Friday, February 5, 2016

China's Statisticians Admonished by Communist Inspectors

A Chinese Communist Party discipline inspection team berated the National Bureau of Statistics for poor communist party discipline and ongoing violations of President Xi Jinping's anti-corruption campaign, a reminder of the highly politicized nature of Chinese statistics and the incentives for corruption in the statistical system.
Discipline inspection team announces findings at National Bureau of Statistics.

An article from the Central Commission on Discipline Inspection web site re-posted on the National Bureau of Statistics site reported on a January 31, 2016 meeting where an inspection team berated the bureau's communist party organization for weak leadership, poor party discipline, failure to fulfill responsibilities, and failure to establish party organizations at the grass roots level. The inspectors found a number of problems at the bureau, including improper employment and promotion practices, officials who used "data" for personal gain, abuse of power, and violations of President Xi's "eight regulations" such as excessive office space. The inspectors accused statistics officials of failing to do their jobs and complained of continued problems with "bureaucracy" and "lazy government."

The inspectors' inquisition came several days after the chief of the Bureau, Wang Bao'an, was fired for serious disciplinary infractions. Wang had only been at the statistics bureau for half a year, and his sins were apparently committed when he was in much more lucrative positions overseeing massive public works investment.

A year ago, the statistics bureau held a meeting where the previous director reminded the bureau that falsification of statistics is a type of corruption that should be severely punished.

A commentator writing on the Caixin web site recalled the "fake statistics = corruption" admonishment and pointed out that some believe misleading data has prevented the government from capably managing the economy in recent years. There is strong pressure from officials to produce statistics that show success which can be reported to higher level officials, resulting in promotions and awards.

An example of the absurdity of a politicized statistical bureau is a questionnaire administered by the National Bureau of Statistics last year which found that 91.5% of the public is satisfied or relatively satisfied with progress on the communist party's clean government and anti-corruption campaigns. How could the bureau have possibly reported any other result?

Besides corruption and deliberate falsification, there may be more fundamental problems. Political reliability trumps professional competence in selection of personnel. Why would clever and capable statisticians take up employment in such a highly politicized organization? Even if the statisticians are good, the quality of their surveys depend on respondents telling the truth when they fill out the forms.

In a press conference to discuss the new GDP statistics in January, a reporter asked former bureau chief Wang how the bureau is adjusting its methods to monitor such a rapidly-changing economy where new companies are springing up, old ones are going out of business and new ways of doing business are appearing. Wang talked about plans to make improvements in the future but could not say how statistics are keeping up with changes already happening.

Thursday, February 4, 2016

GMO Corn an "Open Secret" in NE China

Chinese authorities have waffled between funding research on genetically modified crops while stoking fears of imported GMOs. As they dragged their heels on approving transgenic crops for commercial use, there is mounting evidence that Chinese farmers are growing them illegally. 

The Chinese communist party's "document no. 1" released last month called for "strengthening research on transgenic agricultural technology and its supervision, carefully spreading results on the basis of safety assurances."

Is it a coincidence that a week later it is announced that the Chinese state-owned company ChemChina plans to pay $43 billion for the Swiss company Syngenta whose products include transgenic crops? This deal appears to be in line with the "strengthening research" part.

The admonitions about "supervision" and "careful" dissemination of transgenic crops may be about a decade too late. A detailed Greenpeace survey of the corn industry in Liaoning Province caused a stir when it reported that genetically modified material was found in nearly all the samples collected from fields, seed dealers, and products in supermarkets. 

No genetically modified corn varieties have been approved for commercial sale or use in China, so planting GMO corn for sale is illegal. Genetically modified cotton has been available to farmers for about 15 years, but no other GMO crop is legally planted for commercial use on a large scale. Dimsums reported on planting of GMO corn more than a year ago. This follows allegations of widespread GMO soybean production in Heilongjiang last year and detection of GMO rice in supermarkets. 

China Dialogue's bilingual article on the Greenpeace report quoted a well-known seed industry expert from China Academy of Agricultural Sciences who said, “The reason there is such a large area of illegal GM corn is that this has been going on in Liaoning for a decade, regulation has been lacking.”

According to a China Times article, the spread of illegal GMO seeds  in northeastern China is an "open secret". An unnamed seed industry person told China Times that farmers prefer pest-resistant seeds, which are all transgenic. (However, some of the purportedly pest-resistant seed varieties are fake and do not resist pests, according to this person.) The seed industry person went on to blame small companies illegally selling seeds developed by multinationals as the source of the problem. 

