Friday, December 31, 2010

Linking Supermarkets WIth Cooperatives

The Ministers of Commerce and Agriculture announced a new campaign to improve city vegetable supplies by pushing forward the "Farmer-Supermarket Counterpart" program. This is an arrangement in which supermarket chains buy fresh produce directly from farmer cooperatives. By cutting out the middlemen (traders, brokers, wholesale markets), farmers should get a higher price and supermarkets reduce their cost. Ideally, supermarkets form stable long-term supplier relationships with cooperatives, sign contracts at fixed prices, provide standards and technical training, and help the cooperatives develop brand names for their products. Retailers exert more control over producers and it becomes easier to trace products back to their source.

Earlier this year it was announced that the "farmer-supermarket counterpart" would be expanded, and another meeting was held in October 2009

The program's Chinese name, nong chao dui jie (农超对接), is hard to translate. Above, I translated it literally, but can also be translated "supermarket direct purchase." Direct purchase has been used by Carrefour for several years, based on its experience using it in France. In the last two years China's Commerce and Agriculture ministries teamed up to encourage use of the direct purchase mode as a pilot program in several large supermarket chains.

Another article today promotes the virtues of the direct purchase program in Daqing, an outlying district of Beijing. Their pilot program was begun shortly after a directive was issued by the Ministries of Commerce and Agriculture in December 2008. One Daqing farmer recalls two years ago selling vegetables on the side of the road to traders who gave them little say over the price and cheated them. Another farmer complained about the high cost of hiring a truck to drive vegetables into the city to sell. Farmers think it will be more convenient and less risky to have contracts to supply supermarkets.

This week's meeting announced that the "direct purchase" program will now be promoted nationwide as a means of ensuring reliable vegetable supplies in cities. The impetus for this is apparently the State Council's order that officials find ways to ensure vegetable supplies to address the rapidly-rising vegetable prices this year.

The campaign is a good example of China's unique approach to addressing economic problems in which government, communist party, and business interests are intertwined to promote new strategies. The term "counterpart" is showing up in more campaigns. This reflects the government/communist party's role as a matchmaker in bringing together scattered farmers (formed into cooperatives) with urban-based companies. One of the chief means of suppporting the program is a series of meetings and trade fairs organized by officials where supermarket chains and cooperative leaders come to arrange deals. Many of the cooperatives are organized by communist party branches, village or township officials, or leaders of agricultural extension stations.

The "counterpart" program is another example of officials attempting to impose socialist/confucian preferences for order, planning, hierarchy and organization from the top down on a society that tends toward bottom-up chaos and complex webs of business relationships.

The program draws on officials' central planning instincts combined with western-style MBA-think. Small farmers are organized into cooperatives and matched up with big supermarket chains. Farmers sign contracts to sell specified quantities of product at fixed prices. The program is being incorporated as part of the "vegetable basket" system in which mayors of cities are responsible to make sure that vegetable supply and demand is in balance. The article speaks of forming big standardized "vegetable gardens" to fill the "vegetable basket". The "counterpart" program will be incorporated into the new five-year plan, a holdover from the days of Stalinist central planning.

But unlike central planning, government is not a direct player. Instead, the goverment plays an indirect role by coordinating, guiding, and nurturing. The five work items that officials are to undertake in expanding "Farmer-Supermarket Counterpart" include:
1. Organize cooperative leaders, clarify responsibilities, form a mechanism for coordinating work of multiple departments.
2. Guide cooperatives to "get bigger and stronger" by encouraging them to form unions and create a set of model cooperatives.
3. Push forward standardization of cooperatives' production, record-keeping, and traceability systems.
4. Use various methods to match up supermarkets and farmers, "guide" farmers and supermarkets to enter into long-term supply relationships.
5. Give more policy support (subsidies for cooperatives to build storage, logistics, and product testing facilities).

The strategy entails channeling fresh produce business from wet markets into supermarkets. The Minister of Commerce said the 12th five-year plan calls for supermarkets in medium and large cities to double the share of their sales from fresh produce to 30 percent.

The direct purchase program faces challenges. In Daqing, the reporter estimates that only 1 percent of the city's supermarket sales of vegetables come from the pilot direct purchase program. One problem is that local vegetables are only available during the summer and early fall. The program is said to be more successful in the south where the growing season is longer. There are still few farmers involved in cooperatives in Daqing. The coops are small, they have to provide test results for products and they must acquire business licenses. Cooperatives are being encouraged to unite to sell their products together. Experts recommend that officials make it easier to get business licenses and provide financial and technical support to cooperatives. The Daqing reporter says he was told that the program has made much faster progress in Shandong and other regions.

Wednesday, December 29, 2010

U.S. DDGS Antidumping Investigation

A bag of DDGS from a Chinese ethanol company in a Jilin Province feed mill

China announced an antidumping investigation against distillers dried grain with solubles (DDGS), a feed ingredient imported from the United States. DDGS is a byproduct of the production process for making ethanol. Chinese feed mills began importing DDGS from the U.S. in significant quantities in September 2009. Chinese customs statistics show that imports during the 12 months ending in October this year totaled about 3 million metric tons (mmt).

(To put this number in perspective, China's imports of corn were about 1.5 mmt during that period and imports of soybeans were about 50 mmt. China uses roughly 70 mmt of corn for feed each year.)

The interest in importing DDGS is reflected by the many queries posted on Chinese electronic discussion boards seeking information about DDGS and how to import it. According to Chinese web sites, DDGS is a byproduct of the fermentation process that produces ethanol and carbon dioxide from starch. It is high in protein, fat, fiber, amino acids, and vitamin B. There is also a product called distillers' dried grain (DDG) from a simpler production process that does not add soluble materials and has lower energy and nutrient content than DDGS.

Nutritional value of US DDGS: crude protein content 26% or higher, crude fat 10% or higher, .85% lysine, .75% phosphorus. It can replace high-protein ingredients like soy meal, fish meal, and additives. It also has an "unknown" factor that promotes animal growth. It can compose up to 30% of feed for livestock, poultry, and aquaproducts, and it can be fed directly to ruminant animals.

Some distilleries in northern China and Anhui Province produce DDGS or DDG. These include processors of drinking and pharmaceutical alcohol as well as a handful of factories making fuel ethanol. Chinese web sites point out that protein and fat content of U.S. DDGS is more predictable than that of Chinese DDGS which is made from a wide variety of raw materials. One post says the most important advantage of U.S. DDGS is its lower mycotoxin content. The golden-brown color of U.S. DDGS is preferred to the dark-brown and highly variable color of domestic DDGS. Moreover, a post on says, "the price for the US product is not high...contract terms are flexible, quantities available are large." Chinese DDGS mostly is produced in northern China and is costly or impossible to ship to southern China.

