Sunday, December 28, 2008

Caution on Re-start of corn exports

According to a report from China corn market net on Dec. 26, traders say Chinese officials have decided to postpone their issuance of new corn export quotas, cut back on the amount of quotas, and may not give any policy support [e.g. VAT rebate] for exports in order to "control prices and ensure domestic supplies."

The article says that China's decline in corn exports will allow American gain traders to maintain their Asian market share. Chinese corn prices have already bounced back from their two-year low due to the Chinese government's support of prices through increased reserve procurement.

China mainly exports corn to South Korea and Japan. According to customs statistics, this year's exports through November totaled 235,379 mt, down 95%.

This week the government required local grain bureaus to procure an additional 20 mmt of corn from farmers, bringing the total to 30 mmt.

Here is the planned procurement in the latest round which is to be completed by the end of April:
Inner Mongolia 3.3 mmt
Liaoning Province 3.5 mmt
Jilin Province 8.7 mmt
Heilongjiang 4.5 mmt
Total: 20 mmt
Relevant departments are to make their grain procurement plans in accordance with market conditions.

According to the notice from the government, all of the funds allocated for grain procurement and drying should be used; they should not be embezzled

Grain output estimated at 528.5 mmt

Agriculture Minister Sun Zhengcai, speaking at a national agriculture work conference on Dec. 27, 2008, proclaimed that Chinese agriculture continued its stable development this year despite the challenging situation, achieving several years of breakthroughs.

Grain output and yields have both increased five consecutive years, both reaching record highs. Grain production for 2008 is estimated at 528.5 million metric tons, an increase of 5.4%. Yield was estimated to increase 4.2%. Rural household income also saw a relatively good increase of about 8%, also a fifth-straight increase. Oilseeds production also recovered, reversing 8 straight years of falling self-sufficiency rates. There was a rapid recovery of hog production, livestock and aquaculture production continued stable development, and "vegetable basket" supplies were plentiful. Hog inventories were estimated at 470 million head for 2008, a 7.4% increase, and hog slaughter was estimated at 600 million, up 6%. There was steady improvement in the safety and quality of ag products.

Five years in a row of increasing grain harvests...this run of good weather, etc., can't go on forever.

Sunday, December 21, 2008

"If You Build It" Stimulus

As if China needed more stimulus of artificial demand...The National Development and Reform Commission announced a 100 billion yuan stimulus spending plan for next year. It includes
*construction of low-cost housing that will reconstruct urban migrant squatter settlements (10 billion yuan);
*rural gas, drinking water, electrification, roads, and postal service projects, water management, rural cultural centers and other rural infrastructure stuff (34 billion);
*railroads, highways, airports and other big infrastructure (25 billion);
*basic health and family planning service system, repair and construction of schools in central and western provinces, medical clinics, education, cultural and social development (13 billion);
*urban water treatment, solid waste disposal facilities, focus on water treatment and pollution prevention, energy conservation and ecological projects (12 billion);
*independent innovation and production restructuring projects (6 billion).
Financial departments have already allocated the funds quickly. The emphasis is on spending the money quickly, high impact, clear measures of success.

Aren't stimulus measures giving us more of what got us in trouble in the first place? Interest rates of 0 in the U.S. and even more artificial demand in China!

Crises Heal Export Mypoia?

A Dec. 19 article in the Economic Information Daily reports that this year's turbulent market environment is forcing Chinese food companies to look more closely at domestic markets. Chinese companies and officials have viewed themselves as a success if they exported. The domestic market was for the weak companies that couldn't make it overseas.

This year's food safety incidents (pesticide-laced dumplings found in Japan, melamine in milk powder and eggs), the global economic crisis, and appreciation of the Chinese yuan have all contributed to a more sour outlook for Chinese food exports. The reporter gives the Longda Food Group, China's biggest processed food company, as an example. Longda's export sales (80% of them to Japan) fell 20% this year in terms of volume.

The article reports that most food exporters have been raising prices. This reflects rising raw materials costs (i.e. food price increases), higher labor costs due to a new labor law this year, and other factors. Export revenues are roughly constant event though the volume has dropped. The article seems to be saying that some smaller companies have dropped out (been forced out) of the export market, giving the remaining big "dragon head" exporters more latitude to raise prices.

Profit margins on exports are said to be down from 5-6% before to 2-3% now. This is forcing Chinese companies to take a closer look at costs. They pass on much of the increase in raw materials costs in higher product prices. They are looking for ways to cut waste, reduce power and water consumption, and overhead. Companies are required to give employees insurance at 5,000 yuan per head due to the new labor law. Many are laying off workers to cope with the higher costs.