China Times notes that the government has not produced an authoritative report on the amount of GMO crops illegally grown in China.

Several localities have launched crackdowns on genetically modified corn seed sales. A letter sent out by Liaoning's seed bureau threatened to report serious violators to the police. It was reported at a meeting in Jilin Province that three seed companies in the province had their licenses revoked for illegally selling GMO corn seeds. 

A Renmin University professor told China National Radio that sellers of genetically-modified seeds are like drug dealers and should not be tolerated. 

Greenpeace is unable to say how the GMO seeds got into the country. But inspection and quarantine authorities have periodically reported catching people mailing in genetically modified seeds or carrying them in suitcases. On January 27 (incidentally, the same day the "No. 1 Document" was released) an executive with a Chinese seed company pleaded guilty in Iowa to stealing seeds from test plots, propagating them on rented plots of land in the U.S., and sneaking them into China hidden in luggage or in popcorn canisters. 

Tuesday, January 26, 2016

China Will Liberalize its Corn Market...One of These Days

A Peoples Daily article this week signaled that China will allow its corn price to be determined by market forces. Although there is "consensus" that the corn market needs to be liberalized, nothing concrete was revealed about how or when the reform would take place because the details are "complicated."

The article repeated and amplified remarks made in a January 10 speech by Chen Xiwen, the vice director of China's leading group on rural work. The Peoples Daily article was part of a series explaining the broader strategy of supply-side restructuring that China is pursuing in 2016.

Like the steel and housing sectors, China's grain production has overshot consumption, and a huge unsold inventory has piled up. Chen Xiwen said one of the priorities this year is to prevent this stockpile from growing even bigger.

Different from steel and housing, China has tried to prop up domestic grain prices by limiting  imports of grain and buying up surpluses to protect farmers' incomes. Chen Xiwen explained that China's grain prices are now far higher than prices in the international market. This is due to a policy of raising support prices to cover rising production costs, appreciation of the Chinese currency, and a decline in freight costs since 2009, said Chen.

The loophole in this price-support strategy is the lack of quotas to control imports of commodities that can substitute for corn. The substitutes include barley, sorghum, distillers grains, cassava, and cassava starch. Chen estimates that these substitutes displace about 50 million metric tons of domestic corn--about 20% of China's corn output, he said (this blogger calculates 22% of 2015 production of 224.5 mmt).
Calendar years. *2015 through November.
Substitutes=barley, sorghum, DDGS, cassava, cassava starch.

According to customs statistics through November, imports of corn and its substitutes for the calendar year were over 40 million metric tons, up from about 10 mmt in 2009 (the first year China began importing DDGS). The substitutes are omitted from most balance sheets. If they are added in, China's consumption of grain and related products for feed, starch, and alcohol production looks surprisingly robust over the past two years.

Chen says that holding domestic corn prices above the international price results in a confusing paradox in which grain production grew 12 years in a row, yet imports grew in parallel and grain inventories rose to a record level. He also notes that the production of corn doubled in 15 years while soybean imports grew to 81.7 mmt during 2015. Chen suggests that the increase in corn production overshot demand, and he suggests that corn production would be equal to demand if it were cut.

According to Chen, corn will be liberalized to let market supply and demand determine the price. The government will no longer be the main actor in the corn market--there will be diverse buyers and multiple distribution channels. Farmers need subsidies to ensure they receive reasonable income, Chen said, but the subsidies for farmers will be separated from the price. The government will give them a cash payment instead of holding the price at a high level.

A substantial decline in corn price has already occurred for many farmers, especially those in regions not covered by the temporary reserve price support program. Peoples Daily cites the example of a large-scale farmer in Shandong who received 1680 yuan/metric ton for her corn this year, down from 2100 yuan last year. Chen explains that the government has already reformed the price mechanism for soybeans, cotton, and rapeseed and is experimenting with target price subsidy payments to replace price supports.

While Chen said "everyone" agrees that the corn market must be liberalized, the timing and details of how it would occur are "complicated." Thus, there is no concrete announcement about when this would take place--will it be next month, in May, September, next year, or several years from now? No clues, leaving futures traders and other market participants exposed to a quantum change in corn price at the government's whim (and officials wonder why China's futures market is not used to set global prices...)

