Sunday, December 28, 2008

Caution on Re-start of corn exports

According to a report from China corn market net on Dec. 26, traders say Chinese officials have decided to postpone their issuance of new corn export quotas, cut back on the amount of quotas, and may not give any policy support [e.g. VAT rebate] for exports in order to "control prices and ensure domestic supplies."

The article says that China's decline in corn exports will allow American gain traders to maintain their Asian market share. Chinese corn prices have already bounced back from their two-year low due to the Chinese government's support of prices through increased reserve procurement.

China mainly exports corn to South Korea and Japan. According to customs statistics, this year's exports through November totaled 235,379 mt, down 95%.

This week the government required local grain bureaus to procure an additional 20 mmt of corn from farmers, bringing the total to 30 mmt.

Here is the planned procurement in the latest round which is to be completed by the end of April:
Inner Mongolia 3.3 mmt
Liaoning Province 3.5 mmt
Jilin Province 8.7 mmt
Heilongjiang 4.5 mmt
Total: 20 mmt
Relevant departments are to make their grain procurement plans in accordance with market conditions.

According to the notice from the government, all of the funds allocated for grain procurement and drying should be used; they should not be embezzled

Grain output estimated at 528.5 mmt

Agriculture Minister Sun Zhengcai, speaking at a national agriculture work conference on Dec. 27, 2008, proclaimed that Chinese agriculture continued its stable development this year despite the challenging situation, achieving several years of breakthroughs.

Grain output and yields have both increased five consecutive years, both reaching record highs. Grain production for 2008 is estimated at 528.5 million metric tons, an increase of 5.4%. Yield was estimated to increase 4.2%. Rural household income also saw a relatively good increase of about 8%, also a fifth-straight increase. Oilseeds production also recovered, reversing 8 straight years of falling self-sufficiency rates. There was a rapid recovery of hog production, livestock and aquaculture production continued stable development, and "vegetable basket" supplies were plentiful. Hog inventories were estimated at 470 million head for 2008, a 7.4% increase, and hog slaughter was estimated at 600 million, up 6%. There was steady improvement in the safety and quality of ag products.

Five years in a row of increasing grain harvests...this run of good weather, etc., can't go on forever.

Sunday, December 21, 2008

"If You Build It" Stimulus

As if China needed more stimulus of artificial demand...The National Development and Reform Commission announced a 100 billion yuan stimulus spending plan for next year. It includes
*construction of low-cost housing that will reconstruct urban migrant squatter settlements (10 billion yuan);
*rural gas, drinking water, electrification, roads, and postal service projects, water management, rural cultural centers and other rural infrastructure stuff (34 billion);
*railroads, highways, airports and other big infrastructure (25 billion);
*basic health and family planning service system, repair and construction of schools in central and western provinces, medical clinics, education, cultural and social development (13 billion);
*urban water treatment, solid waste disposal facilities, focus on water treatment and pollution prevention, energy conservation and ecological projects (12 billion);
*independent innovation and production restructuring projects (6 billion).
Financial departments have already allocated the funds quickly. The emphasis is on spending the money quickly, high impact, clear measures of success.

Aren't stimulus measures giving us more of what got us in trouble in the first place? Interest rates of 0 in the U.S. and even more artificial demand in China!

Crises Heal Export Mypoia?

A Dec. 19 article in the Economic Information Daily reports that this year's turbulent market environment is forcing Chinese food companies to look more closely at domestic markets. Chinese companies and officials have viewed themselves as a success if they exported. The domestic market was for the weak companies that couldn't make it overseas.

This year's food safety incidents (pesticide-laced dumplings found in Japan, melamine in milk powder and eggs), the global economic crisis, and appreciation of the Chinese yuan have all contributed to a more sour outlook for Chinese food exports. The reporter gives the Longda Food Group, China's biggest processed food company, as an example. Longda's export sales (80% of them to Japan) fell 20% this year in terms of volume.

The article reports that most food exporters have been raising prices. This reflects rising raw materials costs (i.e. food price increases), higher labor costs due to a new labor law this year, and other factors. Export revenues are roughly constant event though the volume has dropped. The article seems to be saying that some smaller companies have dropped out (been forced out) of the export market, giving the remaining big "dragon head" exporters more latitude to raise prices.

Profit margins on exports are said to be down from 5-6% before to 2-3% now. This is forcing Chinese companies to take a closer look at costs. They pass on much of the increase in raw materials costs in higher product prices. They are looking for ways to cut waste, reduce power and water consumption, and overhead. Companies are required to give employees insurance at 5,000 yuan per head due to the new labor law. Many are laying off workers to cope with the higher costs.

Now more companies are looking at how to develop their domestic business. For example, Longda Group makes 65-70% of its sales domestically but is looking to expand that share. It has invested in a big meat processing operation with another meat company in Henan and is building a new peanut oil processing facility with capacity of 110,000 mt.

This is a positive development. China has over-emphasized exports. Exports have been under-priced. Labor has been exploited (cruel irony of the last major "Marxist" country) and underpaid. The surge of Chinese production has been tremendously wasteful. It's about time someone started looking at these costs and the degree of waste in this economy. It's about time Chinese manufacturers started producing for market demand instead of just producing for its own sake.

Saturday, December 20, 2008

Cotton: reserve purchases and import barriers

China's cotton demand has fallen as U.S. demand for Chinese textiles has slowed. Textile manufacturers are closing or cutting back production as they experience losses and accumulate unsold inventories. Commercial reserves of cotton in November were 3.5 million metric tons (mmt), 10% higher than November 2007 (1.78 mmt in Xinjiang alone). Unsold textile and yarn inventories were up too. Enterprises were estimated to be holding 28.5 days of unsold textile products and 21.57 days of yarn inventory.

As is the case in the soybean market, the government is the main active buyer as it procures cotton for government reserves to prevent prices from collapsing. On Dec. 9, the State Council issued a document floating ideas for policy support of the cotton market that featured planned procurement of 1.5 million metric tons (mmt) of cotton at 12,600 yuan/mt. According to one news report State procurement for cotton reserves totals 660,000 mt this year so far, but commercial reserves are still up 310,000 mt. A subsidy for good quality cotton varieties will be spread nationwide to all cotton fields and there will be unspecified "relief" for the textile sector.

Also similar to the soybean market, cheap imports are an obstacle to supporting domestic prices. According to at least one news report, a quality management system for imported cotton introduced by AQSIQ this year will be used as a nontariff barrier to slow cotton imports.

Cotton imports have already slowed. November cotton imports are reported at 76,000 mt, down 21% from October and down 25% from November 2007. This is the lowest value in four years. The average unit value of imports was $1.64/kg (11,270 yuan/mt). Estimated imports for the last three months of 2008 are down 36% from the same period in 2007. The total for January-November is estimated at 1.943 mmt, down 9%.

The falling cotton prices are affecting farmers. The breakeven seed cotton price is said to be 2.6 yuan/kg, but the current price is around 2.3-2.4 yuan and falling. It's as low as 1.8 yuan in some areas; at this price, farmers are estimated to lose 200 yuan per mu.

Sunday, December 14, 2008

More Hogs, Bigger Farms

In 2007 China’s hog supply was in a severe shortage situation and pork prices soared by about 50%. One of the key policies the government introduced was financial support for breeding sows. Apparently, the policy worked. According to an article from the China Animal Husbandry and Veterinary net, NBS data say the third quarter 2008 inventory of breeding sows was up 12.4% year-on-year. The inventory of all hogs was up 6.6% and hog slaughter was up 5.8%.

There has also been an increase in the scale of hog farms. Traditionally, hog production has taken place on a very small scale in a “hog in every home” pattern. This year it is estimated that farms slaughtering 50 or more head account for over 70% of production. In past years, the share was reversed—about 70% came from “backyard” farms. The number of farms slaughtering 50 or more hogs is targeted to reach 50% of the total production nationally by the end of the year.

The government at the central and local level is implementing all kinds of policies to encourage commercial standardized hog production on a larger scale using unified standards, and “ecological” approaches that collect the waste and turn it into methane gas, fertilizer, and fish food. There is a nationwide campaign to create “animal husbandry zones” in villages where farmers centralize their livestock in concentrated feeding operations. The target is to establish 70,000 of these zones by the end of 2008.

An article focusing on Jiangxi Province, one of the poorer areas of south-central China, suggests that the current downturn in the hog sector may expedite the shift toward larger-scale farms. The article notes that hog prices peaked at 19.4 yuan/kg earlier this year and are now down to 14 yuan. Feeder pig prices have fallen by nearly half, from 800 yuan for a 10-kg piglet to 440 yuan now.

Jiangxi’s Dongxian county has 22 large scale hog farms with 10,000 or more hogs. The county veterinarian says 20 big farms have expansion plans, despite the downturn in the hog sector. The large farms have learned through experience how to deal with the constant cycles in the hog industry. Since 2000, the article says there have been two deep declines in hog prices: in 2000 and 2006. The 2006 crash led many farmers to slaughter their sows and led to the soaring prices in 2007. The reporter asserts that, while past downturns have left a bad taste, large “specialized household” farms have not dropped out in the current downturn. On the contrary, they have “caught fire.” Commercial-size farms (50 or more hogs) account for 85% of production in this county and hog inventories are up 36% year-on-year; slaughter is up 42.7%.

