Sunday, March 10, 2019

Pork Reserve Buy Scaled Back

The first round of China's pork reserve purchases have been scaled back from 100,000 metric tons to 10,000 metric tons, according to a China Feed Industry Information Network report. Stronger hog prices last week may have reduced the urgency of removing pork from the market.

According to the report, the average hog price in China increased 3.85 percent last week. The average was 12.42 yuan/kg, up from 11.96 yuan/kg the previous week. However, the average price of pork fell 0.3 percent and the ex-factory price of a swine carcass fell 1.05 percent.

The report confirmed that pork reserve purchases were due to begin March 8, but "100,000 changed to 10,0000." The 10,000 metric tons of pork translates to 143,000 hogs, the article said (assumes 70 kg of pork per animal).

The reason for scaling back purchases is not identified, but rising prices may have prompted the decision. The analysis said the volume of swine being produced is shrinking slightly, but consumers are reducing purchases of pork and the overall market supply is adequate. The analysis said farmers have become reluctant to sell hogs and prices are rising. The article said that price has become detached from basic supply and demand. Prices are expected to rise gradually, but regional imbalances remain prominent. Price declines are possible in some regions.

The feed industry report also raised concern that the conclusion of U.S.-China trade consultations could result in an agreement to import U.S. corn. The report warned that an influx of U.S. corn would put downward pressure on Chinese corn prices. 

Friday, March 8, 2019

Crop Land Rents Tied to Subsidies

Chinese farmers are looking for more clarity about promises of higher subsidies for corn and soybeans so they can decide whether it's worth renting land for upcoming spring planting.

Chinese officials hoping to carry out a policy directive to expand soybean production this year recently announced that this year's subsidy payment for soybeans would exceed the corn subsidy by 200 yuan per mu this year, but they did not announce the amount of the subsidy for either crop. In Heilongjiang Province--the largest producing region for both crops--last year's payments were 320 yuan per mu (about $280 per acre) for soybeans but the corn subsidy was slashed to 25 yuan per mu ($22 per acre). There are also "land rotation" payments for farmers who switch land from corn to soybeans or other crops. Officials in Heilongjiang also recently announced they would buy up 200,000 metric tons of soybeans for provincial reserves to bolster soybean farmers' confidence.

An article in Chinese news media speculating on how the subsidy announcement would affect soybean planting reported that land rents are up sharply this year, presumably because of news of higher subsidies. According to the article, rental contracts for farmland in China give prospective farmer/renters two choices: pay a higher rent of 400 yuan per mu (about $350 per acre) if the farmer receives the subsidy payment or a lower rent of 200 yuan per mu (about $175 per acre) if the landlord gets the subsidy. With these kinds of land contracts farmers are urgently seeking information about the subsidies, the article explained.

Officials typically don't announce exact amounts for these subsidies until the fall months when the crop is harvested.

Factoring subsidy payments into Chinese land rental contracts is common practice. Official documents on farm subsidies frequently insist that farmers must have a written contract specifying which party is entitled to subsidies to head off disputes over the payments. An article on a farm real estate web site last year explained that investors and farmers renting rural land must be aware of crop subsidies, poverty alleviation subsidies and subsidized loans attached to the land and gave examples of how to incorporate these payments in land rental contracts. In past years, the "temporary reserve" program that supported corn prices also inflated land rents in northeastern corn-growing regions. Rents declined sharply in 2016 when officials removed the "temporary reserve" for corn, allowing the corn price to fall by about 30 percent.

Wednesday, March 6, 2019

Pork Reserve to Bolster Hog Farm Confidence

Chinese authorities are planning to buy as much as 200,000 metric tons of pork for government reserves to bolster the confidence of pig farmers shaken by the African swine fever epidemic.

The 12-percent shrinkage of China's swine inventory last year reported by the Ministry of Agriculture and Rural Affairs was the largest decline ever recorded, according to a China Agricultural university professor who spoke at a press conference on ASF put on by the Ministry last Friday. The professor attributed the shrinking herd to farmers' worries about African swine fever that discouraged them from replenishing herds; cash flow shortfalls; accelerated withdrawal of small-scale farms due to industry upgrading; and consumers shifting purchases away from pork to other foods. The professor assured listeners that officials are pondering policy measures to help farmers deal with the difficulties and urged farmers to exercise good prevention and control measures and add to their herds to take advantage of expected high prices later in the year.

