Wednesday, February 22, 2017

China Flour Mills Under Pressure

Profit margins for China's flour mills are under pressure from high wheat prices and weak flour prices, according to an analysis last week by Agricultural Futures Net.

The peak season for flour demand around the Chinese new year has now passed, and flour mills have been slow to restart production after the holiday due to slim profits. Some have taken the opportunity to retool machinery.

The cost of raw materials is up. Flour mills are paying an average of 1.33 yuan/500g for wheat, up from 1.19 yuan/500g last year. Wet weather in parts of China's wheat belt last summer have reduced the supply of good quality wheat in China this year.

Flour prices have not risen to match the rise in wheat prices. Salesmen reportedly have not been getting as many orders as they normally do at this time of year. The competition for customers has led to price wars for flour. The average ex-factory price for flour is reported to be 1.7 yuan/500g in Shandong, Hebei, and Henan Provinces, down from 1.8 yuan/500g a year ago.

Mills also rely on sales of wheat bran--the byproduct of flour-milling. Normally, flour and bran prices move in offsetting directions but recently both prices have fallen. About 80% of bran is used for making pig and poultry feed and the rest is used mostly to grow mushrooms. Feed demand is weak due to the campaign to demolish pig farms to comply with directives to create pig-free zones near cities and environmentally vulnerable bodies of water. The wheat bran ex-factory price is .70-.74 yuan/500g.

The Agricultural Futures Net analysis says China's flour milling industry suffers from severe excess capacity and may be facing a shake-out of small mills.  Large companies with financing and technological advantages are expected to survive while smaller mills may shut down.

Sunday, February 19, 2017

China Cuts Rice Prices

China's minimum prices for rice for the 2017/18 crop will be reduced, according to a February 17 announcement by the National Development and Reform Commission. The small reductions, however, will do little to close the 27-percent gap between China and international prices reported by the Ministry of Agriculture for January 2017.

The 2017/18 minimum prices will be 130 yuan/50kg for early long grain rice, 136 yuan/50kg for single-season and late-season long-grain, and 150 yuan/50kg for medium grain rice. The government's grain reserve corporation will purchase rice at these minimum prices if the market price falls below the minimum price level. The minimum prices are announced before spring planting, so these will apply to the early long grain crop harvested in July and the fall crops harvested September-October this year.

The early rice price was reduced 3 yuan/50kg from last year, the middle/late long grain price was reduced 2 yuan/50kg, and the medium grain price was cut 5 yuan/50kg. This is the first time all three prices were cut since the program began in 2005 (last year the early rice price was cut slightly). Prices were raised by roughly two-fold from 2008 to 2013 and held steady until 2016.

According to the Ministry of Agriculture's latest situation and outlook report, January average long grain paddy rice prices in China were slightly higher than the minimum prices for next year. Early long grain averaged 131 yuan/50kg and late long grain rice averaged 138yuan/50kg. The medium grain price averaged 148 yuan/50kg, slightly less than next year's minimum of 150 yuan/50kg.

China rice prices
January 2017 averages
Type of rice
Paddy rice
Early long grain
Late long grain
Medium grain 
Imported rice
Average January 2017 prices from Ministry of Agriculture S&O report. 
Imported rice is Thai 25% broken, C&F, with 1% in-quota tariff.

The price of milled rice is about a third higher than these farm gate paddy rice prices. In January, the average price for milled early long grain rice was 196 yuan/50kg, the average for late long grain was 211 yuan/50kg, and the average price for medium grain milled rice was 234 yuan/50kg. The early long grain price was 27 percent higher than the imported rice price and the late long grain price was 37 percent higher than the price of imported rice. (China's rice imports are predominantly long grain.)

The Ministry reported that China's rice imports for calendar year 2016 totaled 3.56 million metric tons, up 5.5 percent from the previous year. Vietnam supplied 45 percent of the imports, Thailand 27%, and Pakistan 20%. In addition to these legal imports, large volumes of rice are smuggled into the country. China's inspection and quarantine authority reported seizing a record 366,000 metric tons of smuggled rice and other grains last year--five times more than the previous year--due to their "national sword" smuggling crackdown.