One farmer claims that these commercial farms have learned how to “strengthen internal management” to control costs in the downturn. For example, they culled low-producing sows and breeding farms fattened piglets on their own farms when they had difficulty selling them. The adjusted feed formulations to slow weight gain when the market slowed down. The article says the profit per head is 200 yuan, much lower than earlier in the year, but still not bad for a big farm. Farms producing on a large scale can accept a low margin per unit. This is one of the key facts of the modern economy--and one of the key problems facing Chinese agriculture where most of the farms are on a tiny scale. The modern economy--especially in farming--is based on thin per-unit margins. Big scale is the key to making a decent living.

Last year, many articles reported that small farmers were dropping out of hog production due to lack of labor, market risk, disease risk, and a general “it’s not worth the trouble.” The hog sector seems to have gone commercial. However, the return of unemployed migrants to their villages reverses the scarce labor situation that drove “backyard” hog production out. Will backyard production pick up again as labor becomes more plentiful in the villages?

Saturday, December 13, 2008

USDA raises corn estimate

In its December report, USDA raised its estimate of Chinese corn production this year to 160 million metric tons (mmt) from its previous estimate of 154 mmt. In comparison, China's National Grain and Oils Information Center (NGOIC) kept its estimate at 156 mmt.

Nobody knows how much corn is produced in China. It is important not to take any statistics about China too seriously, no matter who produces them. As I understand it, this estimate is a based on crunching dicey preliminary Chinese numbers on provincial grain output and observing the very good weather during the growing season this year. Those provincial numbers don't break out corn separately and are routinely revised downward later. (The number-crunching took this into account, making assumptions about downward revisions in the numbers and the proportion of corn in total grain.)

The danger is that analysts will see this and attribute falling corn prices to China's big increase in corn output. Reports from China indicate the harvest is good but not a bin-buster. A good corn harvest is part of the equation, but not the main driver of the current corn market situation. Global corn prices fell first. The Chinese corn market is partially insulated from the global market and its price trends tend to reflect those in the global market, but only weakly. Weak demand due to a slowdown in the livestock sector and slower industrial use are the big problems driving corn prices lower in China. Chinese farmers are holding on to their corn and other grain, waiting to see if prices get better.

The big corn number does reflect a bigger harvest and a glut of corn this year, but it's important not to expect any statistics about China to be precise. Take your Chinese corn with a grain of salt!

KFC, Wal-Mart Pressured to Cut Prices?

Two articles posted on the China Price Bureau web site December 12, 2008 announced that Wal-Mart, McDonalds, and Kentucky Fried Chicken stores in China are cutting prices before and after the Chinese New Year (January-February). These price cuts are indicators of the serious lack of demand in the Chinese economy right now and possibly reflect desperate government efforts to get things going.

McDonalds and KFC are giving out coupons that give discount prices on chicken nuggets and other items by up to 36%. KFC is giving out a coupon that cuts the price of a 6-piece chicken nugget meal from 11 yuan to 7 yuan during January; another coupon cuts the price of 2 pieces of chicken in February from 15 to 10 yuan. McDonalds is offering prices for meals that are lower than its prices from 10 years ago.

Wal-Mart is cutting prices on groceries, clothing, health products, and furniture. For example, the price of chicken legs is being cut from 22.8 Yuan/500g to 14.8 yuan, a 35% price cut that curiously almost matches the 36% price cut being offered by foreign fast food restaurants. A 4-liter bottle of corn oil is being cut from 72 yuan to 52.9 yuan, a 26% cut. While Wal-Mart’s slogan is “Everyday Low Prices” this is the first time Wal-Mart has announced a big price cut like this since it entered the China market.

Since when is it newsworthy that McDonalds is giving out coupons? Reading between the lines here, it looks like the government has pressured these companies to cut prices in order to keep people happy and stimulate demand. It’s curious that two very similar articles about price cuts by foreign-owned chains would appear simultaneously, and both price cuts refer to the Jan-Feb time period. The Wal-Mart manager spouts rhetoric about “the grim economic conditions,” “preserving customers’ quality of life” and “increasing market demand.” She also mentions that Wal-Mart plans to extend the discounts to appliances; the government also recently announced a subsidy for rural households to purchase appliances which are in serious oversupply.

Thursday, December 11, 2008

China struggles with sinking world prices

As global commodity prices sink, China is struggling to support domestic prices, keep farm incomes from falling and preserve incentives to plant grain next year.

Chinese corn demand is nearly stagnant as the livestock sector slows down. There is another surplus of pork and demand for milk and eggs has collapsed after the melamine incident.

Meanwhile, China has had its fifth consecutive big grain harvest and now is cursed with a flood of grain that has little demand. Prices are on the way down, and farmers are keeping their grain in storage to see if prices get better later.

The government has upped its purchases of corn and soybeans, but what does it do with all this grain in "temporary" reserves? In past years the government subsidized exports of surplus corn or turned it into ethanol. These ideas are being floated again. There is a rumor that an export quota of 5 mmt will be approved. Trouble is, Chinese corn is now much more expensive than corn on the world market. In pre-WTO days, the government just paid a subsidy to the exporters but WTO disallows export subsidies. Now a "VAT rebate" of 13% is given instead, but even with the rebate Chinese corn still couldn't match competitors' prices. In fact, U.S. corn would be competitive in the China market if it were let in. According to an article on the corn price in southern China ports is 1600 yuan/mt, but the estimated delivered price of U.S. corn in southern China is only 1200 yuan/mt, 25% less. A Reuters news report noted that South Korean buyers purchased U.S. corn at $155/mt the other day, the equivalent of less than 1100 yuan/mt.

Another proposal considered in the article is to make the surplus corn into ethanol to burn as fuel. This is how China's ethanol industry was birthed in the early 2000's--to literally burn up surplus corn. However, the article notes that ethanol prices are already well below costs of production and this route would require big subsidies, so this is a nonstarter.

The current market environment is putting China's commitment to free trade to the test. According to Reuters, imported corn is attractive to Chinese feed mills but no one dares to try importing at the risk of attracting the government's ire. The tariff rate quota system set up after China's WTO accession in theory allows a set amount of corn to be imported at a 1% tariff each year, but hardly any has ever been imported. The price differential and high shipping rates didn't favor imported corn imports until now. Potential buyers quoted by Reuters say that they are afraid shipments of corn imports would be caught up in testing and approvals at the border to comply with China's intentionally vague genetically modified food regulations.

Meanwhile, the soybean market is even more of a mess. Since domestic soybeans are more expensive than imports no one wants to buy domestic beans except the government. Many people in the industry favor raising the tariff on soybean imports, but China is again constrained by its WTO commitment to cap its soybean tariff at 3%.

It would not be surprising if Chinese quarantine inspectors find some kind of fungus, pest, or contamination in soybean shipments arriving in China very soon.

Monday, December 8, 2008

Weak demand for corn; prices supported

Highlights from cash corn market report, Dec. 5, 2008

China announced its increase in planned temporary reserve purchases in Heilongjiang Province: Soybean 1.03mmt, corn 1.3 mmt, paddy rice 2.6 mmt.

Latest statistics on corn procurement as of Nov 20, in 10 major provinces (Hebei, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Shandong, Henan, Sichuan, Shaanxi, Gansu) grain enterprises procured an estimated 4.929 mmt of corn, an increase of 3.746 mt from the same period last year. Of that total, 1.188 mmt (24%) was purchased for central reserves, up 0.996 mmt from last year.

The NDRC, grain bureau, finance ministry, and agricultural development bank issued a notice that the national plan for temporarily increasing grain inventories will be raised by 14 mmt, including 7.5 mmt rice, 5 mmt corn, 1.5 mmt soybeans.

Farmers are cautious in selling corn, waiting for the price to go up, so the actual pace of sales is sluggish. Farmers are eager to sell because they need to repay loans by the end of the yaer, but demand among purchasers is not that strong. Industrial users are having to compete with state reserve purchasers. The market for industrial products is not booming so enterprises are taking a wait-and-see approach. Some companies are cutting their procurement prices.

This week the corn price in Manchuria was basically stable. Prices are supported by state reserve purchases. From the point of view of traders and processors, the situation is not so clear. The weather has turned cold, moisture has dropped, so drier corn brings a higher price. Putting all these factors together, prices are more of less stable.

In the Yellow-Huai Rivers North China region the corn price continues to fall. Demand from industrial users and feed mills is low. Contracts for purchases for state reserves have not been finalized and purchases not yet started. Traders are on a “buy as you go” pattern, shipments from grain stations light. The market has been hit by the global crisis, and market’s confidence is low. The livestock market is still weak. Pork costs are still high, so the pork price is not falling. Poultry prices are in a slow decline. There is not a lot of room for further decreases in meat prices. Right now the sow inventory is very big, which creates a big supply of feeder pigs, but farmers are not eager to expand their herds. Farmers are tending to slaughter hogs now. Feed mill purchases are not that great; they are letting inventories fall to a low level.
Northern ports. Since farmers are eager to sell grain, a lot of new corn is coming on the market. The price in southern port areas is also going down. A lot of corn (600-700,000 mt) has arrived at northern ports and been shipped to the south in the last two weeks. The inventories are up, however, and expected to push prices down.

World prices have fallen below Chinese prices. The CBOT corn price is about $3.11/bu, under $3.60 at Gulf ports, and the cash price in South Dakota is under $3. By comparison, the prices received by farmers in northern China are $4.50-$5.50. The price at Dalian is $5.64, and it's $5.86 in Guangdong.