The investigation of U.S. DDGS appears to be another "tit-for-tat" trade action in which China chooses an important U.S. export to retaliate against some U.S. trade action. The Bloomberg story links the DDGS antidumping to the U.S. complaint to the WTO against imports of Chinese wind-energy equipment. The Wall Street Journal article draws similarities to the antidumping move against U.S. chicken earlier in 2010 which was linked to a U.S. limit on tire imports.

This move toward limiting U.S. DDGS appears calculated as a retaliatory measure, not a protection of Chinese farmers or industry. Reducing DDGS imports helps virtually no one in China (except a handful of ethanol-producing companies who get supplementary income from selling DDG/DDGS as a byproduct). It's hard to see how Chinese farmers are hurt by imports of U.S. DDGS. Chinese corn prices have risen about 20% in the last year. Chinese officials have in recent years moved to limit domestic fuel ethanol production (and consequently DDGS output) due to pressure on limited grain supplies. Limiting imports of DDGS will hurt feed mills, contribute to upward pressure on livestock producer feed costs and help boost meat prices even higher.

According to market reports over the past year, rising Chinese corn prices were the motivating factor for the import of DDGS. Corn is in short supply in China and reducing DDGS imports will tighten the supply of feed raw materials even more.

The only major benefit of moving to limit DDGS imports appears to be to launch a trade skirmish by undermining one of the success stories in U.S. agricultural exports to China.

Agricultural trade conflicts like this will become more common as the Chinese government tries to ratchet grain and oilseed prices upward year after year. Ever-rising domestic grain, oilseed and meat prices combined with an appreciating Chinese currency will push Chinese agricultural commodity prices above international prices, making it more attractive to import agricultural commodities and products made from them. Then, whenever China wants to throw up a protective barrier it can point to low grain and oilseed prices in the U.S., blame the low prices on U.S. farm subsidies (this was the case with chicken), and then announce an antidumping action.

This strategy of linking low agricultural prices to subsidies may work until the world discovers that China is now itself one of the world's leading farm subsidizers.

Monday, December 27, 2010

Policies Creating Inflationary Pressure in Rural China?

Today's Peoples Daily features an article about the government's policy of putting more money in peoples' pockets to boost domestic consumption. This year's macroeconomic policy mantra is to change the structure of the economy by expanding consumer demand. The article says that a "bulging money bag" is the best way to improve peoples' livelihood, boost consumption, and allow "more people to enjoy the results of development."

The article cites four major ways that the government has put money in rural peoples' pockets: raising minimum wages, raising minimum purchase prices for grain, increasing farm subsidies, and increasing loans for farmers. With all this extra money being poured into rural peoples' pockets, it's no wonder food prices are going up.

The central government has pressured provinces to institute, increase, and enforce minimum wages. All provinces have now set minimum hourly and monthly wages. Shanghai has the highest monthly minium wage, at 1120 yuan ($167), and Beijing has the highest minimum hourly wage, at 11 yuan ($1.65). Hainan raised its minimum wage 37%. In the second quarter the National Bureau of Statistics estimated that there were 157.23 million rural migrants working away from home. That was 6.26 million more than in 2009.

Rural people still get most of their income from planting crops. So raising grain prices is another important measure for raising rural incomes. This year wheat prices and early-season rice prices were raised about 3.5%, middle- and late-season long-grain rice price was raised 5.4% and short-grain rice price was raised 10.5%. The cumulative increases in minimum grain prices over the last four years range from 25% to 40%.

The government has raised farm subsidies by more than 100 billion yuan since 2006. Subsidies doubled in one year (2008) to compensate farmers for rising fuel prices and other input costs. This year China's four biggest farm subsidies totaled 135 billion yuan, over $20 billion, and equal to or greater than U.S. farm subsidies. The average subsidy per farm family was up 17% this year, to 320 yuan ($47)

New subsidies are being added. Pilot seed subsidy programs for highland barley, peanuts, and potatoes were begun. There are also subsidies for planting trees and preserving wetlands. A new grassland preservation subsidy will be introduced next year with funding of 13 billion yuan.

The fastest-growing segment of rural income is compensation for land occupied for nonfarm uses. Provinces have been told to come up with new mechanisms for determining compensation and adjusting it "scientifically" every 2-to-3 years. The tax revenue from the rural land occupation tax is supposed to be "tilted" toward rural and agricultural uses that will benefit farmers.

Another way to boost farmer income is by loaning them more money. Rural banks and credit cooperatives have been "encouraged" to make more micro loans to farmers. In remote areas of 12 western provinces, financial institutions get subsidies for operating costs for rural loans. This year the Ministry of Finance will give awards of 2% (of the loan value?) to financial institutions that raise their rural lending by at least 15%. There are a lot of village and town banks, mutual lending cooperatives, rural lending companies, and loan guarantee companies being set up to boost rural lending.

The article doesn't mention dozens of other rural subsidies, including subsidies for school fees, medical care, infrastructure construction, water projects, financial awards to agricultural counties, and subsidies for standardized farms.

For decades rural earnings and prices were artificially depressed; now the government has decreed that rural wages and prices shall all be artificially raised. Trouble is, when you pour money into an economy through loans and subsidies or raise wages and prices by decree it creates inflationary pressure instead of raising the real earning power of people. The government's decree is boosting costs of labor, land and commodities and is in large part responsible for rapid rise in agricultural and food prices in China this year.

Sunday, December 26, 2010

Less Policy Purchases of Grain This Year

Vice Director of the Grain Bureau, Ren Zhengxiao, said at a recent conference that policy-type purchases of wheat, rice, and corn were down 66% year-on-year for the January-November period of 2010. Since grain prices were rising this year authorities didn't have to buy as much grain at support prices.

State-owned enterprises still were the main purchasers of grain. They bought 109.6 million metric tons (mmt) of grain during January-November, accounting for 46% of all purchases. While the amount of policy-type grain purchases was down this year, procurement at minimum prices still accounted for nearly one-third of purchases.

By my calculation this means total purchases of grain for January-November totaled 238 mmt, over 40% of grain production (540 mmt). This implies still over half of grain is used on farms and never enters the formal marketing system.

State-owned enterprises took advantage of rising prices to sell off grain they had stockpiled in 2009. Sales of grain totaled 170 mmt for January-November, 23 mmt higher than last year.

This situation "reduced losses and increased profits" for grain enterprises. Total profit for January-November was 4 billion yuan.