Now more companies are looking at how to develop their domestic business. For example, Longda Group makes 65-70% of its sales domestically but is looking to expand that share. It has invested in a big meat processing operation with another meat company in Henan and is building a new peanut oil processing facility with capacity of 110,000 mt.

This is a positive development. China has over-emphasized exports. Exports have been under-priced. Labor has been exploited (cruel irony of the last major "Marxist" country) and underpaid. The surge of Chinese production has been tremendously wasteful. It's about time someone started looking at these costs and the degree of waste in this economy. It's about time Chinese manufacturers started producing for market demand instead of just producing for its own sake.

Saturday, December 20, 2008

Cotton: reserve purchases and import barriers

China's cotton demand has fallen as U.S. demand for Chinese textiles has slowed. Textile manufacturers are closing or cutting back production as they experience losses and accumulate unsold inventories. Commercial reserves of cotton in November were 3.5 million metric tons (mmt), 10% higher than November 2007 (1.78 mmt in Xinjiang alone). Unsold textile and yarn inventories were up too. Enterprises were estimated to be holding 28.5 days of unsold textile products and 21.57 days of yarn inventory.

As is the case in the soybean market, the government is the main active buyer as it procures cotton for government reserves to prevent prices from collapsing. On Dec. 9, the State Council issued a document floating ideas for policy support of the cotton market that featured planned procurement of 1.5 million metric tons (mmt) of cotton at 12,600 yuan/mt. According to one news report State procurement for cotton reserves totals 660,000 mt this year so far, but commercial reserves are still up 310,000 mt. A subsidy for good quality cotton varieties will be spread nationwide to all cotton fields and there will be unspecified "relief" for the textile sector.

Also similar to the soybean market, cheap imports are an obstacle to supporting domestic prices. According to at least one news report, a quality management system for imported cotton introduced by AQSIQ this year will be used as a nontariff barrier to slow cotton imports.

Cotton imports have already slowed. November cotton imports are reported at 76,000 mt, down 21% from October and down 25% from November 2007. This is the lowest value in four years. The average unit value of imports was $1.64/kg (11,270 yuan/mt). Estimated imports for the last three months of 2008 are down 36% from the same period in 2007. The total for January-November is estimated at 1.943 mmt, down 9%.

The falling cotton prices are affecting farmers. The breakeven seed cotton price is said to be 2.6 yuan/kg, but the current price is around 2.3-2.4 yuan and falling. It's as low as 1.8 yuan in some areas; at this price, farmers are estimated to lose 200 yuan per mu.

Sunday, December 14, 2008

More Hogs, Bigger Farms

In 2007 China’s hog supply was in a severe shortage situation and pork prices soared by about 50%. One of the key policies the government introduced was financial support for breeding sows. Apparently, the policy worked. According to an article from the China Animal Husbandry and Veterinary net, NBS data say the third quarter 2008 inventory of breeding sows was up 12.4% year-on-year. The inventory of all hogs was up 6.6% and hog slaughter was up 5.8%.

There has also been an increase in the scale of hog farms. Traditionally, hog production has taken place on a very small scale in a “hog in every home” pattern. This year it is estimated that farms slaughtering 50 or more head account for over 70% of production. In past years, the share was reversed—about 70% came from “backyard” farms. The number of farms slaughtering 50 or more hogs is targeted to reach 50% of the total production nationally by the end of the year.

The government at the central and local level is implementing all kinds of policies to encourage commercial standardized hog production on a larger scale using unified standards, and “ecological” approaches that collect the waste and turn it into methane gas, fertilizer, and fish food. There is a nationwide campaign to create “animal husbandry zones” in villages where farmers centralize their livestock in concentrated feeding operations. The target is to establish 70,000 of these zones by the end of 2008.

An article focusing on Jiangxi Province, one of the poorer areas of south-central China, suggests that the current downturn in the hog sector may expedite the shift toward larger-scale farms. The article notes that hog prices peaked at 19.4 yuan/kg earlier this year and are now down to 14 yuan. Feeder pig prices have fallen by nearly half, from 800 yuan for a 10-kg piglet to 440 yuan now.

Jiangxi’s Dongxian county has 22 large scale hog farms with 10,000 or more hogs. The county veterinarian says 20 big farms have expansion plans, despite the downturn in the hog sector. The large farms have learned through experience how to deal with the constant cycles in the hog industry. Since 2000, the article says there have been two deep declines in hog prices: in 2000 and 2006. The 2006 crash led many farmers to slaughter their sows and led to the soaring prices in 2007. The reporter asserts that, while past downturns have left a bad taste, large “specialized household” farms have not dropped out in the current downturn. On the contrary, they have “caught fire.” Commercial-size farms (50 or more hogs) account for 85% of production in this county and hog inventories are up 36% year-on-year; slaughter is up 42.7%.