A few months ago there was talk of China exporting corn if the harvest was good. China is piling up surplus corn, but the drop in world prices will probably make Chinese corn uncompetitive unless they subsidize it. Chinese corn imports are probably not on the horizon given the weak domestic demand and big reserves.

Prices (Yuan/mt)
Farm prices:
Heilongjiang: 1230-1300 ($4.56-$4.82/bu)
Jilin: 1350-1400 ($5-$5.20/bu)
Shandong: 1420-1480 ($5.27-$5.49/bu)
Guangxi: 1650 ($6.12/bu)
Wholesale prices:
Heilongjiang, Harbin 1380 ($203/mt; $5.15/bu)
Jilin, Changchun City 1400 ($5.20/bu)
Shandong, Weifang 1510
Liaoning, Dalian 1520 ($222/mt; $5.64/bu)
Guangdong, Shekou port 1580 ($231/mt; $5.86/bu)
Sichuan, Chengdu 1640
Jiangxi, Nanchang 1640
Port prices:
Northern 1500-1520 ($219-$222/mt)
Southern: 1580-1700 ($231-$248/mt)

Saturday, December 6, 2008

Soybeans: Too Much of a Good Thing?

Just a few months ago all the experts saw world food price inflation as a permanent fact of life. Now, following another record harvest and a big reversal in world commodity markets, China is struggling to keep commodity prices from falling.

China had a big soybean harvest this year and demand is soft, so prices are falling. In October the government announced plans to buy 1.5 million metric tons (mmt) of soybeans from northeastern provinces for central government reserves at a price of 3700 yuan/mt. Market prices are still a lot lower. As of Dec. 5, the market price of soybeans in Jiamusi, Heilongjiang Province's biggest soybean production area, was 3400 yuan/mt, 300 yuan below the support price.

Problem: imported soybeans cost only 3100 yuan/mt. Nobody wants to buy domestic soybeans.

On Dec. 3, the government reserve purchase amount was doubled to 3 mmt. (Corn reserve purchases were also doubled to 10mmt.)

Here are the numbers presented by the manager of a soybean crushing plant in Heilongjiang. He estimates soybean production in Heilongjiang is 7 mmt this year. Food use in the province is 380,000 mt, about 1.7 mmt are sent out to other provinces, and about 250,000 mt are retained as seed. That leaves a surplus of about 5 mmt that must be used for oil-crushing. Nobody wants these beans because imported beans are several hundred yuan cheaper. In the manager's estimation, the level of purchases announced by the government isn't enough to support prices. (To put this in perspective, the reserve purchases are about equal to a month's purchases of imported soybeans of 2-3 mmt.)

Chinese policymakers are desperate to keep soybean and grain prices up. First, they want to keep farmers happy. Second, they're worried that if prices crash, farmers will plant fewer soybeans next year.

A number of ideas to narrow the difference between domestic and imported beans are being tossed around by people in the industry. One idea is to raise the tariff on imported soybeans. Raising the tariff is not an option because as a WTO member, China's soybean tariff cannot be raised above its bound level of 3%. (China actually cut the tariff from 3% to 1% for the April-September period when they were worried about short domestic bean supplies.)

Another proposal involves a tax policy I don't quite follow. It seems to involve discounting the cost of beans when calculating a processor's value-added tax or sending rebates only to processors who use domestic soybeans. I don't understand how this works, but it sounds like it also illegal by WTO rules because it discriminates against imports.

Another proposal is to give subsidies to companies that process domestic soybeans. THere are rumors in the industry that the government has given such subsidies to state-owned companies including COFCO and "93 Oils." An operator of a private edible oil company complains that giving subsidies only to state-owned companies gives them an unfair advantage over private ones.

Wednesday, November 19, 2008

Milk Powder: Mail it In

According to the Economic Observer newspaper, Chinese residents desperate for safe milk powder after the melamine adulteration incident are importing foreign milk powder through the mail. The postal bureau in Suzhou reported that it processed 65 shipments amounting to over 750 kg. of milk powder during October 1-15.

Meanwhile, the Harbin Daily boasts (with no apologies or concerns) that Heilongjiang Province has been pumping out record-setting exports of milk powder. Heilongjiang Province exported 30,000 metric tons of milk powder during the first 9 months of 2008, a 40% increase from last year. That was 51.5% of the whole country's exports. Major markets for the stuff were Venezuela (joke's on you Comrade Chavez), Africa, Taiwan and Hong Kong.

In other Chinese dairy news, third quarter financial reports for major dairy companies were grim. Sales were down and losses of several hundred million yuan were reported for major companies. The exception was Beijing Sanyuan whose milk did not test positive for melamine and still posted a profit. Industry-wide inventories accumulated last month and companies are trying to figure out how to dispose of the milk. In Guangzhou they have burned it. They tried dumping it in the river but that's not such a good idea. The commercial bureaus say that production of milk products has bounced back now although demand is still lagging.

Monday, November 17, 2008

Stimulus: Where Will They Build?

Last week China made a big splash by announcing plans for a huge stimulus package to revive its economy and show the world how important and resonsible China is.

Having spent 40-to-50% of GDP annually over the past decade on building roads to everywhere, a railroad over the Himalayas, new sports stadiums and airports in every major city, subways, mag-lev trains, bullet trains, a rather large dam, and three huge water diversion projects, Chinese bureaucrats are now assigned to come up with ways to spend $586 billion more, mostly on infrastructure. As one newsletter put it, "The hills are alive with the sound of building." Authorities are even thinking about building low-cost housing for rural migrants in cities (although developers used to building high end luxury projects may not go along with this.)

China has also put new emphasis on protecting farmland. It has set a "red line" for the minimum amount of farmland and a minimum grain planted area threshold. It just announced that the whole population should pay attention to grain security and that farmers will not have to worry about having their land taken away.

We have an impending collision of policies here. Where are all these roads, airports, apartments, etc. going to be built? Airports for example, are always built about 50 km outside the city on a big patch of farmland. Roads go through vacant land, and that implies either farmland or wilderness (also in short supply and up for protection). Where will this infrastructure bebuilt? It will have to be built on farmland. Solution: create bogus farmland somewhere else to offset the loss of the land used for the industrial park.

Suppose you're a developer who wants to build an airport on the outskirts of your city, but it's going to take up several square miles of farmland and the prefecture is under orders to maintain the farmland base at a fixed level. You round up some university students, bus them out to some mountainside for the day, feed them lunch and have them drop seeds in the ground all over the mountainside--presto! new farmland has been created--no net loss.

Perhaps a system like carbon credit trading can be introduced where some enterprising official presiding over some distant mountainside or desert can sell "cultivated land credits" to developers who need to offset cultivated land used up in building projects.

Sunday, November 16, 2008

Grain production plan announced

On November 13, the National Development and Reform Commission (NDRC) announced a “National Grain Security Mid- and Long-term Plan” to build a network of grain production areas to guarantee food security. The plan is full of sloganeering and doesn't give specifics. The plan sounds like pretty much what the government is already doing, but it lays out China's general approach to grain policy. It hearkens back to the days of central planning and dredges up the nearly-forgotten but still intact "governors' responsibility system" as the government worries about being able to feed its population. The document stresses that China can't rely on grain imports because its demand is so huge it could outstrip world supplies.

The country will concentrate on building a set of production regions based on good production conditions, high production level and maintaining ecological protection, pay close attention to research to increase local grain production plans and measures.

According to the plan, the country will undertake grain production engineering projects in main grain production areas and western region, large scale commercial grain production bases projects and comprehensive agricultural development projects, at the same time grasp comprehensive production capacity construction in key grain areas in other regions spread basic food grain land construction in the western region, stabilize grain self-sufficiency. Based on stabilization of grain and oil production, our country will adjust agricultural land structure and layout, advance agricultural industrialization structure and regional layout.

The NDRC reaffirms the goal of maintaining 95% self-sufficiency in grain. It says China intends to remain self sufficient in rice and wheat and "basically self sufficient" in corn. Grain production capacity is to be held at 500 million metric tons (mmt) or more through 2010 and increased to at least 540 mmt by 2020. Planted area in grain should be kept at 1.55 billion mu (103 million hectares). Yield should be 325 kg/mu in 2010 and 350 kg/mu by 2020. Central and local grain reserves should be kept at "reasonable levels." Goals for increased interregional trade of grain are also specified with reference to something called "four scattered-ization" (?).

Like all important Chinese plans, this one has 3 slogans:

"Raise one ability" refers to raising grain production capacity while conserving farmland and water. Construction of infrastructure, support for science and technology.

"Utilize two resources" Rationally utilize non-cultivated land and production of nongrain food to increase food supplies. Keys are to utilize pasture and mountainous area, produce livestock the conserve grain, and use grain and oils from trees. "Make use of" international cooperation and the international market, regulated foreign trade in order to control the domestic grain market, balance supply and demand, perfect the import/export system, and stabilize import/export channels.

"Perfect three big systems": (1) Establish the grain market system, including construction of logistics facilities, cultivate and raise grain market competitiveness. (2) Perfect the grain reserve system so the government can control the grain market, stabilize grain prices, and the main means of dealing with emergencies. This involves rationalizing the layout and structure of reserves and establish the management system. (3) perfect the grain processing system to meet diversifying demands for grain, advance grain industry structure and upgrades, raise profitability in the grain industry, promote the means of raising farmers' incomes. Strengthen development of grain and oil processing, develop feed manufacturing and appropriate "deep" (value added) grain processing.