However, the article says that the profit situation has deteriorated since October, especially in Heilongjiang, Jilin, and Henan provinces. Inflationary expectations heated up, some "structural conflicts" contributed to grain price increases in production areas, and state-owned enterprises faced "relatively big market risk."

Some analysts, says the article, think this announcement reflects a dilemma faced by the government. Soaring prices help companies make profits (by selling off inventories), but the rising prices also "pose a threat to government food reserves."

China's High-Cost Era

An article from the Xinhua News Service suggests that the rising price of vegetables is a signal that China's economy is entering a new era of high costs.

According to Sun Jitao, one of the 30,000 or so traders at Beijing's Xinfadi wholesale market, business is getting worse for vegetable traders. By noon, Sun had sold about a third of the vegetables from his truck. He may make 1000 yuan in a day but he has to split it with seven partners. With the rising purchase cost of vegetables, plus packing, transportation and labor, it's not uncommon to lose money on a truckload.

Another trader named Wu selling home-grown ginger complains about the rising cost of production. She said laborers were paid about 7 yuan per hour last year, and this year they can't find workers at 9 yuan per hour (about $1.30). She says it now costs over 8000 yuan to plant one mu of ginger.

She says recent government policy measures led to a drop in ginger prices. She thinks people who bought ginger at the high price a couple of weeks ago, thinking it would keep rising, might be losing money now.

The government's recent measures included canceling highway tolls for trucks carrying fresh produce. Xinfadi reduced the admission fee for wholesalers. These measures contributed to a decrease in prices, but most people think this will be temporary.

According to Ms. Wu, “The state recent measures helped lower some of our costs, but we don't think these are the main factors affecting ag product prices; in the future prices will keep going up.”

One economist from the Academy of Social Sciences said agricultural price increases are due to rising input prices and costs of labor and land. A Beijing University economist sees a big change in China's economy as it faces increasing costs of land, labor, energy, and raw materials.

According to the article, experts say that as China enters this high-cost era it must raise productive efficiency in all industries. The Beijing University economist calls rising costs and improved efficiency "two wheels of the cart," and with the "stagnant wheel" running ahead of the other one, China faces the threat of stagflation.

Thursday, December 23, 2010

Fortified Food Policy

China has managed to fill peoples' stomachs, but many people don't get enough vitamins and minerals. Over the past decade, China's leadership embarked on the next stage in food policy by formulating plans to improve the population's diet quality.

There has been a national nutritional improvement project since 1995. In 2001, an “Outline for China’s Food and Nutrition Development for 2001-2010” was formulated and a National Nutritional Improvement and Development Center was set up under the powerful National Development and Reform Commission. [Ironically, my computer detected a virus when I visited the nutrition center's web site just health is a separate issue...] Wen Jiabao launched an “Advance Public Nutrition Improvement Activity” in 2006 as part of the 11th five-year plan.

According to an interview with a Professor Yu Xiaodong on the nutrition improvement center's web site, the Chinese public generally lacks iron, zinc, and calcium, vitamins A, B1, and B2, folic acid, nicotinic acid and other micronutrients. Currently the only nutritionally-fortified foods widely used are infant food supplements and enhanced [iodized?] salt. The Professor says that fortified and functional foods account for 70%-80% of the food market in the United States but only 5% in China.

Fortified flour was the first product to be promoted in 2001. The fortified food strategic plan includes flour, rice, infant formula, edible oil, salt, and soy sauce. Now officials are stepping up their advocacy of fortified foods. Earlier this year a campaign to promote fortified rice was initiated with a State Council Press Conference in Beijing to be followed by a series of province-level campaigns over three years in Henan, Fujian, Sichuan, and Guangdong.

This campaign, in typical style, features government-sponsored associations working with companies and community organizations to promote fortified rice. The 3-hour press conference explained the benefits of fortified foods and standards, then presented awards to Beijing's first set of fortified rice-selling companies. It also described "donations" of fortified rice to China's Red Cross and a donation of rice to an international school in Beijing. The school program's slogan, "Balanced Diet, Smart Growth," appears to be calculated to appeal to Chinese parents' obsession with producing a smart kid. Also explained was a strategy of setting up "Beijing Healthy Family Unions."

Professor Yu cites high prices as the main constraint on the spread of nutritionally-fortified rice. He says that companies typically use expensive high-grade rice for fortified products, which costs more and discourages many people from buying it. He says that, after learning this fact, "we need to coordinate with companies" to recognize the diverse demands of consumers and offer fortified products that use lower-grade rice that will appeal to price-sensitive consumers.

Professor Yu says the market for fortified foods will grow as peoples' living standards rise and they become more aware of nutritional issues. But of course, he says, the industry needs guidance on policy and technology in order to help achieve real improvements in the public's health.

Addressing Agricultural Pollution...any ideas?

Earlier this week, a university in Beijing held an internal seminar to discuss potential policy measures to recommend that might address China's massive problems with agricultural pollution. I wasn't there and don't know what was actually discussed but the notice about the meeting reveals that the seriousness of agricultural pollution has gotten the attention of policymakers.

The notice describes how agricultural pollution has gained prominence as a problem. In 2005, the State Council's Development Research Center found agriculture was responsible for one-third to one-half of pollution in China and identified agricultural pollution as a factor affecting the country's sustainable development.

In February 2010, the government's first census of pollution sources showed that agriculture is an even bigger source of pollution than previously thought. The census showed that agricultural sources emitted 57% of nitrogen and 67% of phosphorus. The data showed that agriculture is already the largest source of water pollution. The sources of pollution (fertilizer, pesticides, animal waste) varied by region. In regions with a higher level of agricultural industrialization, emissions were higher. Overall, eastern regions had the most serious pollution problems. According to the announcment, crop pollution is mainly from use of agricultural chemicals; livestock pollution comes mainly from waste created by large scale concentrated farms and the use of feed additives.

The meeting announcement notes that policy thinking on agriculture has started to incorporate environmental and sustainability concepts. In 2006, the "No.1 document" on rural policy aimed to create a "resource-conserving and environmentally-friendly" agriculture by 2020. In 2007, a communist party document added "ecological civilization" to the existing "three civilizations" of the Chinese people (material, spiritual, and cultural). The 2007 "No. 1 Document" emphasized the "multifunctionality" of agriculture. In 2008, the communist leadership's third plenum reiterated the 2020 resource-conservation environmentally-friendly goals in the context of pursuing the communist holy grail of "modern agriculture."

The meeting announcement says there has been a shift in policy thinking, but there is still no "clear policy roadmap." The elliptical language seems to point out that environmental objectives collide with the overarching food security objective (growing enough food to avoid relying on imports) and the interests of industry ("capital") in pursuing no-holds-barred agricultural industrialization. The announcement asserts that reliance on technology is not sufficient for solving the problem.

