Saturday, January 31, 2009

Grain Conference Reveals Struggles

A National Grain Work Conference was held on January 20. The Grain Bureau chief, Nie Chengbang, noted that there is still downward pressure on prices since domestic prices are still above international prices and China had a big harvest this year. In this situation, Nie said China has to prevent excessive imported grain from flooding into the domestic market. Li Guoyang, from the Academy of Social Sciences, told the meeting that China can't restrict soybean trade because of its WTO commitments, but "corn requires more caution."

Nie noted that the government had supported prices by announcing three rounds of temporary state reserve increases totaling 50.5 mmt. Most recently [on Jan. 12] a fourth round of 8 mmt procurement was announced [3 mmt northeastern soybeans and 8 mmt of southern rice].

A January 12 article lists the four rounds of procurement:
Oct. 20, 16.5 mmt
Dec. 1, 14 mmt
Dec. 24, 10 mmt (corn)
Jan. 12, 8 mmt

The National Grain and Oils Information center's Jan 8 report estimated that the government's soybean reserve procurment will total 36% of this year's production. Officials warned against cheap imported beans being purchased at support prices for State reserves.

At the grain conference, Grain Bureau chief Nie said that the government needs to keep increasing the grain procurement price to keep up with rising production costs. Nie and Li note that China is in a delicate balancing act of keeping grain prices up to preserve production incentives without raising prices so much that they have an impact on consumer food costs. Chinese authorities are worried about a potential grain shortage if low profits erode production incentives.

The conference drew attention to surging vegetable oil imports, which totaled 7.4 mmt in November 2008. Domestic oil crushers face serious woes due to high soybean price supports. Domestic beans are said to cost 3600 yuan/mt, compared with 3000 yuan/mt for imports. Foreign-invested soybean crushers are accused of increasing "monopoly power" as they take advantage of lower-cost imported soybeans to sell oil and soymeal at lower prices than domestic crushers. Mr. Li notes that policies have traditionally focused on farmers, but they now need to pay attention to the interests of processors.

Tuesday, January 27, 2009

China soybean imports jump 32% in 2008

According to Chinese customs statistics,
China’s imports of soybeans for calendar year (CY) 2008 (Jan-Dec):
Volume up 32% (up 6.6 mmt to a CY2008 total 37.4 mmt)
Value up 90% (up $10.35 bil to a CY2008 total $21.8 bil)

China imports soybeans from the U.S., Brazil, and Argentina.
CY2008 imports from Brazil were up only 10% by volume from CY2007 and were essentially the same as in CY2006.
Imports from the U.S. were up 33% (3.8mmt) by volume in CY2008 and rose a cumulative 56% (5.5 mmt) from CY2006 to CY2008.

The average unit value (average CIF price) of soybean imports from the U.S. was up 49% in CY2008, while the unit value for soybeans from Brazil was up 70% and 55% for soybeans from Argentina

in CY2006 and CY2007 U.S. unit values (CIF prices) were close to those of Brazil and Argentina, but in CY2008 Brazilian unit value averaged 14.5% higher than U.S. unit value (Brazilian beans were more expensive), consistent with the shift of imports to U.S. sources.

Sunday, January 25, 2009

Land Transfer Arrangements

Some commentators hailed the third plenum meeting last October as a major land reform that allows farmers to transfer land use rights and establish big farms. In fact, it has been possible to do this for some time.

There are already arrangements to transfer and consolidate land in relatively rich areas of eastern China where people have alternatives to farming. A recent article describes the arrangements and government policies that have supported land transfers for several years.

Cixi is an area in eastern Zhejiang Province that used to be a major rice-producing area but has now morphed into a center for industry. On average, each family is allocated about 2 mu of land (less than half-acre), usually split into multiple plots.

The local government issued a document in 1999 that supported land use rights trading, and the local government allocated 2 million yuan per year from 2000 to 2003 to support land transfer infrastructure and services. A network of 289 village land transfer stations and 20 township land transfer service centers has been established to serve as intermediaries. If a farmer wants to transfer his land use rights to another in the same village, he goes to the station and signs an agreement. If the land is to be transferred to someone from outside the village, he must go through the township service center.

