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.