yielding technology integrated demonstration" projects will encourage farmers to plant high-protein non-GMO soybean varieties for food use. The project hopes to make soybeans more profitable by raising yields and reducing expenses. By cutting chemical applications the project hopes to reduce expenses for farmers and make soybeans more environmentally-friendly. The document describing the program doesn't mention that chemical fertilizer use for soybeans is much lower than for corn--the crop that has crowded out soybeans in the project areas during recent years. It is unclear whether this is part of the 5.6-billion-yuan corn structural adjustment program announced earlier this year.

The project's emphasis on high-protein soybeans is notable. This is a reversal from the first subsidy for high quality soybean seeds (introduced in 2002) which encouraged farmers to plant varieties with high oil content in order to compete with imported soybeans for crushing to manufacturing cooking oil. Officials now appear to have thrown in the towel on high-oil beans. The domestic industry is producing mainly high-protein beans for tofu, soy milk and protein supplements--and having a hard time meeting the demand.

The soybean project reflects China's traditional emphasis on "demonstration" or "model" farms for disseminating new techniques. This model chooses certain villages or State farms to receive subsidized inputs and technical advice to adopt a technique wholesale. Rural officials are brought in to observe and replicate the technique in their home villages.

Six of the demonstration sites will be in the northeastern region near China's border with Siberia where the growing season is short--Bei'an and Nenjiang Cities and the Heihe State Farm Bureau in northern Heilongjiang, two sites in Inner Mongolia, and one in eastern Jilin Province. These sites appear to be intended to reverse the spread of corn production into these far northern regions by encouraging a return to soybean production and soybean-corn rotations. Technicians will distribute early-maturing soybean varieties to accommodate the short growing season. Other problems to be addressed are the lack of moisture, a fungus that causes white mold, root maggots, and harm to crops from herbicides. The demonstrations will feature crop rotations, soil preparation and deep ploughing in the fall, and fertilization based on soil tests.

A seventh site in Anhui Province will focus on problems related to double-cropping soybeans following winter wheat. In this region, farmers commonly burn wheat straw after the harvest, soybean seedlings are prone to problems due to poor soil structure, and fertilizer is spread on the top soil where few of the nutrients reach the soybeans. Root rot and grubs are caused by bacteria and eggs on wheat straw. This site will feature no-till planting of high-protein soybean varieties among wheat stubble, more efficient fertilizer application, pest prevention, and low-loss harvesting machinery.

The pilots aim to attain yields of 200 kg/mu (about a third more than typical yields). They hope to reduce chemical fertilizer and pesticide use by 10%, achieving cost savings of 15%. The entire process will be mechanized.

The budget is 200,000 yuan ($30,000) for each of twenty-eight 2000-mu fields (four at each of the seven sites). 100,000 yuan will cover production materials--seed, fertilizer, pesticide, land rent, and other costs. Another 35,000 yuan will cover the salaries of technicians and seasonal laborers. Other expenses include maintenance of equipment, testing of soil and soybeans, travel for project participants, and hiring of machinery services for planting, harvest, etc.

Each site's demonstration project will revolve around a local agricultural technology extension center, and experts from other institutes will be invited for consulting. County officials are assigned to develop working groups and coordinate all tasks to make sure they get done. The results are to be disseminated by radio, TV, newspapers, Internet, and other media.

Monday, June 13, 2016

No More Tinkering With Farm Prices, China Officials Say

Agricultural policy officials in China say their country will move toward a system of market-driven pricing supplemented by farmer subsidies decoupled from prices, starting with the reform of corn policy announced in March. Officials acknowledge that tinkering with prices has created an expensive problem, but they also acknowledge that their "target price" subsidy experiments have not succeeded yet.

The comments were made in an article from Business Reference News that was posted on many government-sponsored web sites in China today. Officials explain that the government began setting floor prices for rice and wheat after the grain market was liberalized in 2004. Minimum prices were meant to act as a floor under market prices to protect farmers from downside risk. "Temporary" or "provisional" reserves were established for corn, soybeans, rapeseed, sugar, and cotton as officials fretted about unstable prices during 2007-08.