Against this background, the organizers of the meeting suggest that now is the time to raise policy measures that might be incorporated in the twelfth 5-year plan about to be launched. The discussion was set to include a number of topics. Pollution from agricultural chemicals, food safety risks were to be reviewed, followed by discussion of advantages and disadvantages of control measures and mechanisms, the connection between pollution and food safety problems, the practice of ecological agriculture, integration of traditional and modern agriculture, and international experience with these problems.

Chinese agricultural policy is becoming even more complex and fraught with contradictions. Objectives include producing as much food as possible, raising prices and incomes for farmers, keeping prices low for consumers, keeping food safe, watching out for the interests of small farmers, and promoting concentrate and full-speed industrialization of agriculture. Now, add to this reducing pollution from agriculture. It would be nice if China could feed its huge population while simultaneously reducing chemical use and waste, but in reality there will have to be some tough choices.

I was told that an economist advised the State Council earlier this year to import more pork to ease up on the pollution from pig farms. I suspect that idea wouldn't go over well in board rooms of China's meat companies, all of whom want to be the next Smithfield. Nevertheless, as discussed on this blog recently, there is a quiet wave of regulations being introduced by provinces that restrict where hog farms can be located, which reflects these pollution concerns and should be a constraint on pork production.

Wednesday, December 22, 2010

69% of Crop Residues Utilized

A truck loaded with corn stalks

China has managed to feed a huge number of people on a limited resource base by intensively using its biomass for feeding animals, fertilizing crops, and feeding household cooking stoves and heaters. When rural villages were poor and isolated, people used whatever energy sources they could find nearby and recycled everything--byproducts, manure, and biomass like crop residues--stalks, husks, vines, and leaves.

Crop residues, however, are no longer an attractive source of energy when fossil fuels are available, so a lot of biomass gets burned in the fields. Chinese officials are now trying to simultaneously promote fossil-fuel-powered agriculture by subsidizing agricultural mechanization while also promoting the utilization of biomass for feed, fertilizer and energy.

The government has had a campaign to utilize the residues from crop production at least since the 1990s, and there seems to be a renewed emphasis now that China is grappling with energy issues. Authorities are campaigning to encourage utilization of the energy in crop residues as animal feeds, alternative energy, and raw materials for manufacturing.

As part of this campaign, the Ministry of Agriculture has been carrying out a detailed survey of crop residue utilization over the past year. The results of the crop residue survey were announced last week in a brief article which announced that 69% of crop residues were utilized. The total crop residues available were estimated at 687 million metric tons (mmt) (slightly less than the commonly-cited figure of 700 mmt). Of that total, 265 mmt is corn stalks, 205 mmt rice straw, and 150 mmt wheat stalks. Presumably the balance of 67 mmt includes material from potatoes, cotton, and rapeseed which were also identified as target crops for the survey.

The use of crop residues (see chart) includes feed use 211 mmt (30.69%); energy use 129 mmt (18.72%); 102 mmt fertilizer (14.78%); use as a base for growing mushrooms 15 mmt (2.4%); and use for making paper is 16 mmt (2.37%). The energy use presumably includes use as fuel for cooking and heating in village homes as well as new commercial "alternative" energy projects using biomass.
Chart by dim sums using data from China Ministry of Agriculture

The State Council told the Ministry of Agriculture to formulate standards for crop residues and to carry out the survey in cooperation with local agriculture departments. They apparently have been working on it since 2009. The purpose is to speed up utilization of crop residues in accordance with each region's special characteristics and resourcs. After meeting the needs of livestock feeding, the ambition is to make reasonable use of crop residues for commercial energy production.

This is all part of a massive effort to re-engineer energy use in rural China. The campaign to subsidize agricultural machinery is described as an explicit effort to replace animal and human labor with machines. Thus, the energy for farm work comes from fossil fuels replacing grains and biomass (that fed the workers and animals) produced locally. Water buffalo and other draft animals are probably the main consumers of the 211 mmt of crop residues used for feed, so the reduced number of animals reduces demand for crop residues.

A related campaign promotes conservation tillage--ploughing the residues back into the soil. Another related campaign subsidizes construction of pits to make methane gas from pig manure for cooking and electricity.

Saturday, December 18, 2010

Foreign Companies and Grain Politics

China's imports of agricultural commodities are rising. It's only natural that a country with over 20% of the world's population and 9% of the world's land will import food. However, the process of China's transition to an agricultural importing nation is complicated and fraught with potential conflict. There are a lot of vested interests in China that don't like it. The growing presence of multinational companies that do not have a national identity is a threat to the emerging nationalistic alliance between big Chinese companies and government that is emerging as China's strategy for carrying out policies and development plans.

A steady stream of articles in the Chinese press express fears of foreign companies monopolizing the Chinese markets for agricultural commodities. This week another article, "Foreign Investment Penetration Expanding; Domestic Companies Face Severe Challenges", on the web site offers some more insights about the Chinese narrative about the perceived foreign company threat.

The author cites a surge in foreign companies entering the grain and oils processing sector dating to China's WTO accession [in December 2001]. In 2009, there were 444 foreign companies with over 71 mmt of processing capacity. The author describes a pattern in which foreign companies first targeted the soybean-crushing industry after China's WTO accession and are now using their profits from that industry to branch out into other kinds of grain processing, as well as up-stream and down-stream activities to control the entire industry chain from seeds and fertilizer through processing, logistics, marketing, and retail.

Particularly troubling for the author is that Wilmar, a Singapore company, has begun purchasing rice and wheat from farmers in the last two years. The company has formed arrangements with local grain companies and warehouses to buy raw grain and pays a premium price. [The website ran two very similar articles this year describing Wilmar's business in Henan and Jiangxi.] The report says Louis Dreyfus has begun purchasing wheat recently too. The report complains that the foreign companies have plentiful cash and aren't worried about short-term profit since their objective is to grab market share. This puts the Chinese companies at a serious disadvantage.

The report acknowledges that the premium prices paid by foreign companies are good for farmers "in the short run," but in the long run the author views it as unfavorable for the stable development of the grain market. The presence of foreign companies "makes it hard for the state to control grain markets."

The report recounts a commonly-repeated story about how foreign companies grabbed control of the soybean processing industry. In 2004, some companies allegedly "used futures markets to drive the soybean price higher." After Chinese companies had bought soybeans, "the foreigners then drove the price back down, bankrupting half of the Chinese edible oil companies." The foreign companies then stepped in to buy up the Chinese companies.

The report says that after gaining control of the soybean industry, the foreign companies then "raised prices several times, one of the factors contributing to China's increasing inflation in recent years."