Futures Daily reports that purchases of pork for government reserves will begin March 8. The purchases are expected to be carried out in two 100,000-ton tranches purchased during March and late April and early May.

Zhue.com.cn says the first 100,000-ton purchase this month is confirmed but there are varying rumors about the total amount of reserve purchases. The history of reserve purchases they report indicates this could be the largest purchase of pork for reserves since 290,000 tons were purchased over 11 months during 2009-10. Only 10,000 tons were purchased in 2017 and 2018 and none was purchased in 2015-16.
Chart shows past purchases of pork for reserves and price trends from 2009 to 2019
Market analysts told Futures Daily that pork reserve purchases are generally not large enough to have much effect on price. The purchases are made by contracting with slaughterhouses that receive subsidies to buy and store frozen pork. The main impact is to bolster the confidence of farmers, which encourages them to hold back animals in hope of higher prices. One analyst said reserve purchase contracts are often not fulfilled when prices do go up because slaughterhouses find purchases unattractive, even with a subsidy.

Many investors are convinced hog prices are about to rebound in the second quarter of 2019. Prices could rise from the current 14-15 yuan/kg to over 21 yuan/kg late in the year.

Zhue.com.cn reports that supplies of both hogs and piglets are already tight and prices are rising in many provinces.

During the "blue ear disease" epidemic in 2007, officials gave out 100-yuan-per-head subsidies per productive sow to encourage farmers to keep sows during downturns in the market. In 2009, a "hog price alert" mechanism was launched as a market stabilization tool that would monitor the hog-corn price ratio and a series of other indicators that would trigger purchases and sales of frozen pork reserves. Both of these hog market stabilization measures seem to have disappeared and are not being publicly discussed.

Saturday, March 2, 2019

Provinces Bolster Corn and Soybeans by Reserve-Purchases

Top Chinese grain-producing provinces hope to bolster weak domestic corn and soybean markets by purchasing commodities for provincial reserves in March and April. The move signals weak market conditions in China for soybeans and corn despite having cut off nearly all imports of both commodities from the United States since the trade war began last year.

Chinese news media say Heilongjiang provincial authorities issued a "Notice passing down purchase prices for the first 2019 provincial-level reserve purchases of corn and soybeans" that calls for additional purchases of the two commodities that will be added to provincial reserves. The document--issued February 26 by Heilongjiang Province's Grain Bureau, Finance Department, and the provincial branch of the Agricultural Development Bank of China--sets prices of 1600 and 1620 yuan per metric ton for reserve purchases of corn in two zones of the province and soybean purchase prices ranging from 3420 yuan/mt to 3460 yuan/mt across three provincial zones. Purchases are expected to continue through April 30, the customary end of the procurement season. (The document does not appear to be publicly available.)

Jilin Province also launched provincial-level purchases of corn in December 2018, according to an earlier report from Jilin's grain and commodity reserve bureau.  Jilin had purchased 78,500 metric tons by December 25, said to be 37 percent of planned purchase volume. These purchases were described as reversing pessimism about the corn market by stemming a decline in prices.

Heilongjiang Province also plans to double the volume of soybeans purchased for provincial reserves from 100,000 metric tons to 200,000 metric tons, according to another news media report about a meeting on provincial grain purchase work held February 22. According to the report, this year's purchases of soybeans have been markedly slower than a year ago as processors are getting low profits and traders are getting thin margins. Corn purchases in Heilongjiang are slightly slower than last year, while rice purchases are going smoothly. The report said that provincial-level reserve purchases have been launched to address the "contradiction" between supply and demand of fall-harvested grain. Provincial grain bureau officials will coordinate corn and soybean purchases by local grain companies, the report said.