Top ag policy advisor Chen Xiwen told Business Reference News that problems arose after officials began raising the floor prices every year to cover rising production costs. The temporary reserve price for corn rose from 0.7 yuan/500g in 2007--the program's first year-- to 1.12 yuan/500g in 2014. The rise in prices resulted in Chinese prices becoming de-linked from world prices. Chinese commodities lost their international competitiveness as prices in the global market began to fall. Corn production has risen to a record volume, but imports of substitutes for corn flooded into the market, and domestic corn went into government warehouses. Although the temporary reserve price for corn was cut to 1 yuan/500g last fall, it still exceeded the international price.

Vice Minister of Agriculture Yu Xinrong explains that a new mechanism for agricultural price formation will have two characteristics. Agricultural prices will be completely determined by the market. Second, a subsidy separated from price will ensure that returns to farmers in the most competitive producing regions will remain stable from year to year.

Business Reference News says the reform of the corn market system announced for this fall is a model for the future path: prices will be completely marketized, with all types of buyers free to enter the market to purchase corn. Farmers will get subsidies to maintain their income.

Trouble is, no one has explained how the subsidies for corn producers will work, and no one seems to have a workable approach to put in place.

Officials have pinned their hopes on "target price subsidies" as a new approach to subsidizing farmers. Yet, about half of the Business Reference News article is devoted to explaining problems with "target price" subsidy programs encountered during the last two years of pilots for cotton and soybeans. Officials have not given up on the target price subsidy, but there are "many difficulties to be solved."

According to Wang Xiaoyu, vice-secretary of the Heilongjiang soybean industry association, no one seems to be happy with the target price subsidy for soybeans. Farmers complain that a single target price is inappropriate because prices vary from place to place, some farmers have lower production costs than others, and prices fluctuate over the course of the marketing season. Last year, the soybean price began at 4600 yuan/metric ton after harvest but fell to 4060 yuan later in the season. The government apparently collected prices to set the subsidy while prices were at their high point. By late spring the soybean market had seized up--farmers didn't want to sell at a low price and processors didn't want to buy at the price farmers wanted. Grassroots officials in soybean regions complain about the difficulty of implementing the program. It takes a lot of work to verify the area planted and prices, much of the data reported to them is falsified, and they have to deal with disgruntled farmers.

Mr. Ye Xingqing, an agricultural economist with China's Development Research Center, says the cotton target price pilot has succeeded on only one of three criteria. Ye hails the program for narrowing the difference between prices of domestic and imported cotton, thus removing the severe distortion that existed during 2011-2013 when the "temporary reserve" supported the Chinese price about 40% above the international price. However, Ye says that the target price subsidy still distorts production decisions of cotton producers because the subsidy is tied to area planted and volume of cotton sold. Mr. Ye also worries that the target price exceeds China's "fixed external reference price" which means the subsidy "could be above the 8.5% limit" set by WTO for China's "amber box" subsidies.

Meanwhile, the minimum price programs for wheat and rice have been announced for 2016 with no significant reforms, and government stockpiling of newly-harvested wheat is proceeding. Xinjiang Autonomous Region plans to purchase 1.5 million metric tons of wheat for the "temporary reserve" (Xinjiang is not covered by the minimum price program) at a price of 1.18 yuan/500g.

Ye Xingqing urges prompt reform of the price formation system, worrying that the divergence between Chinese and international prices could worsen if no action is taken. According to Economic Reference News, officials estimate that it will take two to three years to install the new system of market-driven farm prices and decoupled subsidies.

Sunday, June 5, 2016

China Company Cements Eastern Europe Grain Sources

China's giant state-owned food company, COFCO, has begun a $75 million investment in a Ukrainian port facility to cement its growing share of grain trade in the Black Sea region. This follows COFCO's announcement earlier in May that it plans to import a minimum of 1-to-2 million tons of Russian wheat to China in coming years.