Chinese authorities tried to engineer a steady rise in rice prices independent of fluctuations in the international market. The steady increase in minimum prices adjusted to a milled-rice equivalent contrasts with gyrations in Thai and Vietnam prices. When Vietnam and Thai prices dipped in 2012 and 2013, respectively, China kept its minimum prices relatively steady. China's imports of rice exploded when the gap in prices grew to 20-30%. The slightly lower minimum prices just announced for this year's crop will still far exceed Vietnam and Thai export prices unless there is a rebound in global prices. China's support price for medium grain rice also exceeds the California medium grain rice export price by a smaller margin.
China support prices converted to milled equivalent by dividing by .66 and converted to US$.
Thai and Vietnam export prices obtained from FAO-GIEWS database.
China support price for medium grain rice converted to milled equivalent by dividing by .66.
Retail price is monthly average reported by China National Bureau of Statistics, converted to US$.
California medium grain export price obtained from FAO-GIEWS database.

China's exports of rice--mainly medium grain--rose 37.6 percent in 2016. However, the export volume of 395,000 metric tons fell far short of imports. Top markets for China's rice exports were South Korea (44 percent), North Korea (11 percent), and Japan (10 percent).

The Ministry of Agriculture's instructions to officials on crop production for 2017 give top priority to keeping the area planted in rice and wheat stable at 800 million mu (53.3 million hectares), with "national food security as the bottom line." The document calls specifically for stabilizing rice area in the northeastern provinces and keeping double-cropped rice area steady in the south. Officials are instructed to implement the minimum price program for rice and wheat, "guide" farmers to make rational decisions on what to plant, and to enforce the new evaluation system for the "governor's grain responsibility system." Another directive to promote "quality rice" describes an initiative to develop early-season rice for processing use (early rice does not taste good and the government has struggled to prevent farmers from abandoning the early rice-planting).

This year officials will begin setting up "functional regions" for rice and other grains. Officials will assemble databases on fields, weather, maps, and set up technical services to concentrate support in the key production regions. Rice blast disease and "two moving rice insects" will be among the problems targeted by disease and pest control technicians. Officials will identify places with suitable conditions for the "high standard field" campaign to upgrade large contiguous areas of rice fields.

There are some environmental concerns related to rice. The MOA guidance calls for "strict control" of well-based irrigation of rice in the northeastern region. It urges officials to "fight" to completely eliminate rice production from the Beijing-Tianjin-Hebei region within three years. The remediation program for rice fields contaminated with heavy metals will continue. A program has identified different soil types used for rice production and identified strategies and pilots for improving soil quality.

Thursday, February 16, 2017

High gluten wheat shortfall worsens

China has a serious shortfall of strong-gluten wheat this year, sending prices soaring, according to Grain and Oils News.

China's wheat predominantly has moderate levels of gluten which are suitable for traditional products like steamed bread, but western-style breads require flour with high gluten content. After decades of cajoling farmers to produce more of this type of wheat, it is still in short supply. This year's "central document no. 1" includes a directive to focus on producing high- and low-gluten wheat.

This year the shortfall is worse than normal for two reasons. First, there were widespread quality problems with the 2016 wheat crop due to rains and cloudy weather around harvest time. The weather problems affected the main strong-gluten wheat-producing regions, Henan and Hebei Provinces, Grain and Oils News said. The overall quality of wheat from last year's harvest is low.

A second reason for this year's shortfall is greater demand for high-gluten wheat due to stricter monitoring of flour millers. Authorities are cracking down on the use of a chemical additive that flour mills had used as a dough conditioner to take the place of scarce high-gluten wheat. The additive, azodicarbonamide, has been commonly used by flour mills in China. The country's food additive standard allows azodicarbonamide to be used in flour up to .045 g/kg. Its harmfulness to health is controversial but it has gotten bad publicity around the world and in China. Demand for strong gluten wheat has surged as millers give up use of the additive.

The price of one type of high gluten wheat, Xinmai 26, is up to 1.47 yuan/500g (about $422 per metric ton), according to a mill manager in Henan Province. Yet supplies are still hard to get so the price may be bid up further.

Analysts don't expect the shortage to be alleviated until the new wheat crop is harvested in the summer. So far, conditions for the winter wheat crop are favorable and a good harvest is expected.

Monday, February 13, 2017

Double Down on Corn-Buying Efforts in Jilin Province

Worried about the slow pace of corn purchases, officials in a northeastern China province have ordered local officials and companies to step up corn-buying efforts.