The report warns that foreign companies are now using their profits from the vegetable oil industry to begin spreading their dominance to rice and wheat markets. Supposedly, Wilmar has formed a strategic plan that began with operations in Jiamusi, an important rice-growing area in Heilongjiang Provinces, and plans to radiate out to the entire country. Wilmar has begun rice business in Jiangxi and Anhui and is believed to be preparing to expand into Hunan, "basically completing its nationwide layout."

The author warns that the "ABCD" companies (ADM, Bunge, Cargill, Louis Dreyfus) are forming entire industry chains "with the objective of monopoly control." He warns that foreign seed companies are developing rice breeds and a type of corn seed developed by a foreign joint venture is now used for about 10% of the corn plantings in Jilin Province. Wilmar has set up a fertilizer company in Shandong.

The report continues by citing examples of how the big multinationals have dominated the soybean market in Brazil and alleges that Argentina, after adopting American genetically-modified soybean seeds and pesticides "lost control of its soybean industry in less than 10 years."

Finally, the report plays the "food security" card. Grain, the author says, is a strategic commodity, basic to peoples' living standard and social harmony. In the long-term, foreign companies' control of the grain market is not just an eating issue, it is a political issue.

Friday, December 17, 2010

"Change" and "Stability" for 2011 Economy

This month Chinese leaders are discussing macroeconomic policies for 2011. The central economic work meeting concluded on December 12th and the Price Bureau held a meeting on December 15th to talk about price policies.

The two key words at the economic work meeting were "change" and "stability." "Change" represents the change in development mode the leadership is trying to engineer during the 12th five-year plan period which begins in 2011. "Stability" refers to keeping inflation under control.

The "change" in China's approach to economic growth means shifting from a laser-like focus on growth any way possible as fast as possible to a more balanced approach that narrows differences in income, shifts from direct government investment to guiding private investment, and promoting domestic demand and consumption. The plan is to use government subsidies, subsidized bank loans, establish special government funds and give tax cuts to induce companies to invest in projects that will benefit poor people, encourage small and medium enterprises, and raise incomes. Higher incomes are expected to increase domestic consumption and wean China off its reliance on exports and fixed investment for growth.

This most likely means more beneficial policies for agribusiness companies that are believed to help poor farmers. Trouble is, these inducements result in excess capacity, creating a whole new set of problems and chaos.

Meanwhile, the government is flustered over signs of inflation. There will be "prudent growth" in the money supply. Growth in the M2 measure of money supply is targeted to be 15%.

The price bureau meeting celebrated the government's success in keeping prices basically stable during the last 5-year period and also discussed the priorities of change and stability for the next 5-year period.

While the Chinese government says it is committed to an economy guided by the market and letting the market set prices, the government constantly intervenes to control and regulate prices. This is reflected in the price bureau meeting where officials set a long list of tasks for "comprehensive control measures" to maintain "basic stability of prices." Price stability is elevated to a key task for 2011.

Maintaining the supply of agricultural commodities is the first priority listed for 2011. Officials are supposed to promote production and distribution of farm products by raising minimum prices but also prevent poor people from being hit by rising food prices. Vegetable production and fertilizer are singled out as priorities.

Officials are to prepare price control measures, although nothing specific about what this means. Among the strategies are increasing reserves of key commodities and setting up price adjustment funds.

There is a lot of talk about stepping up price monitoring and early-warning systems. Yet, as pointed out in another blog posting this week the "price information center" web site has stopped posting price data on its web site this month.

There is no "early warning" about the pork market, for example. Private newsletters say hog markets are being hit by disease epidemics in a number of areas, farmers are killing hogs early and prices are starting to go down. This could affect pork prices in future prices as well (this happened last year), but the government says nothing about it.

Wednesday, December 15, 2010

Mechanization Achievements Touted

Mechanized agriculture has been a sort of holy grail for communists since the days of Stalin. China's Ministry of Agriculture is still obsessed with mechanization, viewing it as an achievement of modern agriculture. Mechanization frees up land that would be used to support draft animals and laborers, substituting petroleum-based energy for plant-based energy.

On December 14, the Ministry released its report on achievements in agricultural mechanization this year, breathlessly proclaiming that China has entered a new era of mechanized agriculture as human and animal power are replaced by machines in an historic transition. Mechanization has become "the main force in agricultural production and resistance to disasters," playing a role in China's seven straight years of bountiful harvests.

This year "big breakthroughs were made." This year 15.5 billion yuan was budgeted for machinery purchase subsidies, an increase of 2.5 billion yuan, for purchase of 5.25 million pieces of machinery benefiting 4 million farmers. The total power of ag machinery increased 5.1% to 920 million kilowatts, the structure of equipment was improved. Conservation tillage projects received 300 million yuan in investment, 370 million yuan was allocated for establishing a grassroots mechanization system. A total of 407 million yuan was used for subsoil soil preparation subsidies.

Sowing and harvesting of crops was 52% mechanized this year, up 3 percentage points. Transplant of rice seedlings is 20% mechanized, up 3 percentage points; mechanized harvest is over 60%, up 5 percentage points. Nationally, mechanization of corn harvest has reached 25%, up 8 percentage points. In Shandong the corn harvest is 71.5% mechanized.

Agricultural departments organized machinery that somehow overcame drought, "resisted" low spring temperatures, sandstorms, typhoons, and hail.

Mechanization sped up the summer wheat harvest by four days, allowing faster planting of double-cropped corn after the wheat was harvested. In the fall, 29 million pieces of machinery were organized to harvest the crops at high speed with high quality and complete fall seeding, an important contribution to this year’s abundant harvest and laying a good foundation for next year’s grain production.

Cold Chain Development

China has made a lot of progress in improving farm productivity to the point that farmers encountered "hard to sell" problems in the 1990s and 2000s.

Now China is moving to the next stage in developing a modern food system by encouraging marketing infrastructure and management systems. The State Council unveiled a logistics plan for agricultural commodities in July that sets targets and key projects for agricultural and food cold chain development. By 2015, the plan sets targets for 20% of fruits and vegetables, 30% of meat, and 36% of seafood to be marketed through cold chain transportation and storage chains. This is expected to reduce spoilage and increase interregional trade in food commodities. The plan sets targets for spoilage losses of 15% for fruits and vegetables, 8% for meat, and 10% for seafood.

