How to Create "Modern" Agriculture

The “household responsibility system” (HRS) implemented in the early 1980s broke up big collective farms and leased out the land to farm families. Dividing up the land among so many families resulted in tiny farms of a couple acres each, but production took off when farmers operated their own farms and responded to economic incentives. HRS worked well for a couple of decades, but now it is becoming apparent that this kind of farm structure is not ready for the prime time of global agriculture. How do you guarantee that farmers are not using toxic pesticides, growth hormones, carcinogenic drugs, or selling dead pigs to the slaughterhouse when you’ve got so many tiny independent suppliers? How do you trace back to find the source of tainted vegetables that show up in the market? How do you guarantee large quantities of standardized potatoes to make French fries? How do you make sure everybody is vaccinating their chickens and keeping them in enclosed housing?

Chinese ag officials have decided that farming needs to be larger in scale and more vertically integrated. Trouble is, there is no land market to consolidate farms into bigger operations, most farmers can’t get loans to make big investments, and the government is afraid to let farmers sell off their land for fear that China will be “Latin Americanized” (big landlords controlling all the wealth) or “Indianized” (poor landless laborers wandering the country). WIth no assets to secure loans, most farmers are without access to capital markets. So Chinese officials are coming up with all kinds of demonstration projects to teach “modern agriculture” in the context of China’s rickety collective land ownership system.

A June 20 article announces Heilongjiang Province will invest $17.4 million in 11 pilot “modern agriculture” demonstration areas consisting of 40,000 mu (6,600 acres) each of contiguous farmland. The whole farming process will be mechanized from planting to harvest. According to the article, “It will effectively promote the province’s program to promote large-scale farm management and labor transfer, and play a leading role in modeling the new socialist countryside construction.” The equipment includes four imported large modern machines, one tractor of over 395 hp and 3 of 195 hp, as well as 3 domestically-produced 125-hp tractors. They will be equipped with advanced agricultural equipment. The demonstration area will be unified for standardized farming, “liberating” rural labor force, and raising grain production 15-20%, as well as raising farmer incomes.

Another article from June 16 describes a greenhouse-building campaign in Ningcheng County of Inner Mongolia. This program illustrates how various private and public players—higher levels of government, financial institutions, companies, and farmers—are co-opted to support government programs. The township government has “organized” 34 million yuan in funds. Some funds were transferred from the county government, some came from loans issued by the rural credit cooperative, some from investments by merchants, and some from farmers. In March last year, the county ag bureau got 3 million yuan in investment from the Changfeng Vegetable LLC to build a high-tech agricultural demonstration zone using specialized production, industrialized breeding, area management, to spread advanced technology in the whole county. The town government spent money to bring water and electricity to the zone, and gave a subsidy of 40 yuan per meter for greenhouse construction--the subsidy for a full structure was 1200 yuan.

Every day there are dozens of news articles on Chinese web sites describing various "demonstration projects."

Since farmers are hamstrung by not owning their own land, the government has to step in and arrange all the investment. They line up a company to be the intermediary between farmers and the market and to make investments. I observe a pattern of companies that have nothing to do with agriculture making agricultural investments. I’m guessing that companies do this to show their commitment to the cause in order to get some other benefit. In 2007 I visited a vegetable company in Liaoning which was set up like an extension center. The owner’s card said he ran 5 other companies that were all in the textile business. On another occasion I attended a banquet in Yunnan Province hosted by a real estate company. They handed out a brochure showing all the big projects, one of which was a futuristic agricultural technology center where farmers would come to learn about all kinds of new techniques, varieties, and breeds. In 2007 China started experimenting with opening “village banks.” All of them are run by city banks or foreign banks.

More subsidies/bail-outs

Chinese authorities keep rolling out the subsidies for rural areas. In addition to direct subsidies to farmers there are intergovernmental transfers to local governments in grain-producing areas. Many of these local governments are deeply in debt for various reasons--township and village enterprises that failed in the 1990s, over-staffed bureaucracies, and over-ambitious spending. The cancellation of the agricultural tax in 2006 stripped them of a major revenue source.

