Monday, November 12, 2018

China African Swine Fever Scattered Far and Wide

China has had 57 confirmed cases of African Swine Fever (ASF) in 100 days. New cases are being confirmed at a rate of nearly 1 per day, and they are widely scattered across the country with no discernible pattern.

Five cases were confirmed in August after the first outbreak, 18 in September, 25 in October, and 9 in the first 12 days of November. Cases are dispersed across the country in 17 provinces, with 14 cases in Liaoning, 9 in Anhui, and 6 in Hunan Province (see map below). Single cases have been confirmed in four new provinces this month: Chongqing, Hubei, Fujian, and Jiangxi Provinces, but November outbreaks have occurred in widely dispersed regions. The latest case was reported November 9 in Anhui Province. It's very possible cases are under-reported. Some localities have begun offering cash rewards to encourage citizens to report ASF cases.
Cases officially announced on Ministry of Agriculture and Rural Affairs web site.
Note: this is an old map that does not show the boundary between Chongqing and Sichuan.
Soozhu.com observes that there is no clear pattern to the outbreaks, but the cases have followed a north-to-south progression. Mapping the outbreaks (see below) indicates several different clusters in the northeast near borders with Russia, Mongolia and North Korea; Anhui and neighboring provinces; and outbreaks in a string of counties in the mountainous southwestern region that could be connected to the Myanmar-Laos border. A number of cases have occurred near ports, including the biggest cluster near ports in Liaoning Province.

Soozhu.com reports that many of the outbreaks have been on farms that fed restaurant waste to pigs, including many in Anhui Province. A number of localities in China have offered cash rewards to citizens who report cases of farms illegally feeding garbage to pigs or cases of African swine fever. According to Soozhu, a futures analysis company estimates that 5%-10% of China's pigs are fed on restaurant waste, equivalent to 35-to-70 million pigs a year, suggesting that a crackdown on these farms could significantly curtail the pork supply.

A number of large-scale farms have also been infected, and a new development suggests that swill-feeding may not be the main concern: on November 9 the ASF virus was detected in commercial feed tested in Anhui Province. The feed was supplied by a subsidiary of a well-known Chinese company.

Confirmed ASF mortalities constitute a tiny fraction of China's swine herd. The Ministry of Agriculture and Rural Affairs has reported 4,474 swine deaths from ASF since August, and 6,022 illnesses. Farms with confirmed outbreaks held 75,193 animals, but the National Bureau of Statistics estimated that China had 429 million swine on farms at the end of September. The number of swine was down 10.18 million from a year earlier, but the Bureau attributed the decline to closure of farms to comply with environmental regulations. According to China's CPI, pork prices in October were 2.3% lower than a year ago.

The ASF virus has affected pork supplies in many regions through bans on the transport of pigs and pork products between most major pork-producing and consuming provinces. Soozhu.com says the price of live hogs ranges from RMB 10.32 to 18.57 per kg (about $67 to $120 per 100 lb.), an unusually wide range. Soozhu.com says that the supply of hogs cannot meet demand due to curtailment of transportation and demolition of farms in some provinces.

China Soybean Subsidy Boosted

The soybean subsidy in China's largest soybean-producing province has been nearly doubled this year and the corn subsidy has been slashed as officials try to engineer a shift in acreage from corn to soybeans.

Grain and Oils News reported last week that the Heilongjiang Provincial Government raised the soybean subsidy payment to 320 yuan per mu this year from 173 yuan last year. The corn subsidy was cut to just 25 yuan per mu from 133 yuan last year. This year's soybean subsidy would equal about $280 per acre and the corn subsidy would be about $22 per acre at the current exchange rate. Subsidy funds will be issued to county agricultural bureaus who are supposed to distribute payments to farmers within 15 days.

Heilongjiang Province soybean and corn subsidies, 2017-18
Crop
2017
2018
Yuan per mu
Soybeans
173
320
Corn
133
25
Source: Grain and Oils News.