What policy measures will be taken? The provincial governors' responsibility system (introduced in the 1990s to charge governors with responsibility for ensuring supply-demand balance in their provinces) must be fully implemented, and taken into account in provincial-level job evaluation systems. Each province should have a farmland preservation target responsibility system to guarantee that the basic level of farmland will not decrease, make sure land use is not changed and improve land quality. Strengthen pasture and non-cultivated land conservation and development. Increase investments in agricultural research, implement science, and perfect farmer training systems. Keep increasing financial support for grain production, including grain subsidies, minimum price procurement, and grain risk fund system. Establish and improve a system for grain-consuming regions to compensate grain-producing regions. Increase investment in grain production capacity and logistics facilities. Improve grain statistical systems for market control. Strengthen the emergency management system. Address the serious problems of waste and loss. Stress the need for the entire population to be aware of grain security.

The State Council will organize groups to formulate 10 plans for grain production, consumption, marketing, science, etc. Unified thought, and serious attention is required by all levels of government to ensure full implementation.

Saturday, November 1, 2008

China exports starch

China's industrial use of corn has been booming over the last few years. Chinese analysts estimate that starch, alcohol, and related industries use about 40 million metric tons of corn annually compared with about 92 mmt used for animal feed. The starch industry has a history of booms and busts. The industry apparently is overbuilt and Chinese industry reports indicate some starch products are in surplus and a large share of some products are being exported.

According China National Grain and Oils Oct. 30 Corn report: China’s corn starch exports for Jan-Sept 2008 totaled 397,000 mt, up 74% from same period last year. From 1992-2006, exports were never more than 200,000 mt.

The total for calendar year 2007 was 342,000 mt, which will be surpassed this year for a new record. The main reason is that domestic starch production is in a serious surplus situation; the excess is exported. This year China’s corn starch exports mainly go to SE Asia and other Asian countries, including 27.2% to Indonesia, 16.8% to S. Korea, 8.4% to Philippines, 7.5% to Taiwan, 4.5% to Malaysia.

Exports of distillers' dried grains with solubles (DDGS, the by-product of alcohol production, used for feed) in Sept totaled 17,800 mt, relatively low, but the calendar-year total through September looks to be about 180,000 mt. Alcohol production declined in July-Sept, cutting back on the supply of DDGS co-product.

2009 Support price for wheat announced in October

China' National Development and Reform Commission announced the minimum procurement prices for wheat produced in 2009. Usually the minimum price is not announced until May, just before the wheat harvest and 6-7 months after it was planted. This time they announced the minimum price in October, early enough to influence planting decisions.

Minimum prices for last 3 years (yuan/50 kg)
2007 White 72; Red 69; Mixed 69
2008 White 77; Red 72; Mixed 72
2009 White 87; Red 83; Mixed 83

[corrected May 25, 2009]

Sunday, October 26, 2008

Support Soybean Prices as World Prices Fall?

The professors haven't had a chance to publish their erudite articles explaining the causes of this year's food price spike yet, and already world commodity prices are dropping like a rock--faster than anyone anticipated. So are ocean shipping rates. The whole food price landscape is changing. Where a few months ago Chinese authorities were desperately trying to protect consumers from “food inflation,” now they are desperately trying to support prices for farmers while world prices are dropping.

The China National Grain and Oils Information Center (CNGOIC) weekly report on edible oils markets describes the soybean situation. In coastal regions where most soybeans are imported, prices have fallen from about 3800 yuan/mt to 3150 yuan/mt over the past 4 weeks. Soy oil and meal prices are also weakening. The landed cost of soybeans arriving in November (including duty) is expected to be 3100 yuan, which is lower than the price of soymeal.

Chinese authorities have announced that they plan to buy 1.5 million metric tons of soybeans for central reserves at a support price of 3700 yuan/mt. Domestic market prices in northeastern provinces rose on this news, but were still much lower, at 3200-3500 yuan. (Domestic beans are mainly produced and crushed in the northeastern provinces. Imported beans are crushed in foreign-invested plants along the coast.)

The problem is, how does China support soybean prices at 3700 yuan when imported beans are available at 3100 yuan? Declining oil and meal prices will make it hard for domestic crushers to offer high prices for domestic beans. U.S. news reports indicate brisk Chinese demand for U.S. soybeans given the rising Chinese prices.

Chinese authorities are no doubt looking for ways to keep out imported beans in order to support prices. The temporary cut in soybean duty to 1% expired this month and is now at 3%. I assume the 13% VAT is also being assessed. There are rumors that China is considering raising its soybean tariff above its bound rate, which would be a rogue move.

In other news, a Chinese official announced plans to consolidate soybean crushing capacity in the hands of Chinese companies. The industry utilizes less than 50% of its 90 mmt crushing capacity. Many (domestic) crushers are idle much of the time. The government plans to close small crushers or have them be acquired by Chinese companies. Foreign-owned crushing capacity will be capped—no expansions or acquisitions. Resentment of foreign dominance of the soybean crushing industry has been stewing for several years.

Saturday, October 25, 2008

Party Meeting: Keep Doing What You've Been Doing

The Chinese Communist Party held a high-profile meeting—the third plenum of the 17th party congress if you want to be precise—which focused on rural affairs. In the lead-up to the meeting, there were many expectations floated that watershed reforms would be issued. Much was made of the fact that 2008 is the 30-year anniversary of the 1978 reforms that broke up the failed farm commune system, awarded farmers leases to plots of land, and started China on its unprecedented economic boom.

The document released on October 12 goes on and on (the English translation is 22 pages in a Word document) about principles and strategies, etc. I do not see any major reforms here—it looks to me like a validation of strategies China has been pursuing in recent years.

The aspect that received the most attention leading up to and during the meeting was the prospect for giving farmers greater rights over their land, including the possibility of transferring it and consolidating land into bigger farms. I have not had the fortitude to plough through the entire plenum document but it appears to devote only a couple of paragraphs to land issues.

From the macro land-use perspective, there is a resolve to preserve and strictly control cropland. The document reiterates that the cultivated land area will not be allowed to decline below the “red line” of 1.8 billion mu (120 million hectares—they are about 1-2 million hectares above the threshold presently.) Cultivated land cannot be converted to another use until an equal area of land has been reclaimed or otherwise transformed into cultivated land. The new land cannot be in another province, county, or even a different prefecture. So if you want to build a golf course on cropland, you have to plough some hillsides or drain a lake in the suburbs to create new cropland to offset it. The document doesn’t get into these specifics. The document also commits to land “reclamation” explicitly and the above requirement seems to also imply an encouragement to plant crops on environmentally fragile land. (A big campaign in the 1990s and other earlier periods to boost grain production caused severe “dust bowl”-type wind and water erosion.) Elsewhere in the document there are seemingly contradictory statements about environmental protection, including environmental subsidies for farmers.

At the farmer level, there is language about strengthening farmer land use rights and registration and allowing farmers to lease, trade, or swap these rights. This practice is already widespread and there are many examples of farmers or companies that have assembled large scale farms by leasing land from neighbors. However, arrangements about land transfers are set at the local level and vary widely. What the document may do is to give a green light for the land use rights to be traded in villages nationwide. This may not have that much effect, though. Land use trading schemes have been developed in regions where there are strong incentives to do so because so many village residents have better things to do than farm. They form these schemes with little regard for national policy. The places where the schemes haven’t yet developed already are probably areas where there isn’t much incentive to do it.

The anticipated land reforms were expected to lubricate rural financial markets by giving farmers an asset to borrow against, but these hopes were squashed. In a press conference this week, Chen Xiwen, a top agricultural policy official, emphasized that it is not legal for farmers to use their land use rights as security for mortgage loans. They can use agricultural commodities, equipment, vehicles, and contracts with agribusinesses as security, but not farmland or rural houses. Chen emphasized that this is a social stability issue. He is afraid farmers will sell their land and have nothing to fall back on if things go bad. Moreover, rural banks already awash in nonperforming loans could be further drained of cash with a surge of bad farmer mortgages.

There’s lots more in the document—rural finance, cooperatives, maintaining “reasonable” commodity prices, modern agriculture, infrastructure, social services, etc. There is an important commitment to making city life easier and legal for rural migrants but not many specifics. But a quick scan indicates no really new or bold directions.

Tuesday, October 21, 2008

OK Peasants, here's your reform

[Warning: this is not a real document--this is satire.]
An open letter from Comrade Hu Jintao, Chairman of the Central Committee of the Communist Party of China to the 750 million comrades in the countryside

Dear Comrades:

In the spirit of the 17th Party Congress, following Marxism-Leninism, based on Mao Zedong Thought, Deng Xiaoping Theory, and the Three Representatives, the glorious Motherland has taken a new step forward in rural reforms.

I know I may have gotten your hopes up in advance of our big party plenum this month by making a symbolic visit to Xiaogang Village in Anhui and suggesting that we might let you own the land you toil on year-in and year-out. Many of you have been clamoring for ownership of your land. Some even took the capitalist road by asserting that you owned land that in fact belongs to the people of our great motherland.

Comrades, please understand that it is not reasonable for you to own your land. If we did that, you would be vulnerable to cut-throat capitalists who would force you to sell your land for a pittance, leaving you penniless (fen-less). I think we all know that this is the government’s job. The right to make a killing on rural land sales is the exclusive right of government officials. No one else gets a piece of this action.