A February 3, 2017 circular issued by the Jilin Provincial government raised concerns that last fall's corn crop is being purchased at a much slower pace than usual. The 15.7 million metric tons of corn purchased as of last month's spring festival was much less than in previous years. Despite great efforts and special measures to ensure that farmers are able to buy this year's corn harvest, the document says there have been declines in price recently, buyers became cautious, and farmers are anxious to sell their corn. There has been a steady increase in unspecified new contradictions, new situations, and pressure on grain marketing.

Each local government and department must pay high attention, clearly recognize the new situation grasp the extreme importance, complexity, and arduousness of grain purchase and sale, and recognize the utmost importance of work on purchase and sale of grain, the document said. The circular calls for adopting "unconventional measures."

The document orders local officials and companies to double down on efforts to buy corn by encouraging diverse players to enter the market to buy grain. Officials must fulfill the obligations demanded by the provincial governor food security responsibility system. They should ensure implementation of subsidies for industrial processors and feed mills to buy corn. They should coordinate transportation of grain by rail and enforce the waivers of highway and bridge tolls for grain. Companies should process more, buy more, and build more storage facilities. COFCO's trading company, China aviation grain reserve company, and provincial grain companies are called upon to exercise their social responsibility to buy grain. The provincial branch of Sinograin is instructed to buy more grain when prices are falling and other companies exit the market, and to make large one-time purchases. Officials are instructed to form partnerships with purchasers and make credit available. Officials should arrange for technicians to advise farmers on preventing quality problems, but they should also encourage companies to loosen up quality requirements to allow farmers to sell corn with excessive levels of mold.

Bank Loans and Bulldozers for Agriculture

China is revving up its build-it-and-they-will come economic growth model to overhaul the countryside. China's Central Document No. 1 lays out an elaborate grand-sounding program for supply side structural reform of the countryside, but it boils down to doling out cash to mop up surplus commodities, bulldozing old stuff, pouring concrete, and creating a "market" for uncompetitive seed and farm equipment companies.

The cash sluice gate was opened by the strategic agreement signed between the Agricultural Development Bank of China and the Ministry of Agriculture in September 2016 which pledged to lend no less than 3 trillion yuan ($450 billion) to support agricultural modernization by 2020.
Created from Agricultural Development Bank annual reports,

According to the Ministry of Agriculture, the Bank had approved 24.7 billion yuan ($3.5 billion) in loans by the end of December and loans had been disbursed for projects worth 13.55 billion yuan ($2 billion). The Ministry said most of the loans were made to national-level dragon head enterprises for working capital to ensure they had enough funds to buy up crops from last fall's harvest. Companies got 100 million yuan each. The borrowers were given an extended repayment period to relieve them of financial pressure.

Now that the bank has funded the procurement of the fall grain harvest, it will focus on funding the priorities in this year's "Document No. 1", most of which involve bulldozers, pipes, other construction, and funds for loan guarantee companies. The top priority is food security and improving grain quality, and the featured program is "construction of high standard fields" for grain, cotton, oil seeds, and sugar production. This is basically a construction program covering a large contiguous area that levels fields, builds irrigation networks, access roads, levels fields, and builds sheds for tractors, grain dryers and anything else needed.
An airport road financed by the Agricultural Development Bank.

Most of the other priorities in the Document No. 1 are construction projects: agricultural industrial parks, science parks, service centers for land transfer, wholesale markets and warehouses,  and organic farming projects. Other loans will be for farm machinery and seed companies, databases for new "functional grain production areas," smart farming, drones, etc. Most will be funded by loans from the Agricultural Development Bank of China. Grants from the central government to grain-producing counties and other "awards" will help pay the interest.

The bank is branching out to fund a major push for poverty alleviation which aims to move 10 million people out of poverty this year. The program is a combination of physically moving people out of poor areas and starting up industries in poor regions. The bank is also making loans for clearing out shabby houses and constructing apartments to urbanize the rural population.

Since this is a socialist country where there is no private ownership of land, no one can be expected to make investments in it. Therefore, it becomes the government's responsibility to collect the money and make the investments. In practice, the economy becomes a scramble among officials for the funds, and the winners are those with the best connections and the most red envelopes. When the construction binge results in products unneeded by the market, a second round of cash follows to buy up the unneeded commodities and store them.

China Ag Imports Shrank in 2016

China narrowed its foreign trade deficit in agricultural products during 2016, according to figures reported by its Ministry of Agriculture. Data for January-December 2016 show the value of imports was $111.57 billion, down 4.5 percent from the previous year and the value of exports was $72.99 billion, up 3.3 percent. The deficit of $38.58 billion had narrowed by 16.5%, according to the Ministry of Agriculture's estimates.