Chen and Peoples Daily revealed that they do not really trust markets. Market outcomes are great as long as they don't threaten China's "food security", reduce income of farmers, or result in domination of the market by foreigners. Officials have calculated that there is not enough grain traded in the world to meet China's needs if they were to import more. Therefore, Chen said rice and wheat will continue to have minimum prices since there can be no question of their production falling short of demand. Chen did not address smuggling of rice, the imbalances and distortions that would result when the price of corn falls to half the price of wheat, nor the plight of the rice- and wheat-milling industry which is unable to raise product prices to cover high raw material costs.

Rather than let farmers decide on their own to plant less corn as the price falls, the Ministry of Agriculture has concocted a giant plan to switch corn area to other crops in a "sickle"-shaped region extending from the frozen northeast through the parched northwest and into the mountainous southwest. The plan will begin this year. Officials are exploring land retirement and fallowing programs. Production costs will be reduced by cutting back on chemical fertilizer and pesticide use. Farms are expected to become more competitive by enlarging the scale of their operations, developing services for farmers, and improving seeds and other technologies.

Saturday, January 23, 2016

Non-GMO Soybean Supply Shortfall in China

China is learning that not all soybeans are equal and you have to pay a premium if you want to consume and produce "non-GMO" products. China's shortage of non-GMO soybeans was one of the main topics of discussion at a meeting on the soybean market held by the Ministry of Agriculture during December 2015 in Heilongjiang Province. The area planted in non-GMO soybeans in China has been shrinking year by year while the demand for non-GMO cooking oil, food products, and protein supplements has grown. Meanwhile, the price of imported soybeans--which are predominantly genetically-modified--has been falling.
According to data from the National Grain and Oils Information Center, the price gap between Chinese soybeans for food processing and imported soybeans grew to 1000 yuan per metric ton in mid-2015. The gap narrowed after domestic beans came on the market in the fall, but there is still a roughly 25-percent gap in price. This is a big change from past years when prices were comparable between the two types of beans.

Until recent years, China thought of soybeans and other farm products as generic commodities, but now there are distinct segments in the soybean industry. The dominant portion consists of processing soybeans to make cooking oil which now utilizes imported soybeans almost exclusively. Several smaller segments require use of non-GMO soybeans as raw material: non-GMO cooking oil, food products like tofu, and soybean protein used as ingredients for other foods or nutritional supplements.

China's soybean imports soared to 81.7 million metric tons during the calendar year 2015, a number that China's Economic Daily called a challenge to the country's "protein security." The import volume was up 10.3 million metric tons, despite a slowing economy.

China's own soybean production is shrinking. At the December soybean conference it was estimated that domestic soybean output was about 10 million metric tons in 2015, down 2 mmt from the previous year. Reportedly, some farmers in Hunan Province have switched from cotton to soybeans as cotton prices plunged, but production in northern regions has been declining as farmers switched to corn and rice. A new plan aims to focus on building up a "green" soybean production base in Inner Mongolia in coming years. At the meeting other northeastern provinces cried out for government aid to supply farmers with seeds, to build irrigation facilities, and give support to Heilongjiang's "weak" soybean processing industry.

Falling international prices make it hard for Chinese non-GMO soybeans to command a premium. Despite tight supplies of domestic Chinese beans, their price has been falling, just not as fast as the price of imported soybeans. At the soybean industry conference it was estimated that the food processing industry needs about 10 mmt of soybeans annually, of which an estimated 3 mmt of imported GMO soybeans are used surreptitiously by food processors and the volume was said to be growing steadily. This substitution of cheaper imported beans--called an "open secret" over two years ago--was said to be a chief reason why domestic non-GMO soybeans cannot command a sufficient premium to bring forth a greater supply.

At the industry conference it was said that the soybean-based protein supplement industry has very strict standards that prohibit use of GMO soybeans--because a large portion of their products are exported. GMO soybeans are reportedly easy to obtain at soybean wholesale markets in southern coastal regions. Some operators imported far more soybeans than they could use in order to get letters of credit which they lent out short-term at high interest rates on the gray market. They dumped their excess beans in wholesale markets, contributing to the leakage of imported soybeans into the food processing industry.

advertisement for soybean protein isolate--a "non-GMO soybean product"

Four years ago, the Ministry of Agriculture held a meeting to hail China's soybean industry as a global supplier of non-GMO soybeans and protein products. Exports of soybeans and protein products were booming by 2013, but now they are being undermined by the shortfall. Customs statistics through November 2015 show that China's export volume of soybeans--used for food products in the U.S., Japan, and elsewhere--fell to 121,700 metric tons, down 38 percent from the same period in 2014. China's exports of protein concentrate products totaled 94,000 mt, down 22 percent.