Moreover, if you blindly sold off your land we are afraid you might form bands of hooligans roaming around the country causing trouble, or you might build slums that would turn our gleaming Beijing and Shanghai into stinking holes like Manila or Calcutta. When you come into our beautiful cities to risk your life building our skyscrapers, please stay in the comfortable temporary dormitories we have built for you behind fences on the construction sites, and go home when you’re finished. Please stay out of the city when we have special events like the Olympic Games.

You still can’t sell your land and get rich like your city cousins do, but we have decided that you will be able to trade “land use rights.” A land use right is a thing that some intellectual thought of. It’s sort of like a derivative. No one knows what it is but you can trade it. We even started a special experimental exchange in Chengdu to trade them. This will no doubt be another success like our stock market and futures market in which prices have absolutely nothing to do with the fundamentals of supply and demand. At least it provides an outlet for the Chinese gambling instinct that's closer than Macau or Las Vegas.

Your land can’t be taken away from you. So you will be able to take out a mortgage secured with your land use right without having to worry that the bank will come and foreclose on you. Some capitalists have asked, “Why would a bank secure a loan with land use rights to land they can’t take ownership of?” They obviously do not understand China. The bank will lend money to you because we told them to. If the bank wants to build a shopping mall on Liberation Road, it will have to go out and start a “village bank” that gives away free money to peasants.

See how great the communist system is?

Best regards,
Comrade Hu Jintao

Monday, October 20, 2008

Does that meat look good? If so, watch out

Color is one of the chief attributes Chinese consumers look for when buying meat and fish. But an article on the China animal husbandry bureau web site, "What kind of Meat is unwanted by 10 million buyers?" warns that buying meat based on its color could be a losing proposition.

The reporter frequently hears shoppers in the market uttering phrases like, “This chicken foot is very yellow; I’ll buy this one,” or “The pork here is very red; this kind is good.” Some consumers will not buy chicken feet unless they are a yellow color. They also prefer red pork. A bright color connotes the all-important "freshness" or a new unusual food item--both popular attributes with Chinese shoppers. The reporter notes that not long ago there was a type of fish with yellow bones called a “strange banana fish” in a market in Shunde.

An individual with a Chinese feed company told the reporter that this is a mistake. If you eat very yellow chicken feet or red pork, they were mostly likely made that way by adding dye to feed. According to another industry insider, the "banana fish's" color was produced by adding a yellow pigment to feed.

The additives are of two types. One is natural additives--for example, adding corn can produce a yellow color in meat. Another is through synthetic chemical dyes which are often used because of their low cost. Generally, large reputable companies use only natural additives, but a few illegal small enterprises and farmers use chemical dyes to cut costs. The resulting meat looks good and sells well; it’s hard for ordinary consumers to detect the dyes. But the ingestion of dyes could have harmful effects on people who consume it.

Of course, this is also an issue for fruits and vegetables. If they look shiny and free of blemishes, there's a good chance that is because they were bathed in pesticides.

Toxic dyes, preservatives, and other additives are probably the biggest single food safety problem in China. These problems are among the most commonly cited violations by FDA officials in their refusals of Chinese food shipments.

Wednesday, October 8, 2008

What happened to food inflation?

China's CPI still seems to indicate "inflation" in food prices, but most prices seem to be on the way down. The August CPI overall shows 4.9 percent inflation and meat 8 percent.

Average retail prices through September reported on the Price Bureau web site show that prices are falling and close to their year-earlier levels. An article on the Ministry of Agriculture web site refers to plummeting hog prices in "Hog Industry Black September" and uses language like "disaster" and "landslide" to describe the hog price situation. As reported earlier on this blog, prices are falling below break-even levels and there is a growing sentiment among farmers to start reducing hog inventories.

Vegetable oil prices are still above year-earlier levels, but falling:

Pork and cooking oil experienced the biggest price hikes in 2007. Looking at Chinese cabbage (Da bai cai) as an example of a quite different food commodity, we see a spike around the February winter storm disaster, but prices this year are now tracking last year's and no sign of inflation. By the way, 1 yuan per 500 g. at the current exchange rate of 6.8 yuan/$ is roughly 16-cents/lb. Not many vegetables in my Safeway at that price.

Wednesday, October 1, 2008

How to Deal with the Melamine Problem

China's State Council issued a notice directing everybody to deal with the infant formula problem. On Oct. 1 (a holiday in China--normally nothing gets done all week) the Ministry of Agriculture web site carried news items from most of the provinces on how they are addressing the adulterated milk powder crisis. This illustrates China's latent central-planning instincts and its approach to regulation: the central government issues a directive and the responsibility is passed down to the province and then to the county and so on. Food safety regulation can vary widely depending on who is in charge in various communities and how much money is available.

The Ministry of Agriculture says there are exactly 152,653 inspectors checking milk stations nationwide. Exactly 18,803 had been checked and registered as of September 29.

Heilongjiang's article has the theme of "solving the issue of difficulty selling milk." The provincial government has organized exactly 8 guidance/inspection teams to carry out inspections of exactly 5,256 milk-collection stations to monitor and control milk marketing to ensure that milk is exactly 100% free of melamine. Another 8 teams made up of exactly 1,028 inspectors will inspect exactly 696 feed mills. (I'm amused by the obsession with numbers.)

Heilongjiang will "coordinate" dairy companies Wandashan, Flying Crane, Longdan, Daqing, Beiyinmei, and other companies to increase their purchases of raw milk. It is estimated that purchases of milk rose by 10,000 metric tons during Sept. 21-29.

Most of the provinces are in a frenzy to increase testing. Heilongjiang says its testing facilities are running at full capacity. Tianjin says it has 116 inspectors carrying out 24-hour monitoring. It has sent out 6 guidance groups to inspect 190 stations in 12 counties. Three non-compliant farms have been closed but no melamine has been detected. Jiangxi is forbidding award of new licenses to unlicensed dairies or restoring of revoked licenses.

Subsidies are being given to companies and local governments to upgrade testing capabilities. Jiangxi is assisting 5 key milk production counties in buying testing equipment. In Tianjin, one district is giving subsidies of 10,000 yuan to each milk station to purchase testing equipment. Another district aims to concentrate dairy cows in "livestock production zones"--areas within a village devoted to livestock--to better control and monitor cattle. The zones get a subsidy of 300 yuan each.

Shandong Province floated "ideas" that include subsidies for everyone: a one-time subsidy for milk stations that sign contracts to buy milk from farmers in October, a 5% subsidy to companies for dairy products sold during October, 3 months of free interest on loans for dairy processors to increase milk procurement between now and next March, subsidies of 50,000 or 100,000 yuan (depending on size of the company) for purchase of testing equipment, and subsidies for county government testing labs.

Among the articles about government inspectors and subsidies, there is one describing Nestle's system for ensuring the quality and safety of milk in Shuangcheng, a region in Heilongjiang. Nestle has 78 milk-buying stations in Shuangcheng that collect 1300 or so metric tons of milk daily from 240,000 farmers. The article describes how the process is carefully planned out with careful checks along the way. Milk station personnel are hired directly by the company to purchase milk from the farmers; they are not permitted to buy milk from intermediaries. Farmers have to apply for a registration with the company. If accepted, the farmer signs a contract that specifies quality requirements, price determination, and livestock-raising methods. Each cow is registered in the company's computer system. Each time the farmer delivers milk, the quantity is recorded. Payment is made by an automated system through a debit card. Milk is checked and tested at the milk station. It is kept refrigerated before and after the testing. Trucks are sealed with a seal unique to each station, and the seal is checked to make sure it is intact and recorded when it reaches the processing plant.

The Chinese government's approach to food safety typically relies on have labs, equipment, subsidies, and hardware in place. I have toured more labs than I can count in China, and the implicit message is, "Look, we've got imported equipment and technicians to test food. Problem solved." The real solution is in looking hard at the process and building in safeguards and controls as Nestle apparently has done.

Monday, September 29, 2008

Rice prices on way down?

An article from the China grain net detects weakening rice prices as a big new harvest comes on the market. The author of the article speculates that the government will try boost prices by increasing procurement for state reserves.

The author notes the influence of the government on prices. Early-season rice harvested this summer opened with a relatively high price after harvest, but it fell when government procurement tailed off. In Hunan, Hubei, Chongqing, and other areas of the south where grain reserve depots have been procuring rice the price for middle-season rice is about 0.9 yuan/jin or higher. In Sichuan, the price is about 0.9 or lower--the weak prices there are attributed to government aid (rice) pumped into the region affected by earthquake, pushing supply beyond demand.

In the northeastern provinces, rice has just started coming on the market. The author anticipates a similar pattern of high opening price followed by a decline unless the government decides to support prices. The policy for grain hasn't been announced yet, but the author--in classic communist style--cites an inspection trip to Henan by President Hu Jintao in which he commented that it was important to raise grain prices. There are also rumors that raising grain prices was discussed in a high level meeting with Premier Wen Jiabao.

The author observes that the Chinese government is in a balancing act of wanting to help farmers but afraid of food price inflation. He thinks that the government will support northeastern rice prices and corn prices by procuring more grain to set a price floor while wheat prices will be adjusted through auctions. Some experts have recommended a price floor of 0.95 yuan/jin for northeastern rice but the author notes that suggestions are not always adopted.