The facility in the southern Ukraine port of Nicolaev will reportedly have capacity to handle 2.5-million metric tons of grain annually, with 143,000 metric tons of storage. The Ukrainian port will be wholly owned and operated by COFCO for its exports of corn and other grains.

According to the description of the investment, this is part of COFCO's "13th five-year plan" strategy to achieve an "unmatched global layout" covering "the entire industry chain." COFCO's expansion is in concert with China's national "one-road, one-belt" strategy of projecting its influence in a string of countries from its border into Europe.

The investment strategy also dovetails with China's national strategies of gaining control over the whole supply chain for farm commodities--including trading, logistics, and processing--and diversifying sources of imports.

The Ukrainian investment "basically completes" COFCO's international acquisitions. On March 3, COFCO gained full ownership of Noble Agriculture and renamed it COFCO Noble Agriculture. With the acquisition of Noble Agriculture and Nidera, COFCO's international assets now comprise 52% of its balance sheet.

COFCO's acquisition of Nidera gave it control of an advanced facility at the Romanian port of Constanta. According to the Chinese description, this gives COFCO strategic access to corn, wheat, barley, and rapeseed in Romania, Hungary, and Serbia for export to Europe, the Middle East, and Africa. COFCO Agriculture also has a sunflower seed oil-processing plant in the Ukraine.

COFCO says it exports 1.5-to-2 million metric tons of corn, barley and other grain from Ukraine to Europe, Iran, Southeast Asia, and North Africa. Nidera reportedly exported a record 4 million metric tons from the Black Sea region during 2015.

On May 18, COFCO's chairman, Yu Chunbo, announced that the company plans to import at least 1-to-2 mmt of wheat annually from Russia to China. This is the "minimum level of cooperation" between the two countries, Yu said. The volume could rise to 3-to-5 mmt, depending on the price.

The company's communist party secretary told journalists that COFCO plans to further expand and improve its global layout to implement the country's national grain import and export strategy with the greatest possible efficiency as part of  China's "national team."

"Efficiency" is not the adjective that comes to mind as a description of COFCO's financial performance. Another recent article points out that COFCO's acquisitions of Nidera and Noble Agriculture vaulted the company into the ranks of the large "ABCD" multinational companies when measured by assets, but its profitability is still relatively weak. COFCO's $62.4 billion in assets after its  rank the company at number 3 in size among multinational grain companies in the world . However, the article points out that its net income of $200 million is relatively weak, comparable to that of the number 4 ABCD. COFCO's profitability looks even weaker when one considers that the company gets $712 million in subsidies from the Chinese government. Without the subsidies, COFCO apparently would be making losses.

The subsidies do not include the windfall profits COFCO makes by importing grain at low 1% tariffs using import quotas set aside by the government for use by designated state trading companies--primarily COFCO. Ninety percent of the 9-million-ton tariff rate quota for wheat is reserved for state trading companies, while hundreds of private sector companies must scramble get a share of the 10% of quota divvied up among them. The state share of the 7.2-million-ton corn quota is 60%. Presumably, COFCO uses the state-owned quota to import corn from Ukraine and will use it to import wheat from Russia.

Monday, May 30, 2016

Environmental Laws Ban Pig Farms in China

Officials in China are pushing ahead with a nationwide campaign to shut down pig farms in populated and environmentally-sensitive areas. The shut-down plan appears to be cutting pig numbers at a time when a short supply of pork is causing prices to soar.
"arrest warrant" for a pig satirizes the campaign to close or move pig farms. source: toutiao.com