Grain and Oils News proclaims that the higher subsidy for soybeans has stimulated more soybean production. This is puzzling since the amount of the subsidy is being announced after farmers have already harvested their soybeans, about 6 months after they decided what to plant. In May, Chinese propaganda announced that soybean subsidy payments would be 200-to-210 yuan per mu. Also during spring planting "emergency measures" were announced which promised subsidies of 350 yuan per mu in some localities that included a 150-yuan "crop rotation subsidy" payment for shifting land from corn to soybeans.
Which subsidy will this plot of land qualify for?
A crop tour of Heilongjiang last month reported an interview with a farmer who calculated that corn would be more profitable than soybeans unless the soybean subsidy was 350 yuan per mu (the farmer expected the corn subsidy to be 120 yuan per mu). The crop tour participants did not detect an increase in soybean plantings this year. They heard there was not much change in soybean-corn planting on State farms along the Russian border; there was an increase in corn prompted by rising corn prices last year; and some local officials encouraged farmers to convert land to rice paddies.

According to calculations reported by Grain and Oils News, the 320-yuan subsidy is equivalent to 1.33 yuan per 500g of soybeans produced. This nearly doubles income from soybeans which currently fetch a price of 1.6 to 1.7 yuan per 500g (roughly $12.50 to $13.70 per bushel). A county soybean association official said a price of 3 yuan/500g (about $23/bu.) for soybeans would induce farmers to grow more soybeans.

Sunday, November 4, 2018

China's $27Bil Corn Dump

Chinese authorities sold 150 million tons of corn reserves during 2017-18 at prices 30%-40% less than they paid for it. The bill comes to an estimated $27 billion for loan write-downs and 3-to-5 years of storage and interest costs. Some commentators think the Chinese market's ability to absorb the massive injection of corn is an indication that the country now has a structural deficit in corn S&D.

China's corn reserves spiked to a crisis level after the government bought up a cumulative 310 mmt of corn and managed to sell off just 70 mmt from 2012/13 to 2015/16 using a "temporary reserve" program to put a floor under prices in northeastern provinces. After making some adjustments, Chinese analysts estimated reserves reached 210 mmt in 2016. After that year's harvest authorities allowed a 30-percent decline in corn prices to a more realistic level, but they purchased an additional 30 mmt to prevent prices from falling too far too fast.

During 2017 and 2018 Chinese officials put priority on auctioning off their mountain of corn reserves. They suspended a longstanding rule that commodity reserve sales had to recover the cost of acquisition and extended the auctions earlier and later in the year than usual, beginning in April and continuing through the end of October 2018. This year's auctions are expected to stop in November as new crop corn is coming on the market.
  • According to China Grain Net, 100.14 million metric tons of reserve corn were traded in 28 weeks of auctions from April to October 2018 (45% of the 219.9 mmt offered for sale). Auctions during 2017 traded 57 mmt. The 2-year total was 157.5 mmt, China Grain Net reported.
  • Grain and Oils News reported that net sales via the 2018 auctions totaled 93 mmt and estimated that the remaining stock of temporary reserve corn was 89 mmt.
  • The Dim Sums blog calculated that 48.8 mmt was traded in 2017 and 96.3 mmt was traded during 2018--a 2-year total of 145.1 mmt--based on a compilation of 2017 and 2018 auction results reported by National Grain Trade Center.
The corn was sold at prices well below the prices paid for the corn when it was purchased during 2013-15. This implies that funds from the auctions will not fully pay off loans from the Agricultural Development Bank of China that financed the purchases, in turn implying a massive write-off of these loans. Dim Sums compared the auction prices with the "temporary reserve" procurement prices corresponding to the year and province for each lot of corn auctioned. On average, the reserve corn was auctioned at a price that was 39% below the purchase price during 2017 and 29% below the purchase price in 2018. For example, corn auctioned during 2018 brought an average price of $225 per metric ton, but it had been purchased at an average of $316/mt 3-to-5 years earlier (values were converted to US dollars using an exchange rate of 6.7 RMB/$, roughly the average for the last two years).

Summary of China's corn auctioned from "temporary reserve", 2017-18
Item May-Sept
2017
April-Oct
2018
Million metric tons
Grain sold at auction 48.8 96.3
Dollars/metric ton
Average sale price 203 225
Average purchase price  330 316

The total loss from selling at prices below acquisition price was $14.9 billion: $6.2 billion for the corn auctioned in 2017 and $8.7 billion for the corn auctioned during 2018. The cost of interest and storage is estimated to be $12.7 billion: $4.3 billion for 2017 auctions and $8.2 billion for 2018 auctions.  The total cost of the corn auctioned was $27.6 billion: $10.7 billion for the 2017 auctions and $16.9 billion for the 2018 auctions.