One farmer claims that these commercial farms have learned how to “strengthen internal management” to control costs in the downturn. For example, they culled low-producing sows and breeding farms fattened piglets on their own farms when they had difficulty selling them. The adjusted feed formulations to slow weight gain when the market slowed down. The article says the profit per head is 200 yuan, much lower than earlier in the year, but still not bad for a big farm. Farms producing on a large scale can accept a low margin per unit. This is one of the key facts of the modern economy--and one of the key problems facing Chinese agriculture where most of the farms are on a tiny scale. The modern economy--especially in farming--is based on thin per-unit margins. Big scale is the key to making a decent living.

Last year, many articles reported that small farmers were dropping out of hog production due to lack of labor, market risk, disease risk, and a general “it’s not worth the trouble.” The hog sector seems to have gone commercial. However, the return of unemployed migrants to their villages reverses the scarce labor situation that drove “backyard” hog production out. Will backyard production pick up again as labor becomes more plentiful in the villages?

Saturday, December 13, 2008

USDA raises corn estimate

In its December report, USDA raised its estimate of Chinese corn production this year to 160 million metric tons (mmt) from its previous estimate of 154 mmt. In comparison, China's National Grain and Oils Information Center (NGOIC) kept its estimate at 156 mmt.

Nobody knows how much corn is produced in China. It is important not to take any statistics about China too seriously, no matter who produces them. As I understand it, this estimate is a based on crunching dicey preliminary Chinese numbers on provincial grain output and observing the very good weather during the growing season this year. Those provincial numbers don't break out corn separately and are routinely revised downward later. (The number-crunching took this into account, making assumptions about downward revisions in the numbers and the proportion of corn in total grain.)

The danger is that analysts will see this and attribute falling corn prices to China's big increase in corn output. Reports from China indicate the harvest is good but not a bin-buster. A good corn harvest is part of the equation, but not the main driver of the current corn market situation. Global corn prices fell first. The Chinese corn market is partially insulated from the global market and its price trends tend to reflect those in the global market, but only weakly. Weak demand due to a slowdown in the livestock sector and slower industrial use are the big problems driving corn prices lower in China. Chinese farmers are holding on to their corn and other grain, waiting to see if prices get better.

The big corn number does reflect a bigger harvest and a glut of corn this year, but it's important not to expect any statistics about China to be precise. Take your Chinese corn with a grain of salt!

KFC, Wal-Mart Pressured to Cut Prices?

Two articles posted on the China Price Bureau web site December 12, 2008 announced that Wal-Mart, McDonalds, and Kentucky Fried Chicken stores in China are cutting prices before and after the Chinese New Year (January-February). These price cuts are indicators of the serious lack of demand in the Chinese economy right now and possibly reflect desperate government efforts to get things going.

McDonalds and KFC are giving out coupons that give discount prices on chicken nuggets and other items by up to 36%. KFC is giving out a coupon that cuts the price of a 6-piece chicken nugget meal from 11 yuan to 7 yuan during January; another coupon cuts the price of 2 pieces of chicken in February from 15 to 10 yuan. McDonalds is offering prices for meals that are lower than its prices from 10 years ago.

Wal-Mart is cutting prices on groceries, clothing, health products, and furniture. For example, the price of chicken legs is being cut from 22.8 Yuan/500g to 14.8 yuan, a 35% price cut that curiously almost matches the 36% price cut being offered by foreign fast food restaurants. A 4-liter bottle of corn oil is being cut from 72 yuan to 52.9 yuan, a 26% cut. While Wal-Mart’s slogan is “Everyday Low Prices” this is the first time Wal-Mart has announced a big price cut like this since it entered the China market.

Since when is it newsworthy that McDonalds is giving out coupons? Reading between the lines here, it looks like the government has pressured these companies to cut prices in order to keep people happy and stimulate demand. It’s curious that two very similar articles about price cuts by foreign-owned chains would appear simultaneously, and both price cuts refer to the Jan-Feb time period. The Wal-Mart manager spouts rhetoric about “the grim economic conditions,” “preserving customers’ quality of life” and “increasing market demand.” She also mentions that Wal-Mart plans to extend the discounts to appliances; the government also recently announced a subsidy for rural households to purchase appliances which are in serious oversupply.