A local official says the system has eliminated a lot of headaches and disputes that arose over land transfers in past years. In 2002, the first year the system was established, 60,000 mu of land rights were transferred, 6.5 times more than in past years. About 58% of the land in the region has been transferred, and about half of that has been accomplished under the new system. 120,000 mu of land is now in large farms of 100 mu or more. There are 450 large household-owned or jointly-operated farms.

The region has formulated a plan to turn the area into a big vegetable production base. It now has a major vegetable exporting business, as well as fruit, poultry, and government-operated demonstration farms to disseminate new techniques.

The land system is connected to the pension system. Most of the younger adults have left farming for nonfarm business or employment in factories, leaving predominantly old people in the villages. Most Chinese farmers are not covered by any pension or social security, but in Cixi there is a subsidized social security system. Between the social security payment and payments from contracting out land, a rural person can get 400-500 yuan per month, enough for basic needs.

Cixi's system is supported by an active nonfarm sector. Such systems may be the future of Chinese agriculture, but it will be harder to implement in poorer parts (i.e. most of) rural China. Farmers have already devised ways to contract out and consolidate their land in places where it's advantageous to do so. The October "land reform" is catching up with the reality of what is already going on and legitimizing it.

Tuesday, January 20, 2009

Milk Safety: Control or Incentives

A dairy industry conference was held in Beijing on January 19 to “discuss” experiences and measures to address food safety problems.

Although the conference was held by the “China Dairy Industry Association,” the head of the Ministry of Agriculture’s (MOA) Livestock Industry Office is listed as the first chairperson, followed by the head of the dairy association. The MOA official’s comments are featured in a paragraph followed by a paragraph of comments by the dairy industry association head. Listing the MOA official first is a reminder of government's centrality in food safety in China. (In many industries, even the “industry association” itself is a thinly disguised government planning bureau.) Representatives of the big dairy companies and regional associations were also present but their views are not revealed.

Among dairy companies there have been two approaches to tightening up their supply chains. Guangming, Sanyuan, Yinqiao, and Flying Goose have concentrated on developing their own large-scale farms. Others (Yili, Mengniu, Wandashan) have been requiring farmers to keep their cows in village “production zones.” Companies have posted 10,000 supervisory or inspection persons--one at every milk purchasing station. Milk is tested at the station, tested again when it enters the processing plant, and records are kept.

The MOA official emphasized a slogan of “Three Firm Unmovables” that include a long list of measures: increase the scale, standardization, and productivity of dairy farming, test milk, track and monitor cattle, make sure they’re vaccinated, collect data, and do a good job on long-range industry planning. The Chinese government’s solution is typically to come up with a slogan and throw more resources, control and planning at the problem.

While the MOA comments imply that farmers need to be bossed around to make sure they tow the line, the industry association leader focuses more on the interests of dairy farmers and their incentives. The milk powder tragedy was rooted in wild fluctuations in dairy prices, chaotic competition in supply chains, and thin margins that encouraged watering down milk. He calls for perfecting the “milk price negotiation system,” strict enforcement of milk contracting regulations, stabilization of milk procurement, and making sure that farmers get a price premium for good quality milk. The comments are brief, but seem to point to the need to ensure that farmers have incentives to produce a good quality product.

Monday, January 19, 2009

China to Iron Out Hog Price Cycle?

The Chinese government has announced a new system for monitoring hog prices that specifies criteria for intervening in markets when prices fall below specified thresholds. They have a list of price indicators that they plan to monitor and manipulate through market interventions. Can China engineer its way out of the hog cycle?

On January 9, 2009, the National Development and Reform Commission and Ministries of Finance, Agriculture, Commerce, Commercial Bureau, and AQSIQ jointly issued a document that announces China’s intention to iron out fluctuations in hog prices. The document affirms the leading role of market forces but with government control.

The new system identifies a list of indicators that the government will watch to assess the state of the hog market. Indicators include live hog, grain, pork, feeder pig prices and hog inventories. The system aims at maintaining specified ratios between prices and minimum inventories of hogs.

The chief indicator is the ratio of hog price to grain price which should go no lower than 5.5:1. The ratio of feeder pig to wholesale pork price cannot go lower than 0.7:1, hog inventories cannot go lower than 410 million and the inventories of breeding sows cannot go below 41 million.