Estimated financial losses from China's auctions of corn from "temporary reserve", 2017-18
Billion dollars
Revenue from auction sales 9.9 21.7
− Purchase cost -16.1 -30.4
=Loss of value -6.2 -8.7
Cost of interest and storage -4.5 -8.2
Total cost of grain auctioned -10.7 -16.9
Assumes exchange rate of 6.7 RMB/US$;. Interest rate 5%; storage cost of 86 yuan/ton/year--values obtained from a presentation at China's 2018 Agricultural Outlook Conference. Purchase cost estimated from temporary reserve prices for corresponding year and province.

The auctions have been using a first-in-first-out approach. During 2017, 27.9 mmt of corn produced in 2013 and 19.9 mmt from 2014 was auctioned. During 2018, 44.8 mmt from 2014 and 51 mmt from 2015 was auctioned.

China auctions of corn from reserves, 2017-18
Auctioned in:
Produced 2017 2018
Total
Million metric tons
2012 1.0 1.0
2013 27.9 0.6 28.5
2014 19.9 44.8 64.7
2015 51.0 51.0
Total 48.8 96.3 145.1

We can compare the totals with reports of how much was procured during corresponding years to estimate how much corn is left. Let's assume no corn from 2012 or 2013 remains since they have stopped auctioning it. Grain officials reported that 83.3 mmt was procured in 2014 which exceeds the cumulative 64.7 mmt of 2014 corn traded by 18.6-mmt. Grain officials say they procured 125 mmt of corn during 2015/16, which exceeds the 51 mmt auctions of 2015 corn by 74 mmt. These two numbers sum to about 93 mmt. This is a little more than the 89 mmt remaining stock estimated by Grain and Oils News who anticipated that the temporary reserve stockpile could be completely exhausted by mid-2019. There should be an additional 30 mmt purchased during 2016/17 as well.

Grain and Oil News expounded on the "surprising" and "shocking" flip in the Chinese corn market from massive excess supply to deficit in three years: during 2015/16 authorities removed 125 mmt of corn from the market to support prices and in 2017/18 they auctioned 100 mmt to prevent prices from rising. Both Grain and Oil News and China Grain Net note that the corn market shows signs of surprising tightness this year despite the massive release of reserves.

Not all of the auctioned corn has actually entered the market. The reserves are mostly stored in northeastern provinces, and there have no reports of massive volumes of corn clogging ports and rail lines for shipment to other regions. The South China Grain Exchange commented last month that the auctions represented a change in ownership, yet there does appear to be a significant volume of corn injected into the Chinese market.  China Grain Net said processors in northeastern provinces have been using mainly corn from temporary reserve auctions and are now starting to buy corn from the 2018 crop.

A number of Chinese commentators have noted that prices have been climbing. The National Bureau of Statistics 2018Q3 producer price indexes show corn prices up 2.5% year-on-year while wheat prices were down 2.7%, rice prices were down 3.9%, and soybean prices were down 4.1%. Corn prices are 1450-1650 yuan/mt in Jilin Province and 1450-1610 yuan/mt in Heilongjiang, but in the Huang-Huai region further south prices have been rising 50 yuan per week. In Shandong Province, corn prices have been rising and are now in the range of 1900-2040 yuan/mt. Commentators attribute the tight corn market to uncertainty about the size of this year's Chinese crop and trade tensions that have shut down most imports of U.S. grain.

As always, the numbers are obscure, but there does appear to be a remarkable and puzzling flip in China's corn market from excess supply to excess demand in a short 3-year interval. Commenting on this flip, Grain and Oils News says that self-reliance is even more important during this period of re-emerging inflation and trade tensions with the United States. Based on indications that China now has a deficit in its corn supply being filled by sales from reserves, the Grain and Oils News writers insist that maintaining domestic supply-demand balance, steadily increasing corn prices, and stimulating more corn production are important issues for this new era.

Sunday, October 28, 2018

Chinese Statistical Fakers Punished

Chinese companies are being punished for falsifying statistics they report to government statistical bureaus. Since last year the National Bureau of Statistics has been checking local statistics for falsification and misreporting. The Bureau has caught 97 companies in five provinces who will be assessed penalties, have their names published on a black list, and be reported to the "Credit China" web site and a national credit information sharing system. A list of 45 companies in Liaoning, Anhui, Fujian, Shandong, Sichuan, and Guizhou guilty of severe statistical falsification was published with the article. Another 54 companies have a second chance before they will be sanctioned.