Thursday, December 11, 2008

China struggles with sinking world prices

As global commodity prices sink, China is struggling to support domestic prices, keep farm incomes from falling and preserve incentives to plant grain next year.

Chinese corn demand is nearly stagnant as the livestock sector slows down. There is another surplus of pork and demand for milk and eggs has collapsed after the melamine incident.

Meanwhile, China has had its fifth consecutive big grain harvest and now is cursed with a flood of grain that has little demand. Prices are on the way down, and farmers are keeping their grain in storage to see if prices get better later.

The government has upped its purchases of corn and soybeans, but what does it do with all this grain in "temporary" reserves? In past years the government subsidized exports of surplus corn or turned it into ethanol. These ideas are being floated again. There is a rumor that an export quota of 5 mmt will be approved. Trouble is, Chinese corn is now much more expensive than corn on the world market. In pre-WTO days, the government just paid a subsidy to the exporters but WTO disallows export subsidies. Now a "VAT rebate" of 13% is given instead, but even with the rebate Chinese corn still couldn't match competitors' prices. In fact, U.S. corn would be competitive in the China market if it were let in. According to an article on the corn price in southern China ports is 1600 yuan/mt, but the estimated delivered price of U.S. corn in southern China is only 1200 yuan/mt, 25% less. A Reuters news report noted that South Korean buyers purchased U.S. corn at $155/mt the other day, the equivalent of less than 1100 yuan/mt.

Another proposal considered in the article is to make the surplus corn into ethanol to burn as fuel. This is how China's ethanol industry was birthed in the early 2000's--to literally burn up surplus corn. However, the article notes that ethanol prices are already well below costs of production and this route would require big subsidies, so this is a nonstarter.

The current market environment is putting China's commitment to free trade to the test. According to Reuters, imported corn is attractive to Chinese feed mills but no one dares to try importing at the risk of attracting the government's ire. The tariff rate quota system set up after China's WTO accession in theory allows a set amount of corn to be imported at a 1% tariff each year, but hardly any has ever been imported. The price differential and high shipping rates didn't favor imported corn imports until now. Potential buyers quoted by Reuters say that they are afraid shipments of corn imports would be caught up in testing and approvals at the border to comply with China's intentionally vague genetically modified food regulations.

Meanwhile, the soybean market is even more of a mess. Since domestic soybeans are more expensive than imports no one wants to buy domestic beans except the government. Many people in the industry favor raising the tariff on soybean imports, but China is again constrained by its WTO commitment to cap its soybean tariff at 3%.

It would not be surprising if Chinese quarantine inspectors find some kind of fungus, pest, or contamination in soybean shipments arriving in China very soon.

Monday, December 8, 2008

Weak demand for corn; prices supported

Highlights from cash corn market report, Dec. 5, 2008

China announced its increase in planned temporary reserve purchases in Heilongjiang Province: Soybean 1.03mmt, corn 1.3 mmt, paddy rice 2.6 mmt.

Latest statistics on corn procurement as of Nov 20, in 10 major provinces (Hebei, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Shandong, Henan, Sichuan, Shaanxi, Gansu) grain enterprises procured an estimated 4.929 mmt of corn, an increase of 3.746 mt from the same period last year. Of that total, 1.188 mmt (24%) was purchased for central reserves, up 0.996 mmt from last year.

The NDRC, grain bureau, finance ministry, and agricultural development bank issued a notice that the national plan for temporarily increasing grain inventories will be raised by 14 mmt, including 7.5 mmt rice, 5 mmt corn, 1.5 mmt soybeans.

Farmers are cautious in selling corn, waiting for the price to go up, so the actual pace of sales is sluggish. Farmers are eager to sell because they need to repay loans by the end of the yaer, but demand among purchasers is not that strong. Industrial users are having to compete with state reserve purchasers. The market for industrial products is not booming so enterprises are taking a wait-and-see approach. Some companies are cutting their procurement prices.

This week the corn price in Manchuria was basically stable. Prices are supported by state reserve purchases. From the point of view of traders and processors, the situation is not so clear. The weather has turned cold, moisture has dropped, so drier corn brings a higher price. Putting all these factors together, prices are more of less stable.