Another article in the Xin'an Evening News written in classic communist propaganda style seems to be promoting government procurement of rice. The article describes farmers in Wuhu (eastern Anhui Province) lined up on their tractors at a grain depot cheerfully selling their rice at 0.95 yuan/jin. One farmer says this price is so good he will go get the 10,000 jin he has at home and bring it back for sale. He raves about the service at this grain depot: "I bring my rice into the depot and the employees unload it for me; I sell 6,000 jin of rice while I drink tea." The price is above the minimum floor price. The article seems to be promoting government procurement: "The state-owned grain marketing companies are well organized, make careful arrangements, and play an active role as the main market channel to ensure that farmers enjoy selling their grain." The article brags that state-owned companies have procured 240,000 metric tons of rice so far this season, double what they bought last year at this time.

According to the second article, Anhui's rice area this year is estimated at 22.09 million mu, up 1.6 million mu from 2007. The forecast output for Anhui is 9 million metric tons of rice, up 650,000 from last year. 5.9 million mu have been harvested so far (September 20).

Wednesday, September 24, 2008

Textile export slow-down; cotton imports plunge

Cotton has been one of the hottest agricultural import items since China's WTO accession. Much of this cotton is manufactured into garments that are re-exported.

The slowing U.S. economy may be slowing the Chinese export machine. A Sept. 24 article reports that blazing growth of textile exports slowed in August to just 2.8% above year-earlier exports. Textile/apparel exports grew 12% in 2007 and that was down from over 20% growth in 2006.

The slow-down in textile demand combined with burgeoning domestic cotton supplies translates to a slowing of cotton imports. Cotton imports were down 27% year-on-year in August. Domestic cotton is in excess supply, especially in Xinjiang autonomous region in China's far west (the biggest cotton-producing region). According to railroad statistics, in 2007 cotton transported from Xinjiang totaled about 2.93 mmt, about 8.7% higher than the previous year. Approaching the end of the current market year, by the end of august Chinese cotton enterprises had sold 92.5% of their cotton, about 5 percentage points less than the same time last year. It is estimated hat at the end of August there was about 500,000-600,000 mt of cotton to be sold, of which about 200-300,000 mt was from Xinjiang Autonomous region. This cotton needs to be sold before new-harvest cotton comes on the market in the next half-month or so. Cash prices fell about 1% in August and the September contract on the Zhengzhou cotton exchange was down 4.6%.

It is believed that the government commission bought cotton produced in 2007 for reserves during the last ten days of August to alleviate the cotton surplus in Xinjiang. The price was believed to be as high as 13,600 and 13,400 yuan/mt. By August 31, a total of 80,500 mt had been traded. Of that, 60,600 mt was purchased in eastern regions of China at an average price of 13,597 yuan, and 19,900 mt was purchased in Xinjiang at 13,398 yuan by some 40 Xinjiang enterprises.

Sunday, September 21, 2008

China exposed to Wall Street meltdown

A Washington Post article on the current financial crisis points out the major role of Chinese funds in the Wall Street meltdown and provides more evidence of the symbiotic relationship between the U.S. and Chinese economy. It is estimated that China has a fifth of its foreign exchange reserves invested in $400 billion of Fannie Mae and Freddie Mac securities. Chinese banks have billions more invested in teetering Wall Street firms. The article points out "the Industrial and Commercial Bank of China, for example, has $151 million in bonds issued or linked to Lehman; China Merchants Bank has $70 million of Lehman bonds; and the Bank of China has $75.62 million of Lehman bonds."

Wall Street is now reaching out to Chinese investors, asking them to provide a needed infusion of funds. Isn't most of China's foreign currency reserves already in U.S. assets? Why would Chinese investors want to pour good money after bad? One of the big investments made by China's sovereign wealth fund was in the Blackstone Group, which turned out to be catastrophic.

As pointed out in earlier posts on this blog, the financial meltdown was built to an extent on the unsustainable trade gap between the U.S. and China in which the U.S. gets goods from China in exchange for dollars which China invests in U.S. securities. With all that cash being recycled back into U.S. financial markets, bond prices stayed high and interest rates low. The phenomenally low interest rates fueled the housing and consumption boom, pushing consumption levels and asset prices to unsustainable levels and hypnotizing the U.S. population into thinking 15-percent growth in housing prices would go on forever.

Meanwhile, China has 10 million new workers coming on the job market every year AND it wants to become a high-value high-tech economy, so Chinese policymakers were desperate to keep job-creating exports pumping.

Friday, September 19, 2008

Pork Prices Continue to Fall

According to the Ministry of Agriculture (MOA), the national average pork price slid below 10 yuan per jin for the first time this year. It is now generally recognized that this is a typical hog price cycle (but with greater amplitude than usual). In Henan, prices started to shoot up May 18 of last year. The peak price was around February of this year (just after the spring festival). Prices have been slowly falling since then and seem to be dropping faster now as more signs of oversupply become evident. Currently (September 2008), prices are about 2 yuan below their peak and at about the level they hit in August 2007. People thought prices would pick up at the mid-Autumn festival but prices kept falling.

Profit margins are getting slim. Farmers report that prices are nearing the break-even level where their profits evaporate.

According to monitoring of 3600 large and small hog farms in 20 provinces, hog inventories were up 10.6% in the first half of the year, slaughter was up 4.8%, and breeding sows were up 20%. This reflects a big expansion of production capacity. Last year the government began subsidizing hog breeding--quick response.

Wednesday, September 17, 2008

Infant Formula Scandal Widens

Illnesses due to tainted milk powder now exceed 6,000 and 3 deaths.

Powder from the biggest dairy companies in China have all tested positive for adulteration with melamine. Test results showed melamine present in samples of 69 products from 22 brands of milk powder tested, 14% of the products and 20% of the brands tested. There were 87 brands that were free of melamine in the tests. According to the State Council, there are 175 milk powder producers nationwide, of which 66 have stopped production. The 69 products that tested positive are not allowed to leave the factory.

All 11 Sanlu brand samples tested positive with far higher concentration of melamine than any other brand. The two biggest companies were not free of melamine but were not among the worst performers: Yili had 1 out of 38 samples test positive and Mengniu had 3 out of 28 positive. Sanlu's concentration of 2563 mg/kg was much higher than 68.2 mg/kg for Mengniu and 12 mg/kg for Yili.

The vice-secretary and mayor of Shijiazhuang City (headquarters of the Sanlu company) have been fired. The general manager of Sanlu Group has been detained by police.

Local commerce bureaus are requiring supermarkets to check for contaminated formula products and factories are required to inspect all their raw milk.

In Shenzhen, the local commerce bureau is keeping a close watch on infant formula prices, especially on imported formula--to prevent hoarding. In other words, imported formula is the only kind that is assuredly safe, so officials anticipate that there will be a rush buy imported powder. They want to prevent merchants from raising prices to take advantage of the situation. We economists predict that there will be no imported infant formula on supermarket shelves within a few days.

The local commerce bureau in Shenzhen is also requiring that merchants accept returned infant formula and refund consumers' money upon presentation of a receipt. If the consumer doesn't have the receipt, the bureau requires merchants to check records and give a refund anyway.

In Beijing, the health department issued a notice that affected babies will be checked, treated, and provided medication free of charge.

According to kidney experts, the melamine-contaminated powder only affects children and is not affecting adults who consume it (so far). The State Council says melamine is low in toxicity, doesn't stay in the body long and affects mainly the kidneys and bladder.

Monday, September 15, 2008

Infant Formula Disaster: Blame the Farmers

Over 1,250 (so far, the number keeps rising day by day) babies have become sick and two have died from consuming infant formula adulterated with melamine—a chemical derived from coal.

This scandal combines elements from two of China’s biggest food safety incidents. You’ll recall that the big publicity about food safety problems with Chinese food imports started in 2007 when dog and cat deaths were linked to melamine. China’s watershed domestic food safety incident came in 2004 when a series of babies died from malnutrition due to fake infant formula that had little nutritive value.

The latest problem is centered in Gansu Province in western China where babies had been showing up at hospitals with kidney stone problems since March or April of this year. The link among the cases was that all the babies consumed the same brand of milk powder. According to the Chinese Xinhua article of Sept 11, the condition found in the babies is usually the result of poor nutrition typically found only in malnourished children or elderly people. Parents in Nanjing, Shandong, Anhui, Hunan, Beijing and other areas have also reported children with similar symptoms from consuming the same brand of milk powder. Emotional parents are milling about outside the gate of the Sanlu Group waving cans of powder and demanding to know why they weren't told about the contaminated formula their babies were consuming.

A disturbing aspect of this case is that the company selling the milk powder is Sanlu Group, one of the leading dairy companies and the largest purveyor of milk powder in China. Discussions of food safety problems in China invariably point to small businesses as the problem. Consumers tend to trust companies with well-known brands and products sold in supermarkets. As one parent was quoted, “This brand (of milk powder) is bought in reputable supermarkets, the price is low, the brand is well-known, and we felt confident in purchasing it.” One approach to ensuring food safety is to rely on the incentives of big companies to protect the value of their brand to make sure their products are safe.

A spokesperson for Sanlu company refused to admit culpability as recently as a September 11 article, arguing that there was still no proof that the illness was caused by their milk powder. The problem had been widely known since at least July due to a concentration of hospital admissions in Gansu and the company had received dozens of complaints from parents in various provinces as far back as March. The company’s testing revealed the presence of melamine in August. The company has recalled 700 tons of milk powder produced before August 6. The loss to the company has been estimated at over 600 million yuan.

True to form, the incident is being blamed on rogue dairy farmers. Police have detained a bunch of them. Reports from provincial newspapers dutifully report the number of officials working on checking for bad milk powder, the exact number of supermarkets, products, companies, and factories checked, and number of suspected cases.

In an article posted on, A journalist questions whether this is the full explanation and asserts that a full investigation is needed.

The journalist consulted a dairy technician who told him that the problems could have been caused by excessive antibiotics in the raw milk, failure to desalinize the additives in milk powder, or other factors. According to a dairy farmer named Gao in Hebei Province, he had heard a couple of years ago that it was common practice to add urea to milk so it would pass tests. According to publications consulted by the reporter, urea contains melamine, the substance believed to be behind the kidney problems. Another dairy farmer admits that small farmers may be at fault, but asserts that the company should bear some responsibility as well.

The reporter says that both domestic and foreign milk powder companies have encountered quality problems in the last few years. He refers to the notorious Fuyang milk powder incident referred to above in which Sanlu was suspected of involvement but escaped culpability. There were many small milk powder producers that were displaced by large domestic milk powder companies that now challenge foreign brands. Industry insiders are now wondering how this disastrous incident will affect Sanlu’s good image. Moreover, the collateral damage from the public relations disaster could spill over to all domestic milk powder producers.

Friday, September 5, 2008

Mistaking Cycles for Trends?

This year I've gotten a lot of inquiries about Chinese agricultural data from individuals whose email signature sounds like some kind of investment firm. They are usually interested in statistics on meat consumption. I don't ask questions, but one individual told me his boss wanted a list of Chinese companies to invest in. I think another was working on a major investment in Chinese poultry that was in the news recently.

I infer from this that agriculture, especially anything that has to do with or can be influenced by Chinese demand for meat, is the latest investment fad. There have been several big investments in Chinese livestock industry in the news lately. An article in the Aug 31 Washington Post seems to confirm this trend toward ag investments and notes that the shine has quickly rubbed off farm-related stocks. Many of "the smartest guys in the room" working in investment houses and banks have never been through a big agricultural boom and bust before. They may have mistaken the upside of a cycle for a long-term trend.

China's pork and vegetable oil prices shot up 50-60% last year--what many interpreted as an upward trend they can't afford to miss out on. But we need to put price fluctuations in historical context. Historically, Chinese agriculture has gone through cycles with surprisingly little long-term upward trend in food prices. In the chart below you can see that there was a 50% surge in pork prices in 2004. In response, farmers added more hogs (boosting the price for feeder pigs even faster). The result was a similar plunge in prices after those hogs got big enough to go to market in 2005. Prices got so low in 2006 that farmers started liquidating their herds, even killing off the sows that produce more pigs. This, combined with disease epidemics caused prices to start shooting up in 2007. It looks like we have reached the top of the cycle and prices are starting to come down now. Has there been a fundamental change in Chna's pork sector or will we see prices dive in the next 6 months?

Heard about the surging wheat prices over the past year? Chinese demand outstripping supply? Look at the trend in Chinese wheat prices below. (Prices are for Jinan, Shandong Province, at the center of China's wheat production belt but reflect national trends.) There was a steep increase in 2004. Officials took steps to increase production and since then wheat prices in China have been pretty tame. Flour prices have gone up more than wheat prices, reflecting increased wages and other nonfarm costs.Compared to North America and Australia China is short of resources, but it is surprising how agricultural production has been consistently able to bounce back in response to high prices.

Thursday, August 14, 2008

Olympics food safety dirty secrets

We were wowed by the Olympic ceremonies. This amazing display demonstrated how China can concentrate resources on a problem it wants to solve regardless of the cost.

Food safety was one of the big concerns in preparations for the games. Organizers worried that sick athletes or failed doping tests due to hormone-laced meat would give China bad publicity. So since 2005 there has been a massive effort to develop an elaborate system of production bases for vegetables, milk, poultry, etc., including secret pig farms where the hogs eat like kings, have to swear off drugs and get to roam around in exercise yards in accord with European animal welfare requirements.

Last year I visited the control room in northwest Beijing to see the city's food safety monitoring system. Like the opening ceremonies it was an awe-inspiring martialing of technology and "Big Brother"-type control. The wall was covered by a bank of video and computer screens. There is a massive database that allegedly contains every menu item for every restaurant and hotel in the city. Each ingredient can be tracked back through the supply chain to its supplier and farm. Little labels costing $100 each are affixed to each shipment, sending signals back to headquarters via radio frequency. The room displays real-time video from cameras showing the production floor of a poultry plant and loading docks. GPS systems tracked the route and progress of trucks bringing produce into the city as well as temperature of the goods.

As far as I know, no athletes have become ill, but the food safety problem popped up in an unexpected place--the suicide of one of China's top food safety officials. A fascinating article in the Brisbane Times reveals the dirty secrets behind Beijing's food safety system.

Mr. Wu Jianping, head of food supervision with China's AQSIQ, apparently jumped off a building (official story: he accidentally fell) after corruption investigators paid him a visit. It seems that he had a fat bank account and real estate holdings that were far beyond what he could afford on his salary.

It seems that the much-ballyhooed food tracking system that AQSIQ requires companies to use is run by a company actually part-owned by AQSIQ itself. Both producers and consumers have to pay a fee to use the tracking system. Essentially AQSIQ has awarded a monopoly to itself. What makes it worse is that the service duplicates services available already from other companies and some companies are complaining loudly about having to use it.

There are plenty of other opportunities for bribes and corruption in China's food safety system. Beijing hotels and restaurants were presented with a list of approved food suppliers that they must use. How does a company become an approved supplier? Apparently not by producing good products. One chef complained that the bacon from the approved supplier was too fatty; milk was tasteless and chili peppers from the approved supplier cost 12 times the usual price. A little cash for the AQSIQ official surely helps the application along.

China's approach to food safety features lots of lists of approved exporters, licenses, as well as "black lists" of punished suppliers. In a recent survey of corruption, one of the most common motivations was to avoid punishment like being placed on a "black list." The Brisbane Times also reported that it is customary to hire "public relations firms" to get on the list of "famous brand" companies that are so good they are exempt from food safety inspections.

There is a lot of clamoring for a better food traceability system in the U.S. following the recent salmonella scare. Those who want a rigid system of required suppliers and heavy-handed regulation should take a careful look at what's being implemented in China. Its order and technology appeals to the engineers but its rigidity eliminates the magic of competition that provides us with products so dependably and cheaply, and the system provides new opportunities for corruption.

Is the "food crisis" about the turn the corner?

More signs that China's supply situation is turning the corner. Perceived shortages that prompted panic-driven cut-off of grain exports, stuffing of grain inventories, and furious purchases of soybeans and vegetable oil are gradually turning into gluts.

China National Grain and Oils Information Center predicts a record corn harvest this year. They raised their projection to 156 million metric tons, up 3 million from their forecast last month. The rise in corn production is due to excellent weather. It comes despite a slight decline in corn acreage as farmers switched some area to soybeans to take advantage of the high soybean prices. CNGOIC says last year severe drought in july and august hit corn yields, cutting yields over 10% in many areas and 20% in some places. (No one was admitting this last fall.) The drought also devastated China's soybean production last fall, probably more than reflected in government statistics.

With a big new corn crop prices are likely to fall. Earlier this year the Chinese government banned corn exports until the new corn harvest--a big harvest might re-open the corn bins for Chinese corn exports this fall.

CNGOIC also raised its estimate of wheat production for this year to 112.5 mmt. All indications are that the summer grain harvest (winter wheat and early-season rice) was quite good.

CNGOIC's latest balance sheet for corn shows that corn supply has been above (or at worst equal to) corn use for the last 5 years running. And use includes exports. China has been building up corn inventories even during the recent "crisis" period. CNGOIC should know about the status of corn inventories since they are an arm of the Grain Bureau that manages them. Overall grain supply exceeds use as well.

China has really been piling up wheat inventories. CNGOIC also reports that by July (just about a month after harvest) central grain reserves had procured 32.3 mmt of wheat in six major wheat-growing provinces, up 10.8 mmt from the same period last year. Based on the report, last year central reserves procured nearly 36 mmt, around a third of production. We don't know how much wheat they have in stocks, but it's a lot.

Meanwhile, China has imported a record amount of soybeans (related to the drought mentioned in first paragraph above) and now has a glut. Prices of soybean and other veg oils have plunged in recent weeks.

When we look back at this food "crisis" we will see that China's panic-driven response--cutting off grain exports and over-importing soybeans and vegetable oil--drove prices higher than they needed to go. At a time when the world needed food China kept it stored in bins.

Monday, August 11, 2008

Sweet sorghum biofuel saga

Sweet sorghum is another crop being touted as a costless source of biofuel, but the road is not so smooth. Sweet sorghum looks like a giant corn stalk about 10 feet high. The stalk contains sugar that can be squeezed out and distilled into alcohol. Sweet sorghum is seen as an attractive alternative because it can grow on poor land that’s unsuitable for other crops.

Nongrain biofuel projects are the “in” thing and they’re being pushed by the government and everyone wants a piece of the action. Especially since there are generous government subsidies available.

Mr. Liu, an official of the local Agricultural Bureau’s seed company in Huanghua (Hebei Province), complained to a China Times journalist that COFCO had left the farmers at the altar. In March 2007 COFCO and its partner, BP petroleum, made plans for pilot projects in Hebei, Shandong, and Inner Mongolia, giving local officials and farmers some sort of promise that they would buy the sorghum to make biofuel on a trial basis.

(COFCO is a big state-owned company that used to be China’s grain and edible oils trading monopoly. It is now diversifying into various other mostly food-related ventures, including biofuels, with ambitions to become a global agribusiness giant.)