A series of laws and regulations issued by Chinese officials over the last two years appear to signal a new era in which pigs will be physically segregated from the human population, a major undertaking in a society where the species have lived together for thousands of years.
  • Local bans on pig farms began in 2013 following the embarrassment caused by thousands of swine carcasses that floated down the river into Shanghai. 
  • In January 2014, regulations were issued to prevent pollution from waste emissions of "scale" livestock and poultry farms; the regulations called for designating areas where livestock and poultry farms are banned and assessing penalties on violators. 
  • In January 2015, a new PRC environmental protection law called for "circular use of resources," coordination between environmental protection and economic development, and closing or moving livestock and poultry farms that pollute the environment.
  • An April 2015 water pollution prevention action plan specifically requires local officials to "scientifically" designate regions where livestock and poultry farms are banned. Farms in the ban districts must close or move by 2017. The plans must be completed within a year in Beijing, Tianjin, Hebei, Yangzi River Delta, Pearl River Delta.
  • On May 18, 2016, China's Ministry of Environmental Protection issued technical guidance giving local authorities criteria for designating the livestock-ban districts.
China's regulations are intended to address problems with water pollution and odor caused by dumping animal waste into streams, canals, rivers, and lakes. Dumping dead animals is another concern.
Drainage pipe from a Chinese pig farm.
Livestock and poultry farms are to be banned in places that are:
  • near sources of drinking water
  • scenic areas
  • natural resource conservation areas
  • near concentrated human population like residential areas of cities and towns, schools and hospitals
(Local regulations usually ban pig farms near markets and highways, as well.) The bans apply to pigs, chickens, cattle, sheep, ducks, geese, deer, foxes, mink, ostrich, and camels, but most of the emphasis is on pig farms.

The campaign against livestock farms reflects new attention to environmental improvements and balancing economic development with quality of life. These objectives have been given lip service for years but are getting a personal push from President Xi Jinping. The campaign also reflects the "supply-side" reform initiative and a new European-type approach to rural development--in place of a trash-strewn dilapidated countryside, they hope to create a place of bucolic scenery populated by happy farmers.

Local officials have been ordered to formulate plans for designating three types of zones:
  • areas where livestock and poultry farms are banned;
  • areas where such farms are limited;
  • areas that are appropriate for livestock and poultry farming.
The bans apply to "scale" farms and livestock-raising communities. The threshold for swine farms is typically 500-head sold annually (but Chongqing set a lower threshold of 300 head) or 10,000 laying chickens. It does not appear to apply to "backyard" animal-raising.

Some localities give compensation to owners of destroyed farms. There are also penalties for farmers who continue operating in areas where they are banned. One article posted on a pig industry site warns farmers, "This is a real government thing!" and listed six cases of people who have been arrested and jailed 5 to 10 days for operating pig farms illegally.

Livestock farms allowed to continue operating are expected to acquire equipment and facilities to collect and treat waste from their animals. The slurry from the treatment is to be used as fertilizer on crops. Authorities are also setting goals for raising the percentage of waste treated and the proportion utilized.
Tearing down a pig farm. source: weixin rejiao.

Localities throughout China are various stages in formulating these plans. Some 10 provinces have formulated timetables for implementing the bans with varying degrees of specificity. As of May 2016, 150 counties had formulated livestock-ban districts, and some have already destroyed farms. Several regions are targeted for special attention: the Yangzi and Pearl River watersheds and the Beijing-Tianjin-Hebei corridor in northern China.

Map shows localities that have made plans to close or move livestock farms by 2016 or 2017.

Zhejiang Province--the source of the dead pigs that floated into Shanghai in 2013--has been the most aggressive in setting up pig-ban zones. In 2014 they launched plans to close or move 69,597 pig farms that reportedly produced 4.9 million head annually. Anhui Province ordered cities and counties to submit plans for livestock-ban zones by June 2016 and complete closure or moving of farms by the end of 2017. Fujian Province reportedly closed 13,000 pig farms in the second half of 2015. Beijing municipality will ban new construction or expansion of pig farms in its ban-zones, except for breeding and research farms.