In the Yellow-Huai Rivers North China region the corn price continues to fall. Demand from industrial users and feed mills is low. Contracts for purchases for state reserves have not been finalized and purchases not yet started. Traders are on a “buy as you go” pattern, shipments from grain stations light. The market has been hit by the global crisis, and market’s confidence is low. The livestock market is still weak. Pork costs are still high, so the pork price is not falling. Poultry prices are in a slow decline. There is not a lot of room for further decreases in meat prices. Right now the sow inventory is very big, which creates a big supply of feeder pigs, but farmers are not eager to expand their herds. Farmers are tending to slaughter hogs now. Feed mill purchases are not that great; they are letting inventories fall to a low level.
Northern ports. Since farmers are eager to sell grain, a lot of new corn is coming on the market. The price in southern port areas is also going down. A lot of corn (600-700,000 mt) has arrived at northern ports and been shipped to the south in the last two weeks. The inventories are up, however, and expected to push prices down.

World prices have fallen below Chinese prices. The CBOT corn price is about $3.11/bu, under $3.60 at Gulf ports, and the cash price in South Dakota is under $3. By comparison, the prices received by farmers in northern China are $4.50-$5.50. The price at Dalian is $5.64, and it's $5.86 in Guangdong.

A few months ago there was talk of China exporting corn if the harvest was good. China is piling up surplus corn, but the drop in world prices will probably make Chinese corn uncompetitive unless they subsidize it. Chinese corn imports are probably not on the horizon given the weak domestic demand and big reserves.

Prices (Yuan/mt)
Farm prices:
Heilongjiang: 1230-1300 ($4.56-$4.82/bu)
Jilin: 1350-1400 ($5-$5.20/bu)
Shandong: 1420-1480 ($5.27-$5.49/bu)
Guangxi: 1650 ($6.12/bu)
Wholesale prices:
Heilongjiang, Harbin 1380 ($203/mt; $5.15/bu)
Jilin, Changchun City 1400 ($5.20/bu)
Shandong, Weifang 1510
Liaoning, Dalian 1520 ($222/mt; $5.64/bu)
Guangdong, Shekou port 1580 ($231/mt; $5.86/bu)
Sichuan, Chengdu 1640
Jiangxi, Nanchang 1640
Port prices:
Northern 1500-1520 ($219-$222/mt)
Southern: 1580-1700 ($231-$248/mt)

Saturday, December 6, 2008

Soybeans: Too Much of a Good Thing?

Just a few months ago all the experts saw world food price inflation as a permanent fact of life. Now, following another record harvest and a big reversal in world commodity markets, China is struggling to keep commodity prices from falling.

China had a big soybean harvest this year and demand is soft, so prices are falling. In October the government announced plans to buy 1.5 million metric tons (mmt) of soybeans from northeastern provinces for central government reserves at a price of 3700 yuan/mt. Market prices are still a lot lower. As of Dec. 5, the market price of soybeans in Jiamusi, Heilongjiang Province's biggest soybean production area, was 3400 yuan/mt, 300 yuan below the support price.

Problem: imported soybeans cost only 3100 yuan/mt. Nobody wants to buy domestic soybeans.

On Dec. 3, the government reserve purchase amount was doubled to 3 mmt. (Corn reserve purchases were also doubled to 10mmt.)

Here are the numbers presented by the manager of a soybean crushing plant in Heilongjiang. He estimates soybean production in Heilongjiang is 7 mmt this year. Food use in the province is 380,000 mt, about 1.7 mmt are sent out to other provinces, and about 250,000 mt are retained as seed. That leaves a surplus of about 5 mmt that must be used for oil-crushing. Nobody wants these beans because imported beans are several hundred yuan cheaper. In the manager's estimation, the level of purchases announced by the government isn't enough to support prices. (To put this in perspective, the reserve purchases are about equal to a month's purchases of imported soybeans of 2-3 mmt.)

Chinese policymakers are desperate to keep soybean and grain prices up. First, they want to keep farmers happy. Second, they're worried that if prices crash, farmers will plant fewer soybeans next year.

A number of ideas to narrow the difference between domestic and imported beans are being tossed around by people in the industry. One idea is to raise the tariff on imported soybeans. Raising the tariff is not an option because as a WTO member, China's soybean tariff cannot be raised above its bound level of 3%. (China actually cut the tariff from 3% to 1% for the April-September period when they were worried about short domestic bean supplies.)

Another proposal involves a tax policy I don't quite follow. It seems to involve discounting the cost of beans when calculating a processor's value-added tax or sending rebates only to processors who use domestic soybeans. I don't understand how this works, but it sounds like it also illegal by WTO rules because it discriminates against imports.

Another proposal is to give subsidies to companies that process domestic soybeans. THere are rumors in the industry that the government has given such subsidies to state-owned companies including COFCO and "93 Oils." An operator of a private edible oil company complains that giving subsidies only to state-owned companies gives them an unfair advantage over private ones.