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.