A Peoples Daily reporter said netizens alerted him to filthy conditions on pig farms along the Yellow River outside Henan's provincial capital of Zhengzhou earlier this month. Neighbors complained about the smell and flies from one farm set up four or five years ago. The boss of the farm said the 6000 pigs are fed exclusively on restaurant waste because it's cheaper than grain and other feed (using restaurant waste is illegal unless it has been properly treated at high temperature). Plastic garbage bags, plastic bottles, and cans floated in black water outside the farm. The town government told the reporter they were aware of the farm and had issued a verbal order to close or move with a threat to destroy it if the operator fails to comply.

Nasty farm near the Yellow River got a verbal notice of closure.

Trash in water outside the farm.

This doesn't mean that China has given up on raising livestock. The vision of officials is to move animals away from human population and environmentally-sensitive areas and concentrate them in large enclosed farms in the hinterland. The recent five-year plan for the hog industry acknowledged the growing environmental pressure, called for coordination between development and environment, and envisioned stable or modest growth in production capacity by 2020. According to the plan, hog production will become more concentrated in regions with a comparative advantage, but only to the extent that the environmental carrying capacity allows.

Jimo City in eastern Shandong just announced the opening of a 76-million-yuan ($12 million) "smart" automated chicken farm with 300,000 hens and broilers that will be managed by a single worker and will emit no pollution. The poultry litter is collected by automated equipment and used to generate heat. The reporter remarked that he saw no poultry waste and there was no smell around the farm. Local officials said other farms in the area will also automate, creating a new-type non-polluting industry chain. Local officials have designated areas where livestock will be banned, limited, or allowed as suitable. There was been 450 million yuan in investment in poultry farm waste treatment. This, however, is a "model district" which probably means the investment is highly subsidized.


Pig Progress magazine recently described a huge Danish pig farm in Jiangsu Province that has taken measures to insulate its pigs as much as possible from the surrounding country. The farm's sows are imported with purely Danish genetics. The farm is located on a strip of land that juts out into the ocean with no other livestock and few other people nearby. Workers have to stay on the farm for three weeks at a time; they are served good food and given extended time off to prevent them from being tempted to come and go while at work on the farm.

It is hard to tell how much this campaign has contributed to the shrinking numbers of pigs over the last two years. It almost certainly is constraining expansion during a period of record-high pork prices. The Chinese government rolled out pig farm subsidies during similar spikes in pork prices during 2007-08 and 2011. This time subsidies are limited to "model" farms and government propaganda is focused on shutting down pig farms instead of expanding them.

Comments on an article about pig bans posted on an industry web site reveal the complexity of the issue. A few comments supported the program but other reactions reveal the cynicism that has taken root in the Chinese population:

"Get ready for high pork prices."
"Environment is just an excuse, monpoly is the real [objective]."
"Building a hog farm is not easy; if someone came to tear down my farm, I would die miserably."
"Water pollution is because of industry, not farms; air pollution is because so many people drive cars."
"Pig manure is really a problem created by the feed industry."
"Pig farms destroyed, land rented out, what are the common people supposed to do?"
"These departments just like to boss people around! There are so many big polluters that aren't checked! You live off the public, but we farmers have a hard time making money! You build so many houses, but can't turn equipment into money! You can bankrupt us with a single piece of paper!"
"There are two sides to every issue; it's hard to say what's right and wrong."
"Before the country is a hundred years old, people will be eating each other."



Wednesday, May 25, 2016

China Wheat Output Mismatched With Demand

China's 2016 wheat harvest is getting under way. With a near-record output estimated at 130 million metric tons and with demand sluggish, the government is expected to step in and buy up even more wheat than it did last year. However, innovative bakers can't get enough of the high-gluten wheat they need for their flour.

One assessment of the prospects for the 2016 wheat market sees a big surplus of low-quality wheat that farmers in some areas may have trouble selling. Wheat is being harvested in the southern end of the wheat belt in central China, and it will move north through Jiangsu, Anhui, Henan, Shandong and Hebei Provinces over the next month. Weather conditions have varied widely across wheat-growing areas, and the quality of the crop is expected to be uneven. There is not much good quality old grain available, and the price is high.