The market situation is designated according to different colors according to the hog-grain price ratio from “green” to “red”. The “normal” range is specified as 6:1 to 9:1. When the ratio goes below 6:1, increasingly active measures are specified for ratios in specified ranges, that include purchasing pork for central and local frozen pork reserves, adding to local live hog reserves, subsidizing processing companies to purchase pork, giving subsidies of 100 yuan per breeding sow, and managing foreign trade by “limiting” imports, “perfecting” the food safety system, and supporting pork exports.

The document emphasizes that statistical indicators will be issued on government web sites to make producers aware of market and disease risks. We’ll see. The Dim Sums blog has been monitoring various ag prices and other indicators like these and they come and go.

Give China’s technocrats credit for getting away from specifying price levels, instead looking at relationships among prices. It’s not likely that government interventions can stop prices from fluctuating. In 2007, the government intervened when prices were “too high.” A year later prices were “too low” and it was time for another round of interventions. Markets are too complex for any government to monitor and control.

Set Wages to Correct for Inflexible Exch Rate?

A Newsweek article "Give Them a Raise" hits on the fundamental problem creating huge economic imbalances that contribute to the financial crisis: the incredibly low wages paid to Asian laborers. The American consumer is being castigated for buying too much, but how can we resist buying when stuff is so cheap? When DVD players are $40 and a computer is $300, who can resist?

Low wages are one of the factors (but not the only one) behind the bargain basement prices that we've come to expect. The article correctly points out that laborers with low wages can't afford to buy much. A century earlier, when the U.S. was the world's factory, we also had figured out how to turn out massive amounts of product, beyond the capacity of the market to absorb it. Henry Ford recognized the problem and raised wages so that his workers could afford the cars they made.

The Newsweek writer, however, provides the wrong prescription. He calls for a pan-Asian minimum wage. This is unworkable and misses the even more fundamental problem of undervalued Asian currencies.

The Chinese wage is not that bad in the Chinese economy. It appears incredibly low in dollars because the exchange rate is fixed at an unrealistic level. A wage of $5 day translates to about 34 Chinese yuan per day in China. In real purchasing power, this is enough to buy about 11 kg. of rice at current retail prices in China of 3 yuan/kg. In the United States, $5 can buy 2.8 kg of rice (avg price reported by of $.81/lb=$1.78/kg). A Chinese worker can buy 4 times as much rice in China with her wages as she could buy in the U.S. with those wages if they were paid in dollars. (Sure, U.S. rice may be better quality, etc., but it can't account for the 4-fold difference.)

The problem is that the exchange rate between the Chinese yuan and U.S. $ has not been allowed to adjust in order to even out the imbalances created by artificially cheap Chinese goods. The prescription of setting artificial wages instead of letting supply and demand do it is the wrong approach. (I won't even start on the impossibility of enforcing an Asian minimum wage!) The root problem is that the exchange rate has not been allowed to adjust to equilibrate supply and demand. (China's foreign exchange reserves continue to swell--now over $2 trillion--despite the economic slowdown.)

We need less interference in markets, not an unending chain of price- and wage-setting.

Thursday, January 8, 2009

Corn Market Report

A 2008 China corn market report from the China Corn Net is mostly pessimistic.

The corn harvest has been big 5 years in a row. This year it rose a lot (but no estimate given). The government announced three rounds of temporary corn procurement for state reserves to support prices (reported here in December). The 30 mmt would be nearly half of the reserves in the Northeast. Afterward, much of the grain would be in state hands. The procurement is boosting prices as processors and traders try to buy up corn. In parts of Hebei Province there is a scramble for grain as traders are competing for the grain while it's cheap. Processors and feed mills are increasing inventories, preparing for post-spring festival normal operations.

Still, demand from industrial users is down. Paper and textile exports (significant users of corn starch) are down. Sugar prices are down, reducing demand for corn sweeteners. In 2008, it is estimated that starch production fell sharply, perhaps by 3%. During the Olympics period (July-August), many small and medium starch producers in Hebei and Shandong Provinces had to shut down [because of environmental, water use, and energy concerns]. Starting in September, production started to fall nationwide and by October production was down at nearly all starch producers. Capacity utilization was about 60% in September and is now under 45%. In mid-December, northeasstern corn starch prices were down to 1630-1650 yuan/mt, about 2005 levels, but the corn price was still at the 2007 level, leading to serious losses for corn processors. Currently processors lose more than 200 yuan on each ton of corn they process.