Seven main tasks:

1. Spread modern cold chain logistics concepts and technology
2. Improve the cold chain logistics standard system
3. Establish a cold chain logistics and distribution system for key products and regions
4. Speed up and nurture third-party logistics enterprises
5. Strengthen cold chain logistics infrastructure facilities construction
6. Speed up cold chain logistics equipment and technology upgrades
7. Push forward informatization of cold chain logistics

According to the plan’s requirements, central and local governments must strengthen and coordinate, improve policy, integrate resources, increase investment, encourage innovation, cultivate personnel, strengthen laws and regulations, support healthy development of the agricultural product cold chain.

Provincial officials are starting to implement the plan. In November, Sichuan's commerce department announced that developing cold chain systems was a key part of its work in 2010. Sichuan intends to attract mature foreign companies and nurture large model logistics companies.

A month later, Sichuan announced that a big meat logistics distribution center is being launched at an industrial park associated with the airport in Chengdu. The company has investment of 530 million yuan and will have 55,000 metric tons of storage capacity. The meat logistics company is being launched jointly by the Sichuan Commerce Group and the Sichuan State-Owned Assets Management Company. The company's main business will be pork but it will also deal in other meats, poultry, seafood, and frozen foods.

The promotion of frozen meat trade is an important and challenging development. Chinese consumers are accustomed to buying fresh meat, which keeps most pork markets very localized. Part of the commerce ministry's long-term plan is to promote interregional trade in frozen pork to eastern cities. Potentially, this could also open the market wider to imported frozen meat. Interestingly, the November announcement was made at an "American Food Entering Western China" meeting.

However, Chinese authorities probably have ambitions for using this new system to export. The Sichuan distribution center is at an industrial park near the airport that is designated as an inland port.

Monday, December 13, 2010

China food prices up 15%-to-25%

The China Price Information Center is supposed to monitor and report prices to inform policymakers, consumers and businesses about price trends. Normally they post average food prices for about 40 items for three 10-day periods about a week after the end of each month. Now there is more interest than ever in Chinese food prices, so what does the China Price Information Center do? They stop publishing price information. As of December 13, the web site has only posted an abbreviated report for the first 10 days of November with 8 prices: tofu, three kinds of sugar, salt, soy sauce, vinegar, and milk.

This is a reminder of the unique role of statistics in China: they are for leaders to know what's going on (although even people in government don't get accurate statistics and discuss among themselves which numbers to believe). Statistics are not for the public. They are only released to the public if they show good news or agree with some other story the leaders want you to hear.

The National Bureau of Statistics (NBS), however, has continued to release price information and their data show big increases in both farm and retail food prices. Since February 2009 NBS has been reporting average prices for 10-day periods. My calculations based on the November data show that most farm-level and retail food prices are up about 15%-to-25% year-on-year.

Here are some Statistics Bureau farm and retail prices with year-on-year changes from November 2009-November 2010:
Medium-grain rice 24% (retail up 23%)
Long-grain rice 17%
Wheat 11% (retail flour up 11%)
Corn 16%
Soybeans 13% (retail soy oil up 22%, tofu up 6%)
Rapeseed 18% (retail rape oil up 22%)
Peanuts 27% (retail peanut oil up 13%)
Cotton up 76%!
Live hogs 19% (retail pork belly up 16%)
Beef cattle and retail beef up 2% (not everything is up)
Sheep and retail mutton up 15%
Live chicken and retail frozen chicken up 16%
Retail duck up 12%
Retail eggs up 27%

This is not simply a reflection of "inflation," that is, it's not just a macroeconomic phenomenon. There have been many disruptions in ag markets due to weather, disease, and cycles. Every commodity has a different pattern of price increase over the past year. I will just show two examples, again based on National Bureau of Statistics data.

Pork markets were depressed during May 2009 and February to June of this year. Early this year, following the spring festival, there was an oversupply of pork and many pig disease outbreaks. Farmers began slaughtering hogs early and selling sick or dead hogs to slaughterhouses. All this depressed prices severely until June. The market recovered in July but as the peak consumption season arrived in September-October hog inventories were down about 3-to-4% from the same period in 2009. The short supply (plus rising feed and other costs) sent prices up sharply this fall.

Vegetable oil prices were more or less flat through most of this year. It was also just in the last few months that they shot upward.

The increase in food prices is very complex. Many different factors come into play. Chinese officials like to blame speculators. There is clearly a lot of money sloshing around in China looking for a place to go. Production costs are going up. Urbanization and highways are gobbling up land. Agriculture is both a cause and a victim of environmental degradation; environmental problems restrict supply by taking contaminated land out of production, restricting pesticide use, and banning livestock production near population centers. Weather does not always cooperate. Trade policies restricting imports (beef, chicken), drive prices up.

Also, the government's strategy of ratcheting farm prices upward has cemented in place expectations of ever-rising prices (along the lines of housing prices during the U.S. bubble period). When prices are expected to go up, farmers delay selling their grain, waiting for a better price. Millers and processors go out and try to buy as much as possible before prices go up. This process encourages price inflation.

While rising ag/food prices may not be simply a macroeconomic phenomenon, there is a general pattern of nearly all prices accelerating since August. There were been similar events in 2003 and 2007 that only lasted about 6 months.

Sunday, December 12, 2010

Want Safe Food? Grow Your Own

Motivated by distrust of the food system, some Chinese city residents are renting garden plots in the countryside to grow their own vegetables or hiring farmers to grow them.

The International Herald Tribune reported on the "Little Donkey City Peoples' Garden" in a village outside Beijing's 6th ring road. The garden is dotted with plots, each with a name, rented out to city people where they can raise their own vegetables.

Ms. Yi, a retired worker, comes to tend her garden twice a week. She pays 1200 yuan to rent a 30-square-meter plot. By my calculation that's 1/22 of a mu and works out to rent of 25,000 yuan per mu. For comparison purposes, farmland in China typically rents for 300-to-1000 yuan per mu, so this is good money for the peasants.

During the 1970s, like many young city people, Ms. Yi was "sent down to the countryside" to "learn from the peasants." Now she's voluntarily going down to the countryside to grow her own food. She's also learning from the peasants. She says she grows 30 kinds of vegetables "under the guidance of peasants."

Ms. Yi's motivation is a breakdown of trust in the food system following the series of food safety incidents in recent years. She describes herself as "helpless" when she started growing vegetables.

She says, "I used to work in commerce and I know food distribution methods; it's hard to control pollution."

Planting vegetables "gives her happiness she could never get from the concrete and steel-reinforced city."

According to a Renmin University professor, the number of city people renting plots grew from 15 last year to 120 this year. Renmin University set up the Little Donkey garden in 2008 and it broke even this year.

The reporter says there are a number of similar projects around the country as people "vote with their feet." There are no statistics, but the reporter says the growth of these arrangements is "an indisputable fact."

