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]