It is believed that national starch processors' unsold inventory now is 800,000 mt, more than a month's production. They are counting on demand picking up after this month's Spring Festival holiday. Although the government already eliminated export taxes on corn products, there is not much benefit to the starch industry since overseas demand is down.

Demand from the feed industry is also weak, but not as bad as the last couple of years when the hog industry was depressed. Fourth-quarter feed production in November was down 15% year-on-year, December down by a smaller amount. According to preliminary Feed Industry Association stats, 2008 feed production will reach 130 mmt, up 6% from 2007. The pork price recovered, affecting feed production growth, but since hog inventories are relatively high, pig feed grew 10%, but poultry feed growth was about 3-5%.

Economic growth is slowing, so 2009 meat consumption will probably fall. The feed and livestock sectors are not optimistic. In the short term, the chief concern is whether the 2009 hog price will continue falling, especially after spring festival. If the hog sector experiences serious losses, it could slow feed production in the first half of 2009.

The outbreak of avian influenza in Hong Kong 9 days ago was upgraded to serious, and already stopped imports of domestic poultry and other birds from the mainland for 21 days. The HK AI incident is affecting the poultry industry in Guangdong and other areas.

With a surplus of corn, the govt is relaxing corn export controls. But the import price of corn in November was 1300 yuan/mt. The US corn price is clearly lower than domestic prices, and domestic grain processors are more interested in importing US corn. But recently the CBOT price rose and the domestic price fell, narrowing the gap. There could be competitive pressure for imports. Not a few grain enterprises enthusiastically applied for corn import tariff rate quotas allocated for 2009.

According to preliminary customs statistics, Jan-Nov 2009 corn imports were only 41,298 mt, up 76.2%. In November imports were 18,700 mt, already on an upward trend. [However, this is still a miniscule amount. Other reports say this is mostly coming into southern China's border areas from Southeast Asia.]

CNGOIC raises crop estimates

China National Grain and Oils Information Center (CNGOIC) raised its estimates of 2008 corn and rice production in its latest report. It raised its corn estimate to 165.5 million metric tons (mmt) from its previous estimate of 156 mmt. Paddy rice production was raised to 193 mmt from 189 mmt.

The higher corn number seems to validate the USDA's new China corn estimate...or maybe CNGOIC takes its cues from the USDA reports.

Imported Soybeans Spurred by Chinese Price support

In recent weeks, Chinese buyers have been grabbing lots of soybeans in the U.S. market despite the financial crisis. This surge in demand for imports is ironic, given that China had a big soybean harvest. The explanation is that Chinese soybeans are not being sold because the government has supported the price. Imports are flooding in to replace domestic beans.

As reported earlier here, Heilongjiang Province's soybean industry is in crisis. The government sought to support prices at 3.7 yuan/kg. when domestic prices began to follow the downward plunge in global prices this fall. However, China has minimal barriers to soybean imports (the tariff is 3%) and imported soybeans are available at Chinese ports at 3.1 yuan/kg. With such a big price differential, processors don't want to buy domestic beans.

An article posted on the China edible oils net (and on many other Chinese news sites) on Jan. 8, plays up the crisis situation with a nationalistic slant. The article attributes the drop in soybean prices to the American financial crisis, "a cold wind blowing from across the ocean." The price support measure restored market confidence and supported domestic prices and farmers’ profits, "but game strategies adopted by multinational traders brought about another crisis in our province’s soybean industry."

Heilongjiang farmers attracted by high prices early this year, increase production to 7 mmt according to some government statistics, and private associations think it could have reached 8 mmt. Farmers still had some soybeans on hand from the previous year, so there was a huge supply in the region. In December and later, farmers still had 5 mmt of soybeans left to sell. Temporary purchases by the state for reserves totaled only 2 mmt, far less than what farmers needed to sell. With shrinking demand and a surge in supply, downward pressure on prices increased, and the government supported prices.

According to the article, "Since the beginning of 2004, some multinational consortia utilized capital to merge coastal oil processing enterprises that mainly process imported soybeans, providing competition for domestic crushers."