Monday, February 25, 2019

U.S. Soybeans: 1% Market Share in China so far in 2018/19

China continued to import minimal volumes of U.S. soybeans during January 2019, while increased imports of Brazilian, Canadian and Argentine soybeans filled most of the vacuum. Chinese customs data show that China imported 7.38 million metric tons (mmt) of soybeans during January 2019, 1.1 mmt less than in January 2018.
  • China imported 25 mmt of soybeans in the first four months of the 2018/19 marketing year (October 2018-January 2019), of which 20.9 mmt were imported from Brazil and 2.2 mmt were from Canada. The United States supplied just 272,035 mt--a whopping 1-percent market share. 
  • During January, China imported only 135,777 metric tons (mt) of U.S. soybeans--about two Panamax cargoes--compared with 5,814,257 mt a year ago. 
  • Brazil was again the top supplier in January, with 4.9 mmt. Imports from Brazil were up 2.86 mmt from a year earlier. 
  • Imports from Canada jumped to their highest-ever monthly total of 1.23 mmt, 957,000 mt more than a year earlier. 
  • Imports from Argentina rebounded to 985,247 mt, about 900,000 mt more than a year earlier.
  • Imports from Russia, Uruguay and other minor suppliers were down from a year ago.
  • China's "Central Document No. 1" on rural policy priorities released last week called for diversifying sources of agricultural imports. 
China soybean imports, January 2018-19
From
2018
2019
y-o-y 
change
Metric tons
Total 8,477,916 7,376,976 -1,100,940
United States 5,814,257 135,772 -5,678,485
Brazil 2,073,705 4,933,786 2,860,081
Canada 276,612 1,233,682 957,070
Kazakhstan 2,644 798 -1,846
Ethiopia 2,794 0 -2,794
Russia 123,070 87,691 -35,379
Ukraine 570 0 -570
Argentina 89,150 985,247 896,097
Uruguay 95,114 0 -95,114

Chinese importers are now paying higher prices to buy mass quantities of Brazilian soybeans. The unit value of Brazilian soybeans averaged $453/mt in January 2019 and $450/mt in December 2018, up from a low of $427 in September. The average unit value of China's soybean imports a year earlier in January 2018 was $421/mt.

Wednesday, February 20, 2019

China Corn Market: Supply Pressure This Year

Most analysts think China now has a substantial deficit between its production and use of corn which is being filled by dumping a purportedly huge stockpile into the market. Does that mean China will eventually become a major corn importer when the stockpile is depleted? No one really knows for sure because every component of supply and demand is clouded by uncertainty.
  • Last fall, Chinese statisticians adjusted their estimate of corn production upward by 20 percent after discovering 42 million metric tons of additional corn they didn't know about.
  • The statisticians claimed that the country produced 259 mmt in 2017/18, but the grain bureaucracy reported that only 98 mmt was purchased.
  • Authorities claimed to have auctioned off an implausible 100 mmt of corn from implausibly large stockpiles during April-October 2018.
  • We know that China imports 2-to-3 mmt of corn. But imports of corn substitutes--sorghum, DDGS, barley, cassava and cassava starch--have fluctuated, affecting corn consumption to an unknown degree. Imports of corn substitutes soared to 37 mmt in 2014/15, displacing an unknown amount of Chinese corn from consumption. Imports of substitutes fell 20 mmt during 2017/18 and 2 mmt during the first 3 months of 2018/19, crimped by antidumping duties on DDGS, threatened AD duties and retaliatory tariffs on sorghum, and a threatened AD investigation of Australian barley.  
  • Chinese authorities announced ambitious plans to expand ethanol production nationwide by 2020, but only marginal increases have actually occurred. 
  • Industrial processing of corn was heavily subsidized during 2016/17 and less so during 2017/18.
The blanket of fog over China's corn market is evident in a comparison of 2018/19 balance sheets by eight organizations that are all over the map. USDA, Ministry of Agriculture (MARA) and China National Grain and Oils Information Center (CNGOIC) have all adopted the 257.3 mmt production number officially announced by the National Bureau of Statistics.  Others have lower production numbers. Estimates of corn use range from about 250 mmt to 310 mmt, but these are all wild guesses. (MARA increased its estimates of both production and use by 40 mmt after incorporating the revised production number in January.) Most organizations expect moderate imports of 3 to 5 mmt. JCI expects a whopping 14.5-mmt of Chinese corn imports. MARA always low-balls imports early in the marketing year. 