A June 27 Peoples Daily article posted on the Internet says that the central Ministry of Finance will allocate 12.7 billion yuan ($1.8 billion) for “comprehensive agricultural development” in order to develop grain production. This is an increase of 10.9% from last year. The funds will be targeted to main grain production areas with planned sown area of 26.55 million mu (1.77 mil. Hectares) of middle- and low-yielding fields. The aim is to raise grain production capacity by 3 million metric tons.

Apparently, this is at least partly a bail-out of local governments. According to the report, 2.6 billion yuan is earmarked for reducing local government debts for land management projects and another 7.1 billion yuan is for complete cancellation of various debts. The purpose is to lighten the burden on rural organizations and farmers, and deal with rural “debt risk” and increase the “enthusiasm” of the “rural masses” to produce.

This year funds for comprehensive development will mostly be allocated to 13 main grain-producing provinces, especially counties with big potential for grain production growth. 300 million yuan will be devoted to medium-scale irrigation projects. It will explore other ways of transforming agriculture with financial aid: enthusiastically supporting “dragon head enterprises”, large-scale crop- or livestock-producing households, farmers’ specialized cooperative organizations, and other modern agricultural management systems. I will give some examples of these types of projects in a later post.

Soybeans Pile Up at Chinese Ports

According to the June 4, 2008 monthly report on edible oils markets by China National Grain and Oils Information Center (NGOIC), soybean inventories at Chinese ports are at an historical high. In May soybean stocks at ports were estimated to be about 3.55 million metric tons, up 250,000 mt from April, and 1.4 mmt higher than the same period last year.

One reason given by NGOIC for the bulging stocks is an unusually large volume of soybeans arriving at ports. In May 3.5 mmt arrived; in June 3.8 mmt are expected and in July 3.3 mmt are expected—10.6 mmt in 3 months. That is up from about 8.5mmt for the same period in 2007 and 2006.

NGOIC also cites a slow-down in soybean crushing since April. Factories have accumulated high inventories of soy and palm oil and demand for oils has slackened. They don’t see an increase in soy oil demand on the near-term horizon and suggest that an increase in soymeal demand will have to lead the way in reviving crushing. The report sees little prospect on the inventory situation changing in the near-term.

Elsewhere in the NGOIC report a chart shows huge crushing margins for imported soybeans from July 2007 through February 2008. This period corresponded to upward trends in soy oil, meal, and bean prices. Margins then plunged into negative territory in April and May. This also corresponded to a flattening/decline of prices.

Food Inflation Under the Microscope

Inflation in China is one of the big topics these days. China's consumer price index keeps registering significant inflation, especially in food prices. Is it really "inflation" or higher food prices that reflect market disruptions? The prices that have driven the inflation figures have stabilized over the last few months, but this won't show up in the CPI which only shows year-on-year changes. We can shed a little more light by looking at individual prices.

The two markets that have seen the biggest increases in prices are pork and soybean oil. These two price increases reflect mainly market conditions. Pork supplies in China shrank in 2007 due to disease and a massacre of hogs in 2006 due to low prices. Soybean and veg oil prices shot up for various reasons--soybeans lost area to corn, biodiesel demand in Europe boosted veg oil demand, China had a bad soybean crop in 2007 and China's rapeseed (the other main oilseed in China) production was down the last couple of years due to more planting of wheat and early rice.

Pork prices seem to have stabilized over the last few months, although they're not coming down. News reports say pork consumption is in a seasonal summer slump and supplies are gradually coming back. The earthquake didn't have much effect on pork production since the area that was hit doesn't produce that much pork. Prices are still about 50% above last year's price, and this is reflected in a roughly 25% increase in the meat portion of the CPI. If prices stay at their current level, year-on-year "inflation" will disappear by late summer (see chart below).



Cooking oil prices have stabilized too. The Chinese government has been out buying veg oil like crazy, building up stocks. It recently canceled the VAT rebate for veg oil exports even though it exports minimal amounts. Oddly, it cut the tariff on olive oil, an oil that is virtually unknown in China. In any case, veg oil prices peaked in March and are coming down slightly, although still 45% above last year and this is what shows up in China's CPI.



I don't have room to show all the prices. Admittedly there are a lot of prices that are still trending upward. Some vegetable prices are rising, but others fell after peaking during the winter storms in February. Beef and mutton are rising, but poultry is more stable.

Inflation is an across-the-board increase in prices. There do seem to be increases across a broad range of commodities, but some of the price increases were clearly results of microeconomic disruptions.

Real Estate Bubble With Chinese Characteristics?

A report by the economics research institute of Renmin University in Beijing warned that the tightening of cash availability could set off a chain-reaction in the real estate sector. The report said that real estate square footage (actually “meter-age”) coming on the market in the first four months of 2008 rose by over 20%. However, the amount actually sold declined 4% year-on-year. (In the same period last year real estate sales were booming at a 25-percent annual rate.) In other words, we have an excess supply situation that could lead to price declines, followed by declining profits for China’s budding class of real estate tycoons, and declining investment in real estate—the biggest single piece of China’s enormous fixed asset investment pie. The report speculates that this could occur in the second half of 2008 and continue into 2009. Long-time China watchers will recall the forests of half-finished buildings that marked the last real estate bust in China about a decade ago.
Source: Jinghua Times, reposted on chinaprice.gov.cn

Blue Ear Blues and Post-quake vaccinations

It was about a year ago, in mid-2007, that strange reports about the "blue ear disease" (porcine reproductive & respiratory syndrome or PRRS) in hogs first started coming out.

The Ministry of Agriculture rushed out a vaccine last year, but the top veterinarian, Dr. Jia Youling, announced on June 11, 2008 that "blue ear disease" is still present in 22 provinces (out of 31) this year. From January to May there were 289 outbreaks in 194 counties. Dr. Jia said 45,858 animals were affected, including 18,597 that died and 5,778 culled. This is only a tiny percentage of the hundreds of millions of pigs in China, but it sounds like the virus is spread over a wide area.

Dr. Jia says the Ministry is working with related technical departments to develop a vaccine, and they are within 3 months of completion. They have already selected 12 veterinary medicine companies to manufacture the vaccine.

Blue ear is just one of the many animal disease floating around in China. A news item from the Ministry of Agriculture animal husbandry bureau web site notes that officials are working hard to avoid potential animal disease in the earthquake aftermath. Veterinarians and animal health officials in the Sichuan earthquake disaster zone have been busy disposing of dead livestock and disinfecting, and now they are doing emergency vaccinations of pigs for Japanese encephalitis, swine type II streptococcus, anthrax and rabies, and 4 kinds of human and animal diseases. It's estimated that they did 528,533 emergency rabies immunizations, 2,577,247 Japanese encephalitis immunizations of pigs, and 1,294,831 type II swine streptococcus immunizations. Of the 2.9 million cattle and sheep in Aba prefecture, over 1 million were "spring immune" (don't know how to translate this), and 1.3 million were given emergency anthrax immunizations. They are now monitoring animals for disease by testing samples.

Another article tells us that Chengdu City government has safely disposed of 80,453 dead hogs、2,845 cattle、8,786 sheep、1.78 million chickens、67,294 other animals、 and 2000 metric tons of fish in the earthquake zone of Dujiangyan, Pengzhou, Chongzhou, and Daba. They have done over 62,000 rabies vaccinations, 417,000 for (some pig brain disease), 58,700 for type II swine streptococcus.

These folks have been busy. That's a lot of shovels, needles, and vaccines. This is vitally important work that probably won't be recognized by many people.

China Learns the Farm Subsidy Game

China’s leaders are congratulating themselves on policies that have largely insulated China from the world food price crisis. A June 13 news item reports on farmer Jiao Xiqing in Shandong Province who has just brought in another big wheat harvest from his 3 mu (half an acre) of land. Farmer Jiao takes time from planting corn to tell the reporter that he got subsidies of 80 yuan per mu (that would be a total of 240 yuan or $35) and he will gross 2,500 yuan ($362) on the 3 mu of wheat, and that’s not including what he’ll get from the corn he’ll harvest in the fall. The article says that another big harvest of summer grain means that China will have a fifth-consecutive big grain harvest.

The article points out that relatively stable grain prices in China are a sharp contrast to the high prices in world markets. The officials interviewed in the article give credit to China’s policies. The vice-director of the Grain Bureau, Zeng Liying, tells us, “Production is the basis for grain security.” She goes on to explain that China implemented several policies to reverse falling grain production several years ago, including direct subsidies and “protection prices.”

In 2004, China made an historic shift from taxing farmers to subsidizing them, just like the big boys do in North America and Europe. When China was preparing to enter the WTO there was a lot of angst over how its farmers would be able to compete with big subsidized farmers overseas. Chinese officials began devising and experimenting with “countermeasures”: farm subsidies and support prices. By 2004 they were ready to roll out their program, getting additional impetus from a Chinese food price inflation scare in 2004 that most people have forgotten now.

The farm subsidy program was started in 2004 with tiny payments of 10 yuan per mu (about $1.20 at the time) that was given to farmers in 13 important grain-producing provinces. There was also a murky “quality seed” subsidy and a subsidy for buying large machinery. Year by year the subsidies have been raised. Local governments can kick in money too. They also started paying support prices for wheat and rice. The support prices were increased in May. On top of this, they started paying a subsidy to offset rising prices of fertilizer and fuel this year that is even bigger than the grain subsidy. (There are also subsidies for the dairy industry, hog breeding, and large poultry farms.)

The article cited above tells us that the subsidy in Shandong was raised from 30 yuan last year to 80 yuan per mu this year. In Jiangxi Province it’s 130 yuan. In Ningxia Province the subsidy is 50.1 yuan/mu for irrigated land and 13.4 yuan for dryland.

It’s not clear whether these subsidies are (will be) considered “green box” (not linked to production) or “amber box” (potentially distorting subsidies linked to production) when reported to the WTO. But this news report clearly credits the subsidies with raising grain production because income from grain is more attractive compared with growing other crops or leaving to work in the city.

Chinese officials have it good. They can brag about how farmers are thrilled to earn a gross income of $362. Officials in Beijing can easily blow that much in a single night of banqueting. In fact, there’s a good chance that Farmer Jiao’s daughter has left the farm to work as a karaoke hostess at the restaurant where the Grain Bureau officials have their banquets. The several hundred yuan that his daughter sends home every month is what really keeps farmer Jiao happy. That’s what finances his home remodeling and his flat-screen T.V. The wheat money probably doesn’t go too far, even in the Shandong countryside.

Oh, and how do the Grain Bureau officials finance their banquets? Well, they’re sitting on grain reserves of about 150-200 million metric tons. That’s worth somewhere around $50 billion at current prices locked up in warehouses (some of it rotting or serving as rat food). They could sell 10-20 million metric tons on world markets and never miss it, plus make millions of dollars in profits. But they don’t because the government keeps writing checks, paying them to store it in the name of maintaining “grain security.”

When Chinese officials trumpet the effectiveness of their policies, perhaps they should calculate the cost of their “grain security.”

Investment--no brakes on this car

Everybody wants to get a piece of China--whether a factory, shopping mall, condo, or villa--and the country's investment continues to soar. China National Bureau of Statistics released figures for January-April showing urban investment surged 25.7 percent from the same period last year. This makes four straight years of 25-30 percent investment growth (that's following a phenomenal 45 percent growth in 2004). The amount of investment has doubled since 2005. Investment has been an unusually high 40-plus percent of GDP. Even with GDP growing 15 percent in nominal terms, this 25.7 percent rate of growth in investment suggests an rising share of investment in GDP. Will China ever run out of things to build?

Manufacturing accounts for just under a third of investment and it increased by 31 percent this year. Two big-ticket items--electric power and road building, accounting for a combined 10.5 percent of investment--were up by just 4 percent this year. But the biggest chunk of investment--real estate which accounts for 27 percent of investment--was up 34 percent. Furniture manufacturing investment was up 49 percent--watch out U.S. furniture factories if there are any of you left--but textile and apparel investment grew less than 20 percent.

China has a history of boom-bust cycles. The last bust in the late 1990s left a lot of unfinished hulks on the skylines of Chinese cities. The current boom has gone on for an unsually long time and has been incredibly vigorous. Is China different now? Has it gotten over the hump and become a world-beating economy? Or will this be the next bubble to pop? Who knows?

China Urban Investment Jan-April 2008 (increase from year-earlier period)

Sector	Increase	Share of investment
Total	25.7
Agriculture, forestry, fisheries	71.6	1.1
Mining	32.1	3.7
Manufacturing	31.2	32.4
Ag processing	18.4	1.2
Food processing	26.1	0.8
Beverages	27.0	0.6
Tobacco	-11.3	0.1
Textiles	13.4	1.4
Apparel, shoes, hats	19.7	0.7
Leather, furs, feathers	40.8	0.3
Utilities	7.3	7.2
Transportation, freight	18.5	1.8
Real estate	33.9	27.5
Public investments	27.2	7.4
Note: Not a complete list Source: China National Bureau of Statistics.

China Could Solve World Food Crisis Tomorrow

Media reports paint a misleading picture of a China running out of grain as a cause of high world food prices. China is contributing to world food price increases, but not in the way most people think. China has plenty of grain and it could solve the food price crisis tomorrow by dumping grain on the world market (an activity it was regularly engaged in a few years ago).

In sharp contrast to media reports, China actually has plenty of grain on hand. The Chinese grain authorities have warehouses with 150-to-200 million metric tons of grain (so they say), about 30-40% of a year’s consumption. This is about double the amount that the UN’s Food and Agriculture Organization recommends for a safe buffer stock.

Surveys conducted in April indicate that Chinese farmers have an even larger amount of grain stored in their houses and courtyards. China’s central planning commission (National Development and Reform Commission) conducts regular surveys of thousands of farms nationwide to gauge production costs, prices, sales, and grain inventories in order to keep its finger on the pulse of grain markets. A series of survey reports from about a dozen provincial and local price bureaus in a coordinated survey show that farmers generally have 1,000 or more kilograms of grain stored on their farmers as of April 1, 2008. (See table below. Three of the reports were posted on the NDRC’s official web site; I collected the others by doing a Google search of Chinese news sites.) The average was as high as about 2,000 kg. in poor provinces (Ningxia, Shanxi, Guizhou) and as low as 434 kg. in urbanized Tianjin. In Shandong and Hebei, two of the biggest agricultural provinces, farmers held about 1,200 kg. and these major wheat producing areas are about to add grain from this year’s wheat harvest which occurs this month. Rice-producing provinces of the south had plentiful stocks of 750 to 1500 kg.

China: average grain stocks held per farm, April 1, 2008
Province/region	Grain in inventory	Change from last year	Inventory as percent of last year's production
	Kilograms	percent	percent
Shandong	1,185.5	-0.8	38
Hebei	1,275.6	7.9	35
Tianjin	434.0	-15.9	NA
Changchun (Jilin Province)	715.0	18.7	4
Shanxi	2,087.2	29.0	56
Ningxia	1,990.2	-2.2	28
Zhejiang	959.0	10.8	NA
Hubei	764.0	16.1	15
Hongze (Anhui Province)	1,304.8	18.5	20
Jiangxi	762.9	20.0	17
Chongqing	1,473.2	6.8	NA
Anshun city (Guizhou)	1,935.5	NA	45
Source: China National Development and Reform Commission, Production Cost Surveys

More importantly, the surveys also show that grain stocks were up sharply from year-earlier averages in most provinces. For rice, many of the reports said that farmers were holding grain off the market because they expect prices to go even higher—Chinese farmers are hoarding grain, restricting the market supply and driving prices even higher. In Shandong, grain stocks were down because demand for corn was strong and wheat production was down. In Changchun, a major corn-growing area, farmers had sold most of their corn too, but the report for Shanxi said farmers had had trouble selling their corn this year. Taking a simple average of these grain stock numbers gives us 1,240 kg. per farm. This is not a scientific sample, but it does represent a wide cross-section of farms.

The survey also suggests that a substantial proportion of China’s grain is stored on farms. I was able to calculate the ratio of grain stocks to grain produced by the farms for most of the provinces, and their reported stocks were generally in the range of 15-35% of their production.