In April 2008, COFCO suddenly sent out a letter saying that it was suspending the project. A disgruntled Mr. Liu sees this as COFCO reneging on their promise, leaving the farmers at the altar.

It’s not clear exactly why COFCO backed out. A COFCO engineer explains that there are problems with the short harvest season for sorghum and the difficulty of getting it into the factory and processed in the short window of time between harvest and loss of sugar content. Another article says that just about all the sweet sorghum projects (there are also pilots in Xinjiang and Heilongjiang) are idle. COFCO claims it never made any official agreement with the farmers.

Tight cash is another reason advanced. According to industry insiders COFCO got a wad of cash from the government “to stabilize grain and oil prices” and didn’t use it well [exact meaning in original source not clear]. As a result, COFCO is backing off from some of its new ventures to concentrate on its core business. [The government gave subsidies to vegetable oil processors to compensate them for losses sustained due to price controls.]

Another aspect of the story is the freeze-out of private companies. You have to have a license to produce and sell biofuels and receive a subsidy, and the licenses are only awarded to big state-owned companies like COFCO. Journalists have found a couple of private companies that wanted to get into the sweet sorghum biofuel business but have not been able to without a license. One factory owner says he could make a profit selling ethanol for fuel with the subsidy, but without it he has to sell his ethanol as booze at a lower price. In Binzhou, Shandong it is said there is a biofuel factory sprouting weeds due to lack of license.

Is China a market economy? Well, kind of, but not really. Huge investments are made on the whim of officials. The hard-working private entrepreneur is frozen out by the big state-owned behemoth. China accomplishes a lot, but it also wastes tremendous amounts of resources by building idle factories that produce nothing.

Tuesday, August 5, 2008

Livestock/feed sector news

Some news gleaned from a late July feed industry report from China

China’s Commerce Ministry imported 200,000 metric tons of U.S. pork as a buffer to ensure pork price stability during the Olympics. The report notes that 40,000 mt went to a company in Jinan, Shandong Province (Wei’er kang = Wellcome? Foods).

In Anhui and Hubei Provinces (central China) there are rumors of spreading “high fever sickness” among hogs.

Hog prices have been slowly declining for months, but the ratio of hog-feed prices is still well above the historical average. Chicken prices are down slightly and egg prices up slightly. Beef and mutton mostly stable.

In southern China the effects of typhoons (transportation limited, high temperatures, high humidity that promotes disease) have induced farmers to slaughter more animals. The report conveys a general sluggishness in livestock and feed industries in the south. They are past the seasonal peak and waiting for the build-up to the Chinese new year peak. Feed demand is sluggish in the south too, with feed inventories building. This translates to weak demand for corn to ship south from Dalian even though there has been some easing of freight rates.

Corn prices range from
$233/mt ($5.90/bu) in Heilongjiang
$256/mt ($6.50/bu) in Dalian
$279/mt at Shekou pork in Guangdong

On July 29, Anhui Province auctioned off 22,154 mt corn from state reserves. All of it sold, at an average price of 1792 yuan/mt ($265). Total planned auctions (timing of this is not clear—last Tuesday?) of state reserve corn have been 300,383 mt and they actually sold 82.17% of it, at an average price of 1568 yuan/mt ($232). (Last fall they had trouble finding buyers for state reserve corn)
In another part of the report, in connection with a national grain policy meeting held July 29, it says auctions of state reserve corn are planned for the south of 21,000 mt (Fujian, Guangxi, Hainan) and 300,000 mt in the four northeastern provinces.

According to news from the National Development and Reform Commission, 6 provinces in central China had a good harvest of summer grain (wheat and early rice):

Shanxi 2.59 mmt, up 16% from last year
1.17 mmt, up 4%
7.74 mmt, up 6.2%
30.6 mmt, up 2.2%
3.9 mmt, up 5.4%
9 mmt, up 5%

Northeast corn prices are flat at a high level (which explains the corn auction of 300,000 mt in northeast)

Tuesday, July 29, 2008

Cassava for biofuel--no free lunch

The biofuels industry is on a quixotic quest for a free lunch--to find raw materials that don't cost anything--switchgrass, jatropha, used vegetable oil, wind, etc. Most of these are years or decades away from practical use. But let’s consider cassava, also known as tapioca, a “nongrain” feedstock that has already been brought into production.

In December 2007 China opened its first biofuel factory that uses a nongrain feedstock—cassava, also known as tapioca. Cassava is basically a weed that will grow anywhere. You just stick a piece of it in the ground and come back 8 months later to pull up its starchy root. It grows mostly in Guangxi Province and other parts of Southeast Asia where there is lots of rain, sunshine, and marginal soils. The idea is that biofuel can be produced from cassava without diverting grain away from food or feed users—that is, basically a “free” good.

(If you skipped the first chapter of your economics textbook, the basic fact of scarcity is that you can’t get more of one good without sacrificing something else. It turns out that the law of scarcity applies here too.)

It turns out that cassava has become a fairly significant source of starch that substitutes for corn in China. When I looked into China’s customs statistics last week I discovered that China has been importing increasing amounts of cassava—up to nearly 5 million metric tons in 2007. That’s about the amount of corn that some past projections predicted China would be importing by now. (Interestingly--coincidentally or not?--it is also about equal to the amount of corn China exported in 2007.)

China’s starch industry has been that fastest-growing use of corn. It uses corn and other starchy substances to produce hundreds of different products like sweeteners, msg, pharmaceuticals, glues, textiles, etc.

One of the stories we’ve been hearing from China is that corn markets have been getting tighter—that increasing industrial use of corn from factories built in the corn-surplus northeastern provinces was reducing the amount available to the industrial starch behemoths in Shandong Province. It turns out that most of the cassava imports go to these big starch-producing regions—the Qingdao (Shandong) and Nanjing (Jiangsu) districts. It looks like the starch producers have coped with tighter corn markets by importing cheaper cassava from Thailand and Vietnam. Thus, China has averted corn imports at least in part by importing cassava instead. Analysts have been predicting for years that China will become a corn importer, but they never do. No one ever considered that cassava could be a cheaper source of starch that China could use to meet its growing demand for starchy substances.

We have here a rightward-shift in demand for cassava. A new biofuel plant in Guangxi, factories using more imported cassava in northern China. Southeast Asian countries are on the biofuel bandwagon too, encouraging their own producers to make biofuel from cassava. The result of increased competition is climbing cassava prices. There is no free lunch, even in biofuels.

China’s imports of cassava have plunged in 2008, which is probably due to the surge in prices. Guangxi’s crop was hurt by low winter temperatures. Someone is not getting as much cassava as in previous years. I suspect the hundreds of small starch factories and livestock producers in Guangxi and other parts of southeast Asia that have used cassava as their raw material for generations are now suddenly finding themselves priced out of the market. Cassava is not a free good. Using more of it to produce biofuels will divert it from other uses, forcing up prices, and straining supplies of substitutes—like corn.

Another news report last week said there are plans to build a cassava-based biofuel in Hainan Island which would use cassava produced on land acquired by the biofuel company in Laos, an example of the controversial policy of acquiring land in developing countries to produce China's food (and fuel?) needs. Watch out world, here comes China!

Sunday, July 27, 2008

U.S. and China: Joined at the Hip

A very well-done article by David M. Dickson in the Washington Times, "China's Economic Bargaining Chip," explains the economic co-dependency of the United States and Chinese economy. As I've attempted to explain elsewhere on this blog, the U.S. economy is addicted to consuming more than it produces and consequently to debt while the Chinese economy is compulsively producing more than it consumes. China sends the cash from its trade surplus back to the U.S. to invest in Treasury Bills--i.e. it is financing much of the growth in U.S. government debt. It turns out that China's financial wizards have lost a lot of dough investing in U.S. companies like Blacksone, Fannie Mae, and Freddie Mac just before their stock dropped like a rock. There was some discussion about this on my recent trip to China. Another interesting tidbit--the article notes that some Chinese citizens have noticed that China has been ploughing cash back into the U.S. economy, facilitating low interest rates and massive consumption by fat U.S. consumers while hundreds of millions of Chinese citizens eek by on a dollar or two a day.

The editors tried to play up the concerns about China getting a stranglehold on the U.S. economy through its increasing ownership of U.S. companies. These alarm bells have been sounded before--the Saudis in the 1970s and Japanese in the late 1980s.

The more alarming aspect is whether this co-dependency can be broken without the whole thing spinning out of control. The U.S. is trying to avert the consequences of its profligacy by spending even more on a big tax "stimulus", commitments to bail out failing financial firms, the new mortgage bill, and pumping even more money into the economy by keeping real interest rates near zero. Meanwhile, China has gotten itself into a hole by holding its exchange rate down too long. It has been trying to gradually appreciate its currency over the last year-plus, but that has attracted lots of hot money with nowhere else to go. As long as the Chinese exchange rate is ticking upward at a steady predictable pace, it makes lots of sense to put your money in China, and lots of investors are doing just that. Consequently, China's foreign exchange reserves are exploding--up to $1.8 trillion now and expected to reach $2.5 trillion next year. China's monetary authorities are struggling to keep inflation under control. At the same time, its lucrative property market--the source of much of China's new-found glitz and wealth--has turned south.

Some have raised this interesting point: If we're learning that U.S. financial institutions were not as healthy as we thought, what hidden hazards might hidden in the balance sheets of Chinese banks?

The train doesn't seem to be slowing down; it's gaining momentum. Can it be slowed without leaving the tracks?