Low Protein Feed Standards Approved

China's Feed Industry Association has approved release of new swine and poultry feed standards calling for reduced protein content. The association described the standards as a "milestone" that will improve feed efficiency, relieve stress on the environment, and reduce China's longstanding reliance on imported protein materials for feed.

At the October 26 meeting announcing the release, the association said current high rates of inclusion of soybean meal and other protein in livestock feed reduce efficiency and stress animals' metabolism. Low absorption rates means large amounts of nutrients are excreted in waste, becoming a major rural environmental problem.

The association's new standards for feeder pigs, finishing hogs, layer hens and broiler chickens add upper limits on protein and phosphorus, reduce lower limits on protein inclusion, allow more synthetic amino acids, and reclassify animal growth stages in comparison with national standards published in 2008. The association claims that adding amino acids while reducing protein intake will not affect the animal's growth rate or time on feed.

According to the association, the new standard reduces the proportion of protein in pig feed by 1.5 percentage points and 1 percentage point for broiler feed, on average. The amount of protein needed to produce 1 kilogram of pork is reduced from .45 kg to .39 kg, a 13% reduction. The new standard could reduce soybean meal needs by 11 million metric tons annually, the association claimed--equal to a 14-mmt reduction in soybean needs.

These standards are recommendations issued by the association, a semi-governmental organization that was part of the Ministry of Agriculture until the 1990s. They will not necessarily be adopted immediately by all feed mills and producers, although there will likely be political pressure to do so as a measure to avoid importing U.S. soybeans over the next three months.

Wednesday, October 24, 2018

Brazil Overtakes U.S. as top Ag Import Supplier to China

Brazil has overtaken the United States as China's leading supplier of agricultural imports, as China's retaliatory tariffs begin to bite. Tabulations of imports in broad categories posted by China's customs administration indicate that imports of food and agricultural products from Brazil totaled $3.6 billion during September 2018, about 30% of the total. Imports from the United States were $625 million--a 5% share.
China's imports from the U.S. normally fall to a seasonal low during the summer months. The September data are the first to reveal impacts of China's tariff retaliation. China's imports of U.S. ag products during September 2018 were down $690 million from a year earlier--a much larger margin than in July (when most tariffs took effect) and August. China's imports from the U.S. normally jump during November and December as soybeans from the U.S. harvest become available. It's possible imports from the U.S. could be down year-on-year by as much as $2 billion during those months if China minimizes soybean imports from the U.S.

China's imports of ag products from Brazil were up more than $1 billion y-o-y in September. Imports from Brazil have been up from last year in 4 of the last 5 months.
Most of Brazil's dominance is in soybeans. In September, Brazil supplied 84% of China's imports in the category HS 12 (mainly soybeans, as well as other oilseeds and hay). The U.S. supplied 2.9% of imports in HS 12, while Canada supplied 4.9%, and Argentina supplied 1.8%. China's year-one-year decline in imports of U.S. soybeans was largest during January-March--before trade tensions got into full swing. The real impact of trade tensions will become evident during the next 3 months which are typically the peak season for China's purchases of U.S. soybeans.

Brazil is also China's top meat import supplier. In September Brazil supplied 28% of meat imports and the U.S. supplied just 2%. Other major suppliers were the European Union (19.7%), Australia (14.9%), Argentina and New Zealand (about 10% each). The decline in meat imports from the U.S. began in May, after the first tariff on U.S. pork was imposed.

Apart from soybeans, China's imports of U.S. grains, animal hides, fruit and nuts, dairy, meat, and cotton were down from a year ago. Imports of U.S. seafood rebounded in September.
China's imports of sorghum and corn fell to minimal volumes during September. Imports of barley have been relatively resilient. Much of the decline in grain imports reflects near elimination of imports of U.S. grain.

Monday, October 22, 2018

Crushers Confident, Nervous About Tight Supplies

Soybean crushers anticipated making it through the next few months without U.S. soybeans in an October 14 article published in the communist party's Futures Daily, but they also expressed trepidation about tight soybean supplies.