Heilongjiang processors, considering the low-price of "dumped" imported beans, cannot afford to process domestic beans at the state-reserve price. Imported soybeans and domestic beans have a cost difference of 600 yuan/mt. Provincial processors will surely make losses, so they have stopped production. "We’re caught between the high state reserve price and competition from low imported beans, and low-priced products from southern coastal processors [processing imported beans]."

Although the international and domestic soybean markets are weak, at present some multinational grain traders are still importing [a lot of] soybeans. They don't pay the state reserve support price, and moreover they have taken the opportunity to sell their low-priced genetically modified soybeans in our province.

One company representative told the reporter, in general, multinational grain companies buy about 2 mmt of soybeans from Heilongjiang annually. But this year they have not only stopped buying here, they have tightly controlled the port price of imported beans, adding to the pressure on soybeans marketed in our province. At the same time, some of the processors controlled by these multinational grain companies have been selling more soymeal and oil to Heilongjiang. According to estimates, the 600 yuan cost difference between domestic and imported beans is still big even after deducting the 160 yuan transportation cost to Heilongjaing. Feed mills in Heilongjiang have already been buying soymeal from coastal crushers.

This also hurts Heilonjiang’s competitive advantage as a non-GMO province. A lot of GMO soybeans have entered our province, contaminating our soybeans, threatening our ability to stay GMO-free. According to other reports some rogues have been trying to sell imported GMO soybeans in Heilongjiang at the support price. As a result, the imported beans are mixed with domestic non-GMO beans, so Heilongjiang crushers can't claim their oil is non-GMO.

The subtle references reveal lingering suspicions that multinational companies are trying to destroy the Heilongjiang industry. These suspicions came to the fore during an earlier crisis in 2004 when global prices crashed and many Chinese companies were stuck with contracts for high-priced beans.

Tuesday, January 6, 2009

China's Economy: Back to the Future in 2009?

Everybody is talking about China's economic growth for 2009. An article in "China Economic Weekly" gives a run-down of the forecasts. The situation shows a lot of parallels with the Asian Financial Crisis of a decade ago. The article questions whether growth will plummet as it did in 1998.

A GDP growth target of 8% was set at the 2009 central economic work conference held on December 8, 2008. The slogan is "keep 8". There was a similar target ten years ago, and many overseas economists (notably Tom Rawski) suggested that the National Bureau of Statistics was overstating GDP growth to meet the target. The outsiders pointed to declining energy consumption and other indicators that implied to growth in the low single digits.

A China Academy of Social Sciences population and labor economics research institute vice director explained that the 8% growth rate is necessary to absorb surplus rural labor. He says, "if the economy cannot grow at least 8%, we cannot absorb the agricultural labor in the industrial and service sectors, causing big problems for our agricultural income, national development."

National Bureau of Statistics issued economic data showing GDP growth of 9.9% for the first three quarters of 2008, but GDP growth in the 3rd quarter was 9%, lower than forecast. NBS November industrial output growth was just 5.4%, raising differing opinions among industry insiders about whether the 8% target can be maintained in 2009.

The economists in charge of policy seem to be optimistic. The central bank vice director said in a speech two days ago, “Through the effects of the latest central bank surveys, GDP will certainly meet the 8% target, and may be faster.” The State Council Development Research Center Macroeconomic research office director Li Jianwei says his growth cycle model forecast shows domestic stabilization policies will result in 8.4% growth. He claims “8.4% could be low.” The CASS “Economy Blue Book” forecasts 9%. CASS quantitative and technical economics research center director Wang Tongsan says Chinese economy will be a little more than 9%, most likely.

But CASS researcher Yuan Gangming is more pessimistic. "I estimate 2009 GDP cannot reach 8%; it could be 7 or 7.5%. 4th quarter economic growth will be less than 7% because electicity consumption fell, 2009 GDP growth will be 6% at most; If policy adjustments take place in the 2nd quarter, money supply growth reaches 18% or more, growth could be 8% in the second half. But 2009 growth for the full yaer will be 7%."

Some foreign research organizations share Yuan’s pessimistic outlook. Standard Chartered Bank’s latest macroeconomic forecast puts GDP growth for 2009 at 7.5%. Ben Simpfendorfer of the Royal Bank of Scotland forecast is more pessimistic. He says, since consumption, real estate investment, and exports are down, 2009 Chinese GDP growth could be down to 5%; He forecasts just 4% for the first half of the year.