Estimates of China corn supply & demand for 2018/19 (million metric tons, Jan-Feb 2019)
Organization
Output
Use
Imports
Inventory change
USDA 257.3 277.0 5.0 -14.7
MARA-CASDE 257.3 285.3 1.5 -26.5
CNGOIC 257.3 287.9 3.0 -27.0
JCI 246.0 309.8 14.5 -50.0
Yumi.com 234.1 251.7 3.5 -14.3
Cofeed 222.0 247.1 5.0 -20.0
Rabobank 203.0 256.0 5.0
na
BRICS 210.0 255.5 3.5 -5.0

China claims that its corn stockpile peaked at more than a year's production, and authorities made disposal of the stockpile one of their policy priorities over the last three years. All organizations expect a significant reduction in inventories in 2018/19 ranging from -5 mmt to -50 mmt. Does China really have a deficit between annual corn supply and use of 25 mmt or more--as MARA and CNGOIC estimate? If so, does that mean China will one day import that 25-mmt deficit when it finally depletes its corn stockpile?

Most analysts agree that only a portion of the 100 mmt of corn auctioned during 2018 was actually used, and CNGOIC estimates that 45 mmt of it was carried over to 2018/19.

One recent corn outlook by Chinese futures analysts anticipates that this carryover will be one of several factors putting downward pressure on China's corn market this year. In May 2019 authorities are expected to start auctioning the estimated 79-mmt of corn that remains in the temporary reserve. The Ministry of Agriculture said they expect the reserve de-stocking to be completed this year. With potential buyers still holding 45 mmt of last year's auctioned corn and another 257-mmt corn harvest, auction prices will have to be set low in order to successfully dispose of the stockpile.

African swine fever has discouraged swine producers from restocking herds, potentially shrinking feed use of corn. MARA announced two new cases today in two new provinces: Shandong and Guangxi.

The futures analysts worry that more aggressive auctions of low quality wheat and rice from reserves could also compete with corn in feed and ethanol use. Moreover, a pledge to buy U.S. corn and possibly other feeds to settle the trade war could further add to supply, driving prices down further.

China Grain and Oils News notes that farmers have been slow to sell their corn this year. Only 62.5 mmt of the 257-mmt crop had been purchased as of 10 February, 16.7 mmt less than a year ago. That suggests farmers have plenty of corn left to sell in the next few months of the peak marketing season, adding more downward pressure on prices.

If Chinese authorities agree to buy U.S. corn, they will likely ship it directly to a warehouse and lock it up for a couple years until China's corn glut finally dissipates. 

"Document No. 1" Worries About Supply of Farm Products

China's Central Document no. 1 proclaims the importance of doing a good job on rural affairs work in 2019 in view of the challenges of "downward pressure on the economy" and "profound changes in the external environment." Communist leaders insist that emphasis on rural affairs must be unwavering to maintain the "ballast stone" role of rural people, agriculture and the countryside to respond to various challenges and "win the initiative."

The 2019 document announces ambitions to "decisively win the fight against poverty." It includes many ambitious reforms of rural land and governance institutions, promises to construct rural infrastructure, to make the countryside more livable, and to improve rural governance that are already underway. The document emphasizes that these initiatives are especially important this year because 2019 and 2020 are key years for achieving the "all-round relatively well-off society" and preparing for the Chinese communist party's 100th anniversary.