In another type of arrangement, city people hire farmers to plant vegetables using organic methods. The reporter cites a group of 20 white collar workers in Beijing's Zhongguancun district who formed a group that jointly purchases vegetables from a farmer on the outskirts of the city. The reporter says there are about 100 such groups nationwide.

These arrangements were inspired by movements in Japan and the United States. The article cites a group of Japanese housewives who set up an arrangement to direct farmers to grow organic produce for them in the 1970s. Another Renmin University professor, Zhou Li, was inspired by the ideas of Michael Pollan and went to the United States to learn about "Community Supported Agriculture" (CSA). The article describes how CSA works in the U.S. and how Renmin University is promoting such arrangements in China.

Zhou describes how these arrangements are push-back against the industrialization of agriculture in China: “Food safety is a crisis of trust, at its deepest level it is the separation of man from nature, and a separation of man from man,” He recounts the usual complaints about industrialized agriculture "bankrupting" small farmers and reducing the quality of diets.

The Little Donkey Garden project is described as a way of "establishing trust" and "reducing transaction costs."

By my calculation, at current prices Ms. Yi could buy 880 lbs. of cabbage in a Beijing supermarket or 1460 lbs. of cabbage in a street market with the 1200 yuan she pays to rent land in the Little Donkey Garden. Sounds to me like trust is an expensive commodity.

Tuesday, December 7, 2010

Unofficial Veg Oil Price Controls

A Daily Economic News article last week reported that officials had privately instructed major vegetable oil companies not to raise prices before March. These "unofficial" price controls are a good example of the Chinese government's bargain with business: "We help you squash competitors and make money; you help us implement our policies."

The reporter learned from knowledgeable sources that the National Development and Reform Commission (NDRC) had held a private one-time meeting with representatives from large vegetable oil producing companies, including Willmar and COFCO, who together control half of the retail market. At the meeting, the companies were told not to raise prices between now and March (when the communist party holds its big annual meetings). Companies were directed to maintain market supply while simultaneously holding down prices. According to the article, the companies fully supported the curbs on prices.

The meeting was prompted by surging vegetable oil prices. According to the National Bureau of Statistics reports on food prices (published every 10 days), the average retail price for a 5-liter bottle of vegetable oil had risen 17% between early October and mid-November. Rising cooking oil prices are just one part of a general increase in food and commodity prices that pushed the CPI to a 4.4% increase in October. Many economists expect the CPI to be up 5% in November.

An economist from China's Academy of Social Sciences describes the instructions to oil-sellers as a type of "unofficial price controls" that could be followed by documents announcing official controls later. He says that it is common for the government and companies to work together. Following the government's instructions, companies will delay or cancel price increases. He says, "During this special period companies must bear a certain social responsibility."

This echos an NDRC document issued on November 26th which "...hopes grain, oil and oil product companies will perform their social responsibility, participating in the government’s macro controls, especially large and medium state-owned companies."

While China appears to be a market economy, it's still hard to become a big company without favorable treatment from the government. COFCO is a state-owned enterprise. Sure, it's preparing an overseas IPO, but it would not be able to execute the IPO without government help and permission. Willmar is a Singapore company, but their position in the Chinese market is most likely the result of getting the favor of key officials.

This incident illustrates the Chinese approach to industrial policy. The government is "calling in its chips" and asking the companies to "bear the social responsibility." The titans of Chinese industry owe their fortune to the Chinese government and can be manipulated much easier than millions of small private entrepreneurs. This is why the Chinese government wants to see industrial behemoths dominate every sector of the economy.

Livestock Pollution Targeted by Environment Ministry

A Xinhua News Service article on Dec. 5 was headlined "Ministry of Environmental Protection: Livestock and Poultry Industry Have Become the Leading Source of Agricultural Pollution." This follows Shandong's widely-publicized introduction of livestock regulations several days earlier. Apparently, there is a campaign to clean up pollution from livestock and poultry.

The Dec. 5 article announces that the Ministry of Environmental Protection organized a meeting of representatives from provincial environmental protection departments for training on control of pollution from livestock and poultry and to discuss coordination in agricultural development and environmental protection. The meeting was held in Hohhot, Inner Mongolia.

The article reports that the first census on pollution sources showed that commercial-scale livestock and poultry farms were the leading source of agricultural pollution and a major contributor to water pollution. These farms produced 243 million metric tons of waste and 163 million metric tons of urine in 2007. The pollution from livestock "seriously affects the environment of villages and towns and peoples’ health.

The article cites World Health Organization and FAO data, which says there are over 90 diseases that can be transmitted from animals to humans.

The director of the Ministry's pollution control office gave a pessimistic view of the prospects. He explained that "...livestock and poultry pollution prevention work still has many problems, such as establishment of regulations and standards is lagging behind, management mechanisms are imperfect, funding is seriously inadequate, there is no way to implement effective administration and monitoring, poor technical dissemination and service systems, and a shortage of grassroots managers.

The article is perhaps a signal to local officials that they need to start paying more attention to controlling livestock pollution. The article concludes by noting that "...rural household waste treatment and reducing pollution from large scale livestock and poultry farms are a key point in the 12th five-year plan. Each level of local government will issue regulations and guidelines, developing special programs for addressing livestock and poultry pollution."

Monday, December 6, 2010

Who Has Guts?

A reporter in a small city in Hubei Province discovered an unusual practice in the local slaughterhouse. When pigs are slaughtered, employees are forced to separate out the small intestines from the meat and offal for sale to an individual who takes them away and sells them for a much higher price. "If any employee of the slaughterhouse tries to prevent this, they are beaten up. They comply out of fear."

The reporter says he went to the slaughterhouse at 5 am on December 1 to see what was happening. About 80 pigs were slaughtered, the offal was separated from the carcasses and moved to another room. As workers were cleaning the offal, a lady who was not an employee of the factory came and separated out the small intestines, put them in a bag and took them away.

At 6 am, a pork dealer came to buy the pork and offal to sell at markets in the city. A trader told the reporter the intestines are purchased for 10 yuan and resold to a specialized wholesaler for as much as 25 yuan.

So why are pig intestines so valuable? The reporter says that small intestines are not too valuable as food since they don't taste as good as large intestines. He learned that ingredients for medicines can be extracted from small intestines.

In 2008 the world discovered that the blood-thinning agent heparin is made from pig intestines. This may explain why they are so valuable.

Sunday, December 5, 2010

Environmental Regulations Bite Livestock Farms

Livestock farms are increasingly viewed as a nuisance and a hazard, and more localities are implementing regulations to restrict their numbers. China's first pollution census results released in January showed that livestock waste was the largest contributor to water pollution, perhaps adding momentum to the trend.