China agricultural imports and exports, 2016

Exports Imports Net
(Billion US dollars)
72.99 111.57 -38.58
Change from previous year (percent) 3.3 -4.5 -16.5

The volume of soybean, wheat and rice imports for January-December 2016 was up, and the volume of pork imports doubled. Imports of corn, cotton, and sugar fell by about a third. Imports of yarn were also down. Imports of substitutes for corn--barley, sorghum, distillers dried grains, and cassava--all fell dramatically. Beef and milk powder imports rose, but lamb/mutton imports were down slightly. China exported 395,000 metric tons of rice (up 37.5%), 113,000 metric tons of wheat (down 7.4%), and 4,000 metric tons of corn (down 63%). Sunflower oil imports surged by 47% while imports of other vegetable oils shrank by double digits. (Other sources show sunflower oil shipments from Ukraine and Russia account for most of the sunflower oil increase).

China imports of main commodities, 2016
Commodity Import volume Change from prev.yr.

1000 metric tons Percent
Wheat 3,412 13.5
Corn 3,168 -33.0
Rice 3,562 5.5
Barley 5,005 -53.4
Sorghum 6,648 -37.9
Distillers dried grains 3,067 -55.0
Cassava 7,704 -17.8
Cotton 1,240 -29.5
Yarn (cotton substitute) 1,968 -16.1
Sugar 3,062 -36.8
Soybeans 83,913 2.7
Rapeseed/canola 3,566 -20.2
Other oilseeds 2,050 na
Palm oil 4,478 -24.2
Rapeseed oil 700 -14.1
Sunflower oil 957 47.0
Soybean oil 560 -31.5
Pork 1,620 110.0
Swine offal 1,491 82.5
Beef 580 22.4
Lamb/mutton 220 -1.3
Milk powder 846 15.2

The Ministry gave only a partial accounting of the value of imports and exports by category. Oilseeds and livestock were the two largest agricultural import categories by value, but together they accounted for 54 percent of the total import value. The value of oilseed imports declined, reflecting lower prices. The largest agricultural export item reported was vegetables, but their $14.7 billion value accounted for only 20% of the total agricultural export value. Vegetable export value was up 11%. Fruit was the second-leading export item listed, yet China's fruit imports were also significant. The value of fruit imports was roughly equal to the value of grain imports last year.

China agricultural import and export value, 2016

Category Imports 

Change (%) Billion
Change (%)
Oilseeds 37.0 -3.5 1.4 -3.0
Vegetables 0.5 2.0 14.7 11.0
Fruit 5.8 -1.0 7.1 3.6
Cereal grains 5.7 -39.2 0.5 13.6
Livestock 23.4 14.5 5.6 -4.2
Edible oils 5.1 -15.5

Cotton 1.8 -34.7

Sugar 1.2 -34.0

Thursday, February 9, 2017

China MOA S&D Estimates (Feb 2017)

The Ministry of Agriculture's China Agricultural Supply and Demand Estimates for February 2017 made only slight changes for the 2016/17 market year.

The estimate of China's corn imports for 2016/17 was cut to 800,000 metric tons, down from 1 million metric tons last month. The CASDE has shaved their estimate of corn imports from 2.4 million metric tons estimated in July and August last summer to 1 million metric tons November-January, and now 800,000 metric tons. The report's authors attribute the lower import number to China's corn prices gradually falling in line with international prices after elimination of the temporary reserve policy. CASDE says the price of imported corn with 1% tariff for arrival in southern China was 1700 yuan per metric ton in January 2017, which they say exceeds the cost of domestic corn by 120 yuan. They expect the price of imported corn to be in the 1650-1750 yuan per metric ton range during 2016/17. The average wholesale price in production regions is estimated at 1500-1650 yuan.

Estimated industrial processing of corn for 2016/17 was raised by 500,000 metric tons due to higher rates of production than expected. Total consumption of corn is estimated at 211.22 million metric tons. Production is estimated at 215.33 mmt (lower than the National Bureau of Statistics estimate of 219.55 mmt). CASDE estimates that production of corn will outpace production and inventories will rise by 4.4 million metric tons during 2016/17.

China corn supply and demand (Ministry of Ag, Feb 2017)
Item Unit 2015/16 2016/17 Jan 2016/17 Feb
Planted area 1000 ha 38,117 36,026 36,026
Harvested area 1000 ha 38,117 36,021 36,021
Yield Kg/ha 5,892 5,978 5,978
Production MMT 224.58 215.33 215.33
Imports MMT 3.2 1.0 0.8
Consumption MMT 194.09 210.72 211.22
--Food MMT 7.65 7.82 7.82
--Feed MMT 121.01 133.53 133.53
--Industrial use MMT 54.17 57.75 58.25
--Seed MMT 1.66 1.61 1.61
Loss and other MMT 9.56 10.01 10.01
Exports MMT 0.01 0.5 0.5
Surplus MMT 33.73 5.11 4.41

The soybean yield for 2016/17 was raised by 10 kg to 1758 kg per ha due to good growing conditions in eastern Heilongjiang Province that offset reduced yields due to drought in some other areas. Soybean production was estimated at 12.57 million metric tons for 2016/17. The output of high quality soybeans was lower than expected; more poor quality soybeans were used directly as feed. Imports of soybeans are estimated at 85.5 million metric tons.

China soybean supply and demand (Ministry of Ag, Feb 2017)
Item Unit  2015/16   2016/17 Jan  2016/17 Feb
Planted area 1000 ha 6,590 7,156 7,156
Harvested area 1000 ha 6,590 7,150 7,150
Yield Kg/ha 1,762 1,748 1758
Production MMT 11.61 12.5 12.57
Imports MMT 83.23 85.31 85.31
Consumption MMT 96.67 99.77 99.87
--Crushing MMT 82.89 85.50 85.50
--Food MMT 10.35 11.18 11.18
--Seed MMT 0.54 0.61 0.61
Loss and other MMT 2.89 2.48 2.58
Exports MMT 0.11 0.20 0.2
Surplus MMT -1.96 -2.16 -2.19

Cotton production and import estimates are also unchanged. Cotton production is estimated at 4.72 mmt, a little lower than the National Bureau of Statistics estimate of 5.4 mmt. Imports are estimated to be 900,000 metric tons, slightly more than the tariff rate quota. Cotton consumption was raised to 7.59 mmt due to improved global economic conditions since the third quarter of 2016 that is expected to raise demand for textile exports. The ending cotton inventory will be drawn down by year 2 million metric tons during 2016/17 to 9.13 million metric tons, but still more than year's consumption.

China cotton supply and demand (Ministry of Ag, Feb 2017)
Item Unit 2015/16  2016/17 Jan  2016/17 Feb
Begin inventory MMT 12.8 11.11 11.11
Planted area 1000 ha 3,267 3,100 3,100
Yield Kg/ha 1,510 1,523 1,523
Production MMT 4.93 4.72 4.72
Imports MMT 0.96 0.90 0.90
Consumption MMT 7.56 7.54 7.59
Exports MMT 0.02 0.01 0.02
End Inventory MMT 11.11 9.18 9.13

Soybean oil production was raised slightly by 10,000 mt.

China edible oils supply and demand (Min Agriculture, Feb 2017)
Item Unit 2015/16  2016/17 Jan  2016/17 Feb
Production MMT 25.3 25.85 25.89
--Soy oil MMT 14.74 15.16 15.17
--Rapeseed oil MMT 5.6 5.61 5.61
--Peanut oil MMT 3.01 3.18 3.18
Imports MMT 5.81 5.65 5.6
--Palm oil MMT 3.39 3.3 3.25
--Rapeseed oil MMT 0.77 0.8 0.75
--Soy oil MMT 0.59 0.58 0.58
Consumption MMT 31.17 31.41 31.43
--Urban MMT 20.41 20.8 21.4
--Rural MMT 10.76 10.61 10.03
Exports MMT 0.11 0.13 0.13
Surplus MMT -0.17 -0.04 -0.07

China sugar supply and demand (Ministry of Ag, Feb 2017)
Item Unit 2015/16 2016/17
Planted area 1000 ha 1423 1433
--sugar cane 1000 ha 1295 1270
--sugar beets 1000 ha 128 163

--sugar cane MT/ha 60.3 60
--sugar beets MT/ha 53.85 52.5
Sugar output MMT 8.7 9.9
--sugar cane MMT 7.85 8.85
--sugar beets MMT 0.85 1.05
Imports MMT 3.73 3.5
Consumption MMT 15.2 15
Exports MMT 0.15 0.07
Surplus MMT -2.92 -1.67