Concerns about maintaining supply of agricultural products are reflected at several points in the document, including a paragraph about safeguarding key commodities through "top-level design," setting up a system to maintain domestic supplies of each commodity, coordinating use of domestic and international markets and resources, and scientifically determining the volume of domestic commodity supply that must be maintained. The document asserts that rice and wheat "must be protected," corn production needs to be stabilized, and production capacity for cotton, oilseeds, sugar, and natural rubber needs to be firmed up. It advocates greater production of "commodities that are in short supply."
  • A soybean revitalization plan, a call for increased soybean planting, and a Yangtze River rapeseed production initiative reflect concerns about reliance on oilseed imports made more acute by the trade war. The document advocates production of tree crop oils--an idea that has come and gone intermittently since the 1970s.
  • The document calls for construction of "dairy bases," overhaul of small and medium dairy farms, upgrade of infant formula production, and expansion of corn for silage and alfalfa as fodder crops to support cattle.
  • A Xinjiang cotton base initiative is to be re-launched
  • A "dual high" sugar base is to cover the entire production region
  • The document calls for increased effort to prevent and control African swine fever in order to protect the industry's security.
  • The document promotes a recent strategy of creating local industries centered on local specialties fruits and vegetables, medicinal crops, bamboo, tea, nursery crops, and ethnic handicrafts tied in with rural tourism.
Agricultural policy features a series of dictates to maintain minimum amounts of cultivated land (120 million ha), grain planting (110 million ha), enforce "permanent farmland" (103 million ha), strengthen a "responsibility system" to reward and chastise provincial leaders for progress in grain production, and ensure that 53 million ha of high-standard fields are constructed by 2020. It calls for completing the delineation of "functional regions" for grain production and "protection regions" for other important agricultural products.

The document calls for designing a new agricultural subsidy system that is "adapted to WTO rules," protects farmers' income, and supports agricultural development. It specifically calls for adjusting and improving "amber box" policies (those limited by WTO rules) and expanding "green box" support (not limited by WTO rules).  Other domestic policy measures advocated:
  • Improve the minimum price policy for rice and wheat, giving a greater role to the market mechanism
  • Improve subsidy payments for soybean and corn producers
  • Subsidize farmer credit guarantees and cajole banks to increase farm and rural lending and give them lower reserve requirements as a reward. The document calls for rural lending quotas that sound like the U.S. Community Reinvestment Act.
  • Increase support for agricultural insurance, move ahead on pilot programs to insure farmers against income reductions and cost increases, and move forward on "insurance + futures" subsidy pilots.
  • Set up an award system for major grain-producing counties (this appears to tweak the existing grain transfer payment to give local officials stronger incentives to use money for grain production).
The document reiterates a strategy of relying on technology to raise production and correcting environmental abuses that went unchecked in past years when officials urged farmers to expand production without regard for external costs or depletion of resources.
  • Breakthroughs in agricultural technology are featured as a key driver to be nurtured by an elaborate agricultural R&D system that integrates companies and academic institutes and setting up agricultural science parks, innovation centers, demonstration zones, and technology alliances. The document emphasizes protection of property rights, attracting talent, and giving scientists rights to profit from their innovations.
  • A "digital countryside" advocates an "internet + agriculture" strategy, big data, intelligent farming, and e-commerce.
  • Programs to correct past abuses include a program to remediate heavy metal contamination in soil; protect black soil and reverse depletion of aquifers in the northeastern region; efforts to collect and utilize manure from livestock and poultry farms; and a plan to cut back on over-fishing and aquaculture in lakes, rivers, and coastal waters.
The document includes only two sentences dealing with international trade (in contrast to initiatives by the top leadership to expand imports of food to improve the standard of living in the country). The No. 1 Document advocates:
  • "Taking the initiative" to open channels to import products in short supply. This probably means maintaining tight controls over gradual increases, rather than passively allowing imports and foreign companies to flood into the country.
  • Greater diversity of import channels
  • More support for agricultural companies "going out" to invest abroad
  • Greater international cooperation with belt and road countries
  • Nurturing a group of multinational agricultural conglomerates
  • Increasing efforts to control smuggling of agricultural products
The document is rounded out with lengthy exhortations to keep the communist party in firm control of the countryside.
  • Village communist party branches are to be "battle fortresses" that are central to constructing rural infrastructure and institutions.
  • Officials are instructed to do well in "thought work," guiding rural people to practice socialist core values and consolidating the party's ideological positions in the countryside
  • Officials and news organs should propagandize the party's policies that benefit agriculture and rural areas
  • Officials should exhort rural "mass organizations" to discourage bad social practices such as extravagant marriages and funerals, sky-high bride prices, filial piety, and skimming off funds meant for support of the elderly.