The 2016 minimum price for wheat is set at 2360 yuan/ton. Big flour mills are buying small volumes of good quality new wheat at 2300-2340 yuan/ton. Corn prices are 620-to-900 yuan lower than wheat prices in various parts of the wheat-producing region, so use of wheat to feed livestock is expected to be low this year. Wheat bran prices are down too.

Low-quality wheat will have weak demand, and the government is likely to become the buyer of last resort. In some southern regions granaries already have a lot of wheat in storage from last year, but there is less wheat in storage in northern provinces. Most of the grain in storage is poor quality.

With scale of production increasing, the marketing of wheat is gradually changing. Many traditional wheat traders have been stung by financial losses in the last couple years and are cautious about purchasing wheat this year. The article anticipates that government purchases of wheat this year will exceed last year's total. In Anhui, government purchases are expected to reach 5.5 mmt, accounting for more than half of this year's wheat sales. In Henan, government purchases are expected to grow 30% from last year to 12 mmt.

Another article highlights the difficulty wheat mills have in finding adequate volumes of high-quality wheat. China's wheat production has not kept pace with changes in consumer preferences which have shifted from steamed bread and noodles to fancy breads, buns, and processed foods that need special types of flour. The food service and baking industries have responded by offering new products, but they can't get enough strong-gluten flour to make them. Wheat grown in China is predominantly medium-gluten. A couple of companies have begun contracting with farmers to procure strong-gluten wheat. One company has begun operating its own farm.

A start-up company that sells bread products online to Beijing customers is an example of how the baking industry is decoupling from farming. This company was started by five young IT and marketing professionals who saw a niche to be filled as consumers seek out new high-end products and alternatives to traditional shops. The company offers various bread products that can be delivered anywhere inside Beijing's 5th ring road and claims to get 10,000 orders daily.

Bread product offered by a Beijing Internet start-up
Traditional steamed bread

With a big surplus of low-quality wheat and a shortage of high-quality wheat, the price premium for high-quality wheat is expected to be high. Analysts anticipate that farmers in some regions with poor quality wheat may have trouble selling their wheat if granaries fill up.

This year's wheat market is another example of how China's leadership is out of step with their country's development. The "food security" strategy of paying a minimum price for grain to ensure a big supply is based on an outdated concept of generic grain produced and consumed by peasants who eat noodles and steamed bread. The Chinese diet is rapidly diversifying, and the population no longer wants to eat the same bland food day in and day out. Grain is no longer a generic commodity in which one ton is the same as any other.

Chinese officials have been trying to upgrade the quality of wheat for decades with little to show for their efforts. As long as officials offer a floor price to buy whatever farmers produce, their warehouses will be filled with unwanted and unneeded grain. Meanwhile, they ration a tiny import quota that the few lucky recipients can use to import high quality wheat from overseas and sell at sky-high prices.

Thursday, May 19, 2016

China's USDA Conspiracy Theory

The following story actually happened. I have statistics to prove it.   
**************************************************
A Martian Interplanetary Task Force on agricultural commodity markets recently landed on the Earth. A team member assigned to China set out for the city of Dalian, where that country's most active futures market is located.  

As our Martian friend approached the Dalian Commodity Exchange, he came upon two Chinese men in animated conversation, each holding a sheaf of papers in his hand. The Martian stopped to listen.

“They’re up to their tricks again!” One man exclaimed.

“USDA and ABCD—different letters, but the same game! They won’t stop until they own our entire country!” The second replied.

“What can be done to stop them?” The first man waved the paper held in his sweaty hand.

The curious Martian sidled up the two men.

“May I ask what you’re discussing?” The Martian ventured.

“Haven’t you read the U.S. Department of Agriculture’s monthly agricultural commodity supply and demand report? I can't believe they reduced their estimate of soybean production so much. How could their forecast change that much in one month? It has to be part of a plot to bankrupt our Chinese companies!” The first man was furious.