On December 2, many websites carried a brief article describing draft regulations for livestock production in Shandong Province. The new regulations forbid construction of new livestock and poultry farms in areas that supply drinking water for urban residents. The regulations also instruct county (rural) governments to ban livestock farms in residential zones in rural areas. New livestock farms are banned in areas that supply water for household use, scenic areas, protected wilderness areas, urban residential zones, and places where populations of school and research institutes are concentrated.

Rural officials have to set aside "appropriate" zones in rural areas designated for livestock and poultry production and announce this to the public. In those zones, livestock densities have to be kept to a reasonable level.

The regulations ban livestock farms in areas where "levels of hazardous substances exceed legal limits." This appears to be a reference to water pollution. The article continues, " places where the level of hazardous substances is not clear, livestock and poultry farms will be controlled along rivers, next to lakes, and in areas with high densities of animals."

Apparently, livestock and poultry farms are not completely banned in one of these "livestock-raising-prohited zones" (禁止养殖区). The regulations say the number and scale of livestock farms must be strictly controlled and you can't build a new farm or livestock-raising community (养殖小区). The trend encouraged by the government now is to construct concentrated livestock-raising zones like this:

A rendering of the planned ecological hog-raising zone for a village in Dezhou of Shandong Province.

This article was carried on dozens of web sites which probably means it is meant to tell the public and farmers that the government is serious about getting pollution from livestock farms under control.

These are not the first regulations on livestock. Dongguan in Guangdong is often cited as the leading example of a city that banned hog farms. A google search shows that Shanghai had such regulations in 2004. Shanghai now has very few small hog farms.

What appears to be new is that the regulation is extending beyond cities to agricultural provinces like Shandong.

Earlier this year, Heilongjiang Province introduced regulations of livestock farms. It set minimum sizes for farms: 50 head for cattle; 300 head for hogs; 3000 birds for poultry; 200 head for sheep; 1000 for rabbits; 300 for foxes, mink and racoons; and 50 for deer. (Yes, foxes and deer are raised commercially in China.) Farms have to be in places in accord with the local land use plan with suitable air, water, and soil and at least 1 kilometer from populated areas, roads, and slaughter facilities.

It may take a while for these regulations to be enforced. Shanghai's regulations specify that the agricultural commission and environmental protection bureau jointly regulate livestock farms. The environmental protection people probably have less power in rural areas than in Shanghai. Nevertheless, there seems to be momentum toward controlling pollution from livestock and other types of agriculture.

These regulations seem to rule out huge swathes of territory for livestock farms. How can China supply the huge amounts of meat demanded by the population if livestock and poultry production can only take place in small areas? Can the huge concentration of waste in large farms be effectively treated and disposed of?

This trend also implies a shifting of livestock production further into the central and western provinces where there the development-pollution balances is still tipped toward development. This entails an accompanying change in the meat industry to producing chilled meat cuts in rural counties that are transported to big cities on the coast.

Saturday, December 4, 2010

Feed Grain Analysis

A Dec. 2 report posted on the China Livestock and Veterinary Association web site provides a good analysis of China's feed grain situation and outlook.

The report discusses China's growing demand for grain as livestock feed in the context of worries about food security. As feed demand accounts for a rising share of grain use, will China have to import grain?

China has a diverse mix of grains, including corn, rice, wheat, millet, sorghum, and tubers. Soybeans are traditionally included in the Chinese concept of "grain," although they are not directly consumed as feed. Soymeal is the most important source of protein in feed. China also uses a lot of by-products from grain milling, processing and liquor manufacturing.

About 40% of grain is used for animal feed, a total of 200 mmt. Nearly all feed comes from domestic sources except for soymeal which is nearly all imported. The proportion of various grains used for feeds varies. The report estimates the feed consumption of grains as follows.

Grain / Feed Use / Share used for feed
Corn 106.6 mmt 65%
Rice 29.25 mmt 15%
Wheat 23.02 mmt 20%
Tubers 8.99 mmt 30%
Sorghum 3.69 mmt 50%
Soymeal 30.5 mmt 100%
Total 202.05 mmt 40%

The report emphasizes the shift in livestock production to more commercial, industrialized modes of production as a factor increasing grain use as feed. In 2009, the report says the proportion of production from commercial-scale operations was up 5 percentage points for hog farms, 4 points for egg and poultry farms, and dairy farms were up 10 percentage points. The report anticipates that feed demand for grain will rise 3-to-4 mmt per year over the next five years.

Consumption of grains as staple food has been more or less stable. During the last five years population grew 8-10 million per year but per capita consumption fell. Direct food use of grain was steady at about 250 million metric tons (mmt). By 2015, the report anticipates the population will be 1.4 billion people and food use will be 260 mmt. Food use consists mainly of rice and wheat.

The report anticipates that feed use of grain will increase 30 mmt over the next five years and food consumption of grain will rise 10 mmt. Industrial use will also increase but no number is provided. The report suggests that the use of grain for industrial processing should be "scientifically controlled." (In other words, "We're using too much grain for industrial processing.")

The report notes that China is basically self-sufficient in feeds that provide energy--such as corn, but it has a severe deficit in protein feeds. Soymeal is the main source of protein, nearly all of it from imported soybeans. China also imports about 1.7 mmt of fish meal, another high-protein feed. Other sources are cottonseed, other plant proteins, and meat and bone meal products. The reliance on imported protein leaves China vulnerable to price fluctuations and is "a hidden danger for livestock production." It also cites quality problems due to the protein deficit: "...the market is flooded with low-quality protein ingredients, presenting a serious quality threat." This apparently is referring to melamine.

The report cites "a growing tension" in energy feeds. Corn use for feed is reportedly increasing 3.4 mmt per year. Corn production increased 24 mmt from 2005 to 2009 while feed use increased 13.6 mmt. In coming years, corn will compete with food grains--rice and wheat--for land area, leaving little room for growth in corn production and putting pressure on corn supply.

Another issue addressed by the report is the regional imbalance in feed supply and demand. Traditionally, each region was mosty self-sufficient, using locally available feedstuffs. In recent years as the livestock industry became more reliant on grains, southern regions had a deficit and the northeast had a large surplus of grain. The northeast transports about 15 mmt to other regions annually. Guangdong, the province with the largest feed industry, relies entirely on raw materials from other provinces. Transporting feed long distances raises costs and risks for livestock producers. Constraints on rail capacity sometimes result in regional shortages.

The report calls for formulating a feed grain plan (maybe as part of the 12th 5-year plan). This entails identifying advantaged regions that should specialize in feed grain production and determine suitable varieties. It calls for integrating feed companies with farmers by signