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.

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.

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
Anhui 1.17 mmt, up 4%
Jiangxi 7.74 mmt, up 6.2%
Henan 30.6 mmt, up 2.2%
Hubei 3.9 mmt, up 5.4%
Hunan 9 mmt, up 5%

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