Meanwhile,customs statistics show that imports of soybeans from Russia--non-GMO beans grown by Chinese farmers over the border--were up to 320,000 metric tons during January-November 2015, a ten-fold increase from the same period in 2014. The average unit value of the Russian beans was reported at $364 per metric ton--or about 2330 yuan--while imported South American soybeans averaged $425 and U.S. beans averaged $453. The low Russian prices are due to the collapse of the Ruble.

Thursday, January 21, 2016

Hogs Rebounding in China? Pick Your Statistic!

Are China's hog producers rebuilding their herds after a two-year decline, or is the industry still in the doldrums? Two different statistics issued by Chinese government agencies provide conflicting answers. You can pick the statistic that fits your point of view.

Most market analysts follow monthly reports on changes in hog inventories issued by China's Ministry of Agriculture (MOA) which indicate a suspiciously constant number of hogs on farms throughout 2015 following a sharp drop late in 2014.
An "official" hog inventory number buried in the National Bureau of Statistics GDP report this week reveals an expansion of 30 million head during the second half of 2015. This follows a 50-million head decline in hog numbers during the first half of 2015. One would have to dig out the numbers from obscure quarterly reports (the hog number was omitted from the third quarter report) in order to discover this apparent bounce in hog numbers. The trajectory of hog numbers has important implications both for the supply of pork and its price during the upcoming peak-consumption season at the Chinese new year as well as the demand for feed.

Should authorities sell some of their frozen pork stockpile during the holidays, or are farmers gearing up to supply hogs during the peak consumption season? Will barns be too depleted of hogs after the holidays to absorb the supply of soybean meal and corn?

There are even bigger discrepancies in measures of pork output. NBS reported that 708 million hogs were slaughtered during 2015, but the Ministry of Agriculture's (this was issued by the Ministry of Commerce until two years ago) monthly report reveals that only 214 million hogs were slaughtered in "above scale" plants during the year. The NBS number of hogs slaughtered has consistently been over three times the "above-scale" slaughter number, and this year the discrepancy widened. If the two slaughter numbers are accurate, it means that the proportion of hogs slaughtered in large, sanitary slaughter plants is actually declining despite crackdowns and withdrawal of licenses of small slaughter facilities over the last few years.
The two slaughter statistics tend to move in the same direction each year, but the NBS number tends to be more optimistic. This year the change in hogs slaughtered was similar for the two statistical series for the first time since 2010, but the percentages differ. The NBS reported a 3.7-percent decline in slaughter, but the slaughterhouse statistics imply a 9-percent decline.

The bottom line is that we really can't discern much about the current trend in China's hog market from these statistics. Nor is there any way to evaluate the quality of these statistics since there is no detailed documentation explaining the methods and samples.

The fog created by conflicting statistics is ironic because a 2009 program to stabilize the hog market called for issuing a whole series of statistics--including the inventory and slaughter numbers--to inform hog producers so they could make better decisions about expanding or contracting their herds. The statistics are reported on an official government web site, but producers seem to still be in the dark about market conditions. The program did not stop an excessive build-up of inventories in 2012 that was followed by a two-year liquidation of sows that may be still underway.

The MOA numbers suggest that sow numbers continued to decline in November and December. One industry analysis calculates that there has been a cumulative decline in sow numbers of 23.7 percent over 27 straight months since August 2013. The 11.8-million decline in sows the analysis calculates suggests a decline in hog output of 140 to 175 million (using a ratio of finished hogs per sow of 12 to 15), yet the NBS numbers show a decline in hogs slaughter from 2013 to 2015 of only 8 million.

The inept statistical work further reveals the futility of Chinese leaders' attempts to improve on free markets by tinkering with stockpiles and other interventions designed to stabilize prices. The 2009 regulation for stabilizing the hog market called for buying up pork during periods of depressed prices and selling it during periods of short supply. Successful market-tinkering like this presumes that government planners have superior information and foresight based on timely and accurate statistics on supply and demand, but their statistics actually shed little light on the situation. How can planners in a Beijing office building have a better feel for the market than the people who are in the market buying and selling on a daily basis?

Don't plan on conducting your own survey, because the government will probably arrest you for creating "confusion" in the market by providing an alternative to its official statistics.

Monday, January 18, 2016

China to Transform Agriculture by Spending Billions

Chinese authorities have pledged to spend billions of dollars this year to transform agriculture. They plan to fine-tune grain subsidies to encourage structural change in farming, boost farm productivity, and protect the environment. Officials say structural adjustment in agriculture is an "urgent task" for this year.

The planned spending was summarized in a Zhongguo Caixin Bao article December 30, 2015. The biggest expenditures are on programs that have been in existence for a number of years, but they will be tweaked to focus on supporting new types of farms and making farming more productive and environmentally sustainable. Several new smaller programs are being introduced to accomplish these goals.

China's planned expenditures for "agricultural transformation" in 2016
Program Million US dollars
20% of General input subsidy earmarked for "new-type" farms 3,344
Pilot programs steer "three subsidies" toward land fertility improvements 18,688
Subsidy for farm machinery purchases 3,688
Construct high standard fields 6,531
"Modern agriculture" industry development fund 3,181
Structural adjustment of crops 47
Integrate primary, secondary, tertiary sectors in 9 provinces 156
Support for farmer cooperatives 313
Agricultural services pilot programs 156
Agricultural extension 406
Popularization of ag technology 156
Rectification of soil contaminated with heavy metals 234
Governance of underground aquifers 1,078
"Grain for green" land retirement 781
National forest protection 3,047
Wetland protection 250
Source: Zhongguo Caijing Bao; figures converted to U.S. dollars using exchange rate of 6.4 RMB/$.

The biggest chunk of money China spends on agricultural support is the "three subsidies"--a direct payment to grain farmers, improved seed subsidy, and general input subsidy that began in 2004. This year, authorities will begin streamlining and re-targeting these subsidies to reduce the number of separate payments, shift payments toward farmers who rent land from others, and earmark payments for improvements in land fertility.

This year 20% of the "general input subsidy" funds ($3.3 billion based on last year's funding for the general input subsidy) will be set aside for "new-style" farms--farmers who rent in land from neighbors, "family farms," cooperative farms, and farms run by agribusiness companies. These funds will be added to pilot programs for assisting these types of farms and any increase in grain subsidies this year will also be set  aside for these farms.

The remaining 80% of the input subsidy plus direct payments to grain farmers and seed subsidies would total $18.7 billion based on the 2015 budget. In 2016, pilot counties for reforming these subsidies will be chosen from five provinces: Anhui, Shandong, Sichuan, Hunan, and Zhejiang. The pilot programs will consolidate the three subsidies into a single "support and protection subsidy" and use the  funds for activities to improve land fertility and support of large-scale farms.

Subsidies for purchase of farm machinery were also initiated in 2004 and funds have increased 11-fold since then to $3.7 billion in 2016. Officials say they have spent 143.5 billion yuan (over $22 billion) since 2004 to subsidize machinery purchases. The subsidy pays buyers a rebate or discount on a wide variety of equipment. This year's subsidies will support the initiative to strengthen links between farming, processing and distribution and could include processing and milling equipment, milking machines, automated feeders, greenhouses, drones for spraying pesticides, as well as tractors and combines. This year's focus is on equipment needed in key links of grain, cotton, and oilseed industries as well as livestock, aquaculture, vegetables and fruit sectors.

Another big chunk is $6.5 billion to be spent on upgrading contiguous fields, irrigation facilities, and road infrastructure. Water-saving irrigation and management of underground aquifers are major priorities. Chinese authorities say they have spent over $32 billion over the past five years to create 7.2 million hectares of high-yielding fields.Local governments in China will be encouraged to allocate funds earned from renting out state-owned land to "general agricultural development", and authorities will experiment with share-holding investment funds and other methods to attract private investment in farming projects.

Another $3.2 billion will be allocated for "modern agricultural development." Revised regulations for this program issued in 2013 indicate that these funds are like a block grant to local governments which can use the money for building irrigation infrastructure or just about any other agricultural industry development considered to be in the local area's comparative advantage, including pig- and dairy-raising communities, aquaculture, apple and orange orchard construction, vegetables, and flowers. The modern agriculture funds will be steered toward diverse new-style farm operators.