A futures analyst investigated the demand for soybean meal, the effect of trade tensions on soybean supplies and the impact of African swine fever on feed demand in the region by visiting 5 soybean crushing plants, three feed mills and a large integrated livestock company in Liaoning Province. This is a relatively small slice of China's soybean market compared to much larger crushers and feed mills in Shandong, Jiangsu and other coastal provinces further south.

The 25-percent tariff on U.S. soybeans appears to have morphed into a boycott. All of the companies interviewed presumed there would be no imports of U.S. soybeans in the fourth quarter of 2018. There was no consideration that they might buy if the price is right--even though U.S. soybeans with the 25% tariff are cheaper than Brazilian or Chinese soybeans at present. Even a foreign-owned crusher said their company would/could not import U.S. soybeans. Other Chinese news media include similar assumptions of zero imports of U.S. soybeans. Chinese media was quick to counter news from "foreign media" that two cargoes of U.S. soybeans were headed for China by trotting out buyers who insisted the shipments had been purchased in March and April--before trade tensions began in earnest--and they had not purchased any U.S. soybeans since then.

Crushers interviewed by the futures analyst said they have stocked up on Brazilian soybeans and they think they have enough to continue operations through December or January without importing U.S. soybeans. They appear confident they can make it through the next three months, but they anticipate soybean supplies will be "tight." In this article and others, everyone says they expect a soybean deficit of "10 million tons or so." The strategy of stocking up on extra Brazilian soybeans may be difficult to sustain in a drawn-out trade war of more than a year. Stocks will be scraping bottom by the time new soybeans are available from Brazil.

Most of their soybeans are stored in large warehouses at the Dalian and Yingkou ports in Liaoning Province. One crusher transports soybeans by rail from Dalian on a daily basis. Crushers store smaller amounts of soybean meal and oil which they sell mainly in the surrounding region of Liaoning and adjoining provinces.

Crushers sell directly to feed mills, both in bags and in bulk. According to one feed mill, over 90% of commercial feed in this region is produced for chickens and aquaculture and relatively little for hogs. However, a branch of one large integrated feed-livestock company said it produces 300,000 metric tons of feed for swine. Because corn is widely available in the northeastern region, one feed mill said most swine feed is concentrate (mainly soy meal, vitamins and trace elements) and premixes that are mixed with local corn. However, a large feed company says about two-thirds of its production is complete formulated feed for swine. Feed mills agreed that demand for poultry, aquaculture, beef cattle, and sheep is more vigorous than pork demand this year. One said pig feed sales are down this year.

Northeastern China is experiencing expansion of swine production and feed in response to the government's policy of "raising pigs in the north for the south" which has encouraged a shift of swine production from environmentally-stressed areas of the south to the Northeast region. The analysts were told that the expansion is ongoing and only a minor part of the planned new capacity has come online already. There has also been an expansion of crushing capacity--several crushing plants said they had built new production lines with capacity of 2,500-to-3000 metric tons per day. Companies said they expected expansion of soybean meal production to eventually saturate the market (not considering the effects of this year's trade tensions), and shipments of soybean meal from Shandong and other regions to the Northeast would shrink or vanish.

The poultry integrator said they vary the proportion of soybean meal in feed between 15% and 25%, depending on relatively prices of ingredients. The proportion is now at the bottom of the range. The large feed company branch said they use 15%-16% soybean meal in swine feed and may adjust it slightly as the meal price rises. One manager said mills had reduced soy meal use by 3%-to-4% in response to the government's call to cut back on soy meal. Another feed mill said there is some flexibility to adjust soymeal proportion in feed for laying hens but they are trying to keep the proportion stable in pig feed. The northeast region has access to relatively few substitutes for soybean meal. One mill buys some rapeseed from Inner Mongolia and another said they can use small amounts of peanut meal, but no palm kernel meal. Two feed mills said feed price increases are likely as raw material prices rise.

The companies seemed relatively unconcerned about impacts of African swine fever. They said the government's 1,200 yuan-per-head subsidy for culled pigs was enough to encourage farmers to comply with mandated culling in the 3-kilometer radius around outbreaks of the disease. They said the number of pigs culled is a tiny proportion of national production, but they agreed that African swine fever is inducing farmers to scale back plans to expand herds. One large company has put on hold plans to open a large pig breeding farm.