The Martian queried, knitting his brow, “I’ve noticed that USDA sometimes makes big adjustments in its crop estimates from month to month, but how is that a plot against Chinese companies?”

The second Chinese man got in the Martian’s face, “Where have you been? Everybody knows the USDA regularly manipulates its data to drive up prices. They do it all the time.”

The first man continued his friend’s thought, “When prices shoot up, that sets off panic-buying by Chinese importers. After Chinese buyers have sewn up expensive contracts for American soybeans, USDA reverses its estimates a few months later.”

Like a partner in a vaudeville act, the second Chinese man jumped in: ”Then prices fall, and our countrymen are caught with commitments to buy at sky-high prices and they’re bankrupted.”

“Why would USDA do that?” the Martian asked innocently.

“They have pulled this trick many times over the years. There has to be a sinister motive,” the second man explained in exasperation.

“Obviously, USDA is working hand-in-glove with the ABCDs!” the first man interjected.

“What are ABCDs?” the Martian asked.

“Hello?!” The first man was losing patience, “The multinational grain companies—ADM, Bunge, Cargill, Louis Dreyfuss.”

“The ABCDs swoop in to buy up Chinese companies as soon as the USDA’s trickery bankrupts them,” man number two explained, having a slightly higher tolerance for the Martian’s naiveté.

“Why would USDA want to help those companies?” the Martian asked, at the risk of further enraging the men.

“The companies must be paying them!” the first man shouted, crumpling the sheaf of papers and throwing them on the ground.

The Martian looked down and saw that the man had been holding a copy of the USDA report. Throwing down the papers seemed to have a calming effect on the Chinese man.

Nevertheless, the Martian was determined to get to the bottom of this fascinating issue. If USDA can’t be trusted, who can?

The Martian took a step back and questioned the man’s conspiracy theory: “But I heard people who work at USDA wear shabby clothes, drive old cars, and have bad haircuts. There’s barely a single Rolex in the place.”

“I can’t help it if they have no sense of style,” Man number 1 said.

“If I worked at USDA, that’s what I would do,” continued Man number 2.

The Martian delved deeper: “Well, if the USDA is so dishonest, why do you read their reports?”

“Everyone reads them,” responded the first Man, "They're on all the web sites as soon as they come out in the middle of the night, our time."

“Why don’t you just rely on Chinese government reports instead?” the Martian asked.

Man number 2 looked at the Martian as if he was from another planet. “Well, the Chinese government doesn’t have any supply and demand reports like this.”

"If they do, they don't publish them," explained Man number 1, suddenly helpful.

The Martian saw that the second Man was holding a copy of the Chinese Ministry of Agriculture’s monthly Agricultural Outlook magazine.

“May I see your magazine?” the Martian asked.

The man handed him the Agricultural Outlook (which was named after a now-defunct USDA magazine) and the Martian flipped through it. He stopped momentarily, excited to find a table labeled “Chinese grain stocks,” a number he thought was a State Secret. His face fell as he looked closely and saw that the data were compiled from USDA reports. He flipped to the back of the publication and, sure enough, there were no supply and demand tables.

The Martian commodities buff couldn’t resist taking the issue a little further: “If USDA is so clever at tricking Chinese businessmen, why doesn’t the Chinese government publish fake data to trick the Americans?”

Man number 1 looked quizzically at his chum.

Man number 2 shot back, “We’re masters of fake numbers. Our government has an entire statistics bureau to do that.”

The Martian responded, “So why hasn’t China’s statistics bureau been able to bankrupt the ABCDs?”

“Well, nobody believes them,” The man replied.
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It is unclear whether the Martian will spread this conspiracy theory about USDA reports back to his home planet. However, the conspiracy theory lives on in the Chinese news media in articles like "USDA Data Conspiracy Overtly Dangerous 'Foreign Report'" which appeared this week here and here and here and here and here and here and here and...