A relatively modest $47 million is earmarked for "structural adjustment" of crops, which supports the initiative to replace corn acreage with more sustainable small grains and fodder crops like alfalfa. Authorities plan to break up massive mono-cropping of corn and rice by encouraging crop rotations of corn, soybeans, and spring wheat in varying combinations for different regions. This initiative is intended to both alleviate chronic excess supply of corn and improve sustainability of cropping patterns.

Another thrust of the transformation is to integrate the different components of agricultural industry. $156 million is budgeted to support integration of farming with processing and distribution sectors. This funding will be focused mainly on wheat and rice production, milling, and distribution in twelve pilot provinces, including Shandong, Henan, and Ningxia.

Farmer cooperatives will get over $300 million in aid as part of the initiative to develop new types of farming arrangements. Thirty percent will be earmarked for pilot programs in 12 provinces, including Chongqing and Jiangsu, where local authorities can experiment with mechanisms to attract private investment. Another $156 million will be spent on developing private-sector services for farmers in 13 provinces.

Local agricultural extension stations will get over $400 million to stabilize extension teams (i.e. pay their salaries) and disseminate new technologies. Another $156 million is budgeted for disseminating new technologies. Officials say they have spent $750 million over the last five years to improve production in dry areas of northern China. However, the landscape is now inundated with scraps of plastic applied to fields to conserve moisture in the soil. This year there will be an emphasis on recycling plastic film to clean up this "white pollution."

Cleaning up environmental problems is another thrust of the agricultural transformation in China. In 2016, $234 million will be allocated to clean up soil contaminated with heavy metals, with a focus on Hunan Province where some rice growing areas are contaminated with cadmium.

Chinese authorities are trying to reverse the depletion of underground aquifers in dry areas of northern China where crops rely on irrigation. A pilot region that began with 48 counties in Hebei Province during 2014 will be expanded to 63 counties and get over $1 billion in funding.

A new round of "grain for green" will pay local authorities and farmers to retire cropland on steep slopes and grasslands with $781 million budgeted this year. The program is dovetailed with antipoverty and environmental initiatives this year by focusing funds on impoverished regions and areas with slopes of 25 degrees or more which are "seriously polluted" (probably referring to mining wastes). The funds finance planting of trees and grass and grants to farmers.

China plans to spend over $3 billion this year on protecting forests. The focus will be on cutting back commercial use of state-owned forests in northeastern provinces and Inner Mongolia. Like the agricultural extension spending, a large part of this will finance employee salaries and benefits. Finally, $250 billion will be spent on wetland protection. The soybean "target price" program has been adjusted this year to withhold subsidies from farmers who illegally grow soybeans on land designated as forest, wetlands, or grasslands.

This sounds like a lot of money, and it is. When the government is the owner of the land, it also becomes responsible for making long-term investments in it. Officials hope these subsidies will attract and leverage private investment.
Investment in China's agriculture has picked up in recent years. Valued at the official exchange rate, investment doubled from about 10 billion dollars in 2010 to over $25 billion in 2014. By comparison, the planned government spending described in this article totals over $40 billion.

Why is China spending so much? When no one really owns the land, farmers who cultivate the land have little incentive to invest in it. Moreover, Chinese farm prices are the highest in the world and expected to fall. Why would farmers invest in an asset that produces output that is expected to fall in price?

The United States also encourages agricultural investment mainly through favorable tax treatment, not so much through direct subsidies for land improvements, buildings, and equipment purchases. USDA statistics show U.S. farm investment is also growing and remains ahead of China's. U.S. farm investment (excluding operator dwellings) grew from $25 billion in 2010 to $45 billion in 2014.

The investment priorities of farmers in the United States and China are mirror images: Chinese farmers invest mainly in building their houses--a much more secure asset than their land--and they invest little in their farms. U.S. farmers invest far more in machinery, equipment, land improvements, buildings, and livestock than they do in their houses.

Thursday, January 14, 2016

China's Grain Stockpile Gets Out of Hand

China's top rural policy advisor estimated that China has 500 million metric tons of grain reserves. Chen Xiwen made the estimate at a January 10, 2016 economic outlook meeting held by the State Council.
[errata, Jan 26: After reading the speech carefully, dimsums has discovered that news media misinterpreted Chen's speech. He said grain inventories are at a record but did not give an inventory number.]

The director of China's grain bureau acknowledged that grain reserves are at a record level which he describes as "unreasonable."  He said southern rice storage is full, northeastern inventories remain at a high level, and there is a clear surplus of corn and rice. Grain purchase and storage will face "unprecedented conflicts" during 2016, the grain bureau director said. More storage space will be built, private storage will be rented, inventories will be released through various channels, and inventories will be shifted from one province to another. The director called for sticking to market-oriented reform, warning that going back to old approaches would make it "hard to cross the threshold" and give China a greater test.

Heilongjiang Province alone claims to have over 100 million tons of grain in storage--mostly corn and rice. But this is portrayed as a good thing because farmers like selling their grain to facilities with modern warehouses, fancy testing equipment, and a room where farmers can take a nap.

Noting that China imported about 120 million metric tons (mmt) of grain and soybeans during 2015, Chen Xiwen complained that the structure of the country's crop supply is not aligned with demand. Chen acknowledged that China boosted prices above global prices from 2008 until now in order to increase the income of farmers. He says this was necessary because otherwise China could not have narrowed the gap between urban and rural income and there was no other way for farmers to get higher incomes.

View of granary in Heilongjiang Province from Google earth. 

To illustrate the perversity of China's grain and oilseed market, Chen would have done better to compare the 120-mmt import number with the 175 mmt of grain China's grain reserve corporation reported purchasing for policy purposes during 2015. This was a record volume and roughly a fourth of all grain produced in China. Only 18.5 mmt of grain was successfully auctioned off from reserves during the year, and 3 mmt was shifted from one province to another. This follows purchases of 123 mmt during 2014. Facing a lack of space, Sinograin has built 11.5 mmt of new storage space with 16.8 billion yuan (about $2.6 billion) of investment from the government. Chinese authorities are cramming a fourth of the country's own grain harvest into warehouses while the country simultaneously imports huge amounts of grain and oilseeds from the international market.

China may have nearly a year's corn supply in storage, according an analysis by China's Grain and Oils News. Based on data from Sinograin, China's grain reserve corporation, there was 152 million metric tons (mmt) of corn remaining in the "temporary reserve" after last year's auctions of reserves were completed in October 2015. From November 1 to January 5, an additional 58 mmt of corn was purchased for the "temporary reserve" as proceeded at a surprisingly fast pace. That leaves a cumulative total of 210 mmt in the temporary reserve as of January 2016. approximately equal to a year's production of corn. (The Grain and Oils News author appears to have transposed digits in reporting the total as 201 mmt.)

The Grain Oils News analysis breaks out the and region of the corn reserve. The carry-in stocks included 83 mmt from 2014/15, 58.2 mmt from 2013/14, and 10.7 mmt from 2012/13. The 58.3 purchased from the 2015 crops will grow as the buying season continues through April 1, 2016.
Source: Data from China's Grain Reserve Corporation. 

The corn was all purchased in northeastern provinces. Nearly 90 mmt was purchased in Heilongjiang Province, 64.5 mmt in Jilin Province, 34 mmt in Inner Mongolia, and 21.2 mmt in Liaoning Province. An estimated 20.8 mmt of the northeastern corn had been shifted from the northeast to other provinces, so 189.7 mmt is held in the northeast, according to the analysis. 

A corn market analysis by Funeng Futures emphasizes that the corn price is detached from domestic supply and demand and from the international price due to government price-intervention and an import quota that makes it hard for private companies to buy cheaper corn from the international market. The "temporary reserve" price support policy for corn is expected to continue into next year because the government does not want to let farm income drop too much, and there are still problems to be ironed out with the target price policy being piloted for cotton and soybeans. In view of estimated production costs, industry people expect the reserve price for corn to be cut to about 1850 yuan per metric ton for 2016/17. That would be down from 2000 yuan for 2015/16 and 2240-2260 yuan for 2014/15. 

The Ministry of Agriculture plans to cut corn production in 2016 through its structural adjustment program which will convert corn area to more sustainable crops in a "sickle"-shaped belt from the northeastern Russian border through the northwestern periphery down to the southwest. This will address what Funeng Futures describes as a corn market that has had excess supply for many years.