According to the December 26 NBS web site economic data, industrial enterprise profits for the first 11 months of 2008 were up 4.9%, down 31.8 percentage points from last year. Industrial value added was up just 5.4% in November. Normally, China’s industrial value added grows at 14-15%, so this is not a cause for optimism.

The article then asks whether a repeat of the 1998 slowdown is likely. China investment association vice director Zhang Hanya wrote in China Economic Weekly that foreign research organizations and other persons have a pessimistic outlook, mainly based on the 1997 Asian Financial Crisis.

Zhang explains, the Chinese economy grew rapidly after 1992 (14.2% in 1992, 13.6% in 1993) and investment and consumption both were increasing, with serious inflation, and the government started implementing macroeconomic controls. Double digit inflation continued for 3 years until 1996. Inflation was 24.1% in 1994. China achieved a soft landing in 1996.

Although inflation was controlled, starting in 1996, enterprises started experiencing losses, by the end of 1996 13 out of 14 large sectors (such as steel, coal) were experiencing losses. Under such circumstances, in 1998 the government implemented financial policies, issuing bonds of 100 billion yuan annually, reforming the housing market, and implementing urbanization policy, but in 1998 GDP growth was just 7.8%. After 5 years of aggressive fiscal policy, the economy began to recover in 2002.
“But this time it is different,” Zhang told the reporter. From 2002 to 2007 state owned enterprises' profits rose 20-30%, in 2004 the growth was 40%. State owned enterprises have 19 trillion yuan in cash deposits. In this international financial crisis, enterprises are strong. If enterprises can be resilient, the economy can bounce back.

“I estimate enterprises in the first and second quarters can rise up. Steel, chemicals, building materials already started their recovery. In this kind of situation, Our economy will not replicate 1998. It has been on the rise for 5 straight years. I see recovery in 1 year.” Zhang Hanya told China Economic Weekly, 2009 economic growth will start to recover in the first quarter, and will be high by the fourth quarter. “Annual GDP growth could be about 10% for 2009. I think 2010 first quarter economy could be hot again.”

The government announced a 4 trillion yuan economic stimulus package and the subsequent launch of some macroeconomic adjustment measures. The government is committed to stabilizing foreign demand and increasing domestic demand to meet the growth target. A lot of macroeconomic measures have been announced. Since there is a lot of economic inertia, all these policies could heat up the economy in the second half of 2009, according to Zhang.

This aggressive fiscal policy sounds familiar. Caijing economist Shen Minggao pointed out that large increases in domestic investment to increase domestic consumption and stabilize the economy could be the focus in the next two years. If consumption cannot be effectively stimulated, after a couple of years, China’s GDP structure will be even more skewed to investment, possibly exceeding 50% of GDP, the highest proportion in the world. According to World Bank statistics, capital formation was 43.9% of GDP in 2005, higher than all but 5 other countries.

"Only if domestic consumption rises, enterprises confidence can improve. Only if market demand is favorable will companies make investments. Market consumption demand is the most effective wasy to stimulate company investment, and the most suitable way to boost demand growth in the economy,” said Yuan Gangming.

Thursday, January 1, 2009

Loans for Shandong Wheat Procurement up 130% in 2008

The Shandong Provincial Branch of the Agricultural Development Bank of China (ADBC) plans lending of 5 billion yuan in 2009 to support minimum price procurement of 2.86 million metric tons of wheat to stabilize supply. Funds for wheat procurement are to rise 130% from the previous year and the amount procured with those funds is up 125% for a new record amount.

As of November, the total lending for 2008 by the Shandong ADBC totaled 16.57 billion yuan ($2.45 billion) to support enterprises' procurement of 8.26 mmt of grain, 294,000 mt of cotton, 90,000 mt of edible oils to maintain normal procurement and supplies.

Subsidized Bank Loans for Xinjiang Cotton

Statistics from the Agricultural Development Bank of China (ADBC) as of Dec. 20, 2008 show that loans for purchases of cotton in Xinjiang Autonomous Region totaled 28 billion yuan (over $4.1 billion) to preserve profits for 1 million cotton producers in that region.