The average from this survey might be a high (the survey sample probably over-represents major grain-producing households and excludes rural households that work primarily off-farm or grow fruits and vegetables). If we take the low end of this range, it seems plausible that 15% of the grain produced in China was still held in inventories on farms on April 1, 2008. That would be about 75 million metric tons in addition to the 150-200 million metric tons held in State Reserves. Thus, the total grain stocks in China could be 225-275 million metric tons, or 45-55% of the country’s annual grain production. That’s a lot of grain.

Bottom line: there’s a lot of grain sloshing around in China. In fact, by cutting off grain exports this year China is needlessly hoarding grain and driving up world prices. Inflationary psychology is making Chinese farmers into grain hoarders as well. China could solve the problem of high world food prices by dumping about 10 million tons each of rice and wheat (probably even corn) on the world market.

Pigs Eat Wheat

Usually, wheat is more expensive than corn in China (and most other places). Wheat mostly is ground into flour for making bread and noodles while corn is fed mainly to animals. Presently, the usual price relationship is reversed—corn is now more expensive than wheat. A report on China’s feed industry (www.yumi.com.cn) this week noted that feed mills in northern China are paying RMB1690/metric ton for corn and RMB1670/mt for wheat. In past years—before 2006—corn was typically about RMB200 less than wheat.

Chinese feed mills, looking to minimize their costs, are adjusting their feed recipes to use a higher ratio of wheat to corn. The report says mills are generally replacing about 20-40% of corn with wheat, and in parts of Shandong Province (a major wheat-growing area where demand for corn to make starch is booming) half of the corn is being replaced with wheat. Moreover, the new harvest of winter wheat is about to happen, which usually brings on a seasonal decline in wheat prices, pushing prices even more out of whack and encouraging feed mills to substitute even more wheat for corn. Thus, the report predicts that this wheat substitution will soften demand for corn even though feed demand is expected to surge, keeping a lid on corn prices.

This is a reminder of the power of price. Even in one of the last self-proclaimed “socialist” countries, prices convey vital information about the economy—where resources are needed and where they are abundant. When corn is scarce and expensive, feed mills cut back on corn and substitute wheat. This ensures that the surplus wheat spilling out of warehouses gets used up faster (instead of rotting or serving as rat food) and scarce corn gets conserved.

Most people tend to think of the economy like engineers—that things are always produced according to fixed recipes. For example, an often-cited “statistic” is that it takes 7 lbs of grain to produce 1 lb of meat. Therefore (so the story goes), if every Chinese citizen increases his/her meat consumption by 1 lb, China will need 7x1x1.3billion=9.1 billion lbs. of additional grain. Then someone has to requisition that grain from somewhere and make sure it gets to where it needs to be. This is the engineering mentality that created the tragedy of central planning during the “scientific” 20^th century.

There are many recipes for animal feed. The 7:1 grain-meat ratio is for beef feedlots in the Midwestern U.S. where they send cattle for their last few weeks of life for an eating binge to fatten them up for the butcher’s knife. This kind of animal feeding is virtually nonexistent in China where grain has traditionally been a lot more expensive than in the U.S. Grain makes up less than half of feed given to Chinese livestock. Farmers make use of other feeds that are abundant and cheap. One major source of feed is the bran and husks left over after threshing and milling wheat and rice. They also use by-products from making corn starch and ethanol as well as potatoes, vines, vegetables, and table scraps. In China it takes about 3 lbs. of grain to produce a pound of pork and about 2 lbs or less for a pound of chicken or beef. Grain consumption by animals in China is not exploding like many newspaper columnists, bloggers, and even MIT professors think it is, because Chinese farmers conserve on grain when it gets expensive.

Economies are much more flexible than most people realize. People like to think of economies as being like a machine, but an economy is more like an organic being. Different parts are always changing, growing, interacting, and sending messages to each other. Sometimes new parts grow; sometimes unneeded parts die and drop off, leaving the rest of the body with more resources to grow stronger.

There are many recipes for producing things and the recipe can be adjusted with incredible speed based on what ingredients are plentiful and which are scarce. Prices are like messages sent through the nervous system at lightning speed with instructions to buy/sell/conserve/binge whatever is in abundant/short supply. Don’t be fooled into thinking we’re going to run out of this or that. Prices will send the right signals—as long as governments don’t cut the nerves with misguided policies like price controls or subsidies.