New cotton procurement in Xinjiang totaled 2.1 million metric tons. According to provincial agriculture department, 2008 sown area of cotton was 24.338 million mu (1.62 million hectares) and production was 2.8 million metric tons, down about 100,000 mt from 2007.

Because purchasing cotton is too risky, the Agricultural Bank of China (a commercial bank) and rural credit cooperatives have withdrawn from lending, leaving the state-run ADBC policy bank as the main source of funds. Given the lack of commercial bank funds, many privately-owned cotton enterprises have gone to the ADBC life line for loans. This financial support keeps farmers profitable.

Fish exports get more expensive

More evidence that China's food export boom may have peaked. As the full cost of Chinese food products is factored in, prices are rising and demand is slowing.

According to a session on aquaculture at the national agriculture work meeting held on Dec. 29, the value of Chinese fish and shellfish exports rose during 2008 due to the rise in primary commodity prices, but the quantity fell.

Fish and shellfish exports totaled 2.18 million metric tons in the first three quarters of 2008, down 0.9%, year on year. However, due to rising prices, the value of fish and shellfish exports was up 9.8%, exceeding 7 billion dollars. The value of exports is expected to exceed 10 billion dollars for the year.

Aquaculture exports have slowed their breakneck pace of growth and company profits have fallen since the second half of 2007 due to a host of reasons: changing economic situation, food safety incidents, rising labor costs, tighter environmental controls, rising raw materials and energy costs, changes in the exchange rate. In this environment, the Ministry of Agriculture held a meeting on international aquaculture trade development in March 2008 to study the trends and quality/safety problems facing aquaculture products, rising costs, and declining competitiveness. Seven measures were recommended. At the same time, AQSIQ discussed negotiations about regaining shellfish access to the EU market and how to help shellfish gain compliance with EU requirements. Actively cooperate with AQSIQ and other relevant agencies to have discussions with the EU, U.S., New Zealand, and other countries. In October nine companies have followed the Zhanjiang Guolian company (a company in Guangdong Province that AQSIQ used as a model to get past FDA inspections) in passing U.S. FDA inspections to get exemption from automatic detention [under the FDA import alert issued in 2008 for fish and shrimp from China].

This year, through various efforts, aquaculture exports have overcome problems, with exports for January-October totaling 2.44 million metric tons (down 0.3%) and value of 8.6 billion dollars (up 11%). Exports in October alone were 259,000 metric tons, up 5.1%. The value of exports in October was up 24% year-on-year.

The U.S. financial crisis is creating a complicated external environment. At the end of November, the Ministry of Agriculture Fishery Bureau held a meeting with experts and officials from aquaculture producing provinces and municipalities, representatives from industry associations and companies to study the situation.

Aquaculture product prices rose during the first three quarters of 2008. Shellfish (37.8%), tilapia (34.9%), and prawns (14%) had the biggest price increases. One of the bright spots was channel catfish, which saw an 800% rise in export quantity and a 770% increase in export value. Large yellow croaker exports were up 11.6% (value up 13.9%) and tilapia exports were up 5.8% (value up 42.6%). The quantity of shellfish (-9.8%) and prawn (-0.3%) exports fell while their value rose.

Another reason for the rise in export value was development of new markets. The traditional markets for Chinese fish exports are Japan, U.S., Europe, Hong Kong, South Korea, and Russia. Exports to Southeast Asia rose 48.7% (85.4% by value) and exports to the EU rose 9.3% (16.3% by value). Exports to African, Latin American countries, Mongolia, Vietnam, Thailand, and other new markets in Asia rose.

This may be more evidence that Chinese exports have been underpriced in the past. The environmental and health costs of the huge ramp-up in fish production for export were not fully taken into account. The U.S. FDA found that potentially harmful veterinary drugs were regularly showing up in tests of Chinese fish and shrimp in 2007 and issued an import alert. European authorities have found similar problems. Chinese authorities have been working with FDA to figure out how to help Chinese companies meet U.S. standards. Now that they are having to meet these standards, products cost more and the demand is not growing as fast.

A secondary effect is that some of these products appear to be getting diverted to other markets (where standards are more lax?) in Africa and Latin America. There has been a similar surge of Chinese food exports to the U.S. that has coincided with Japan's tightening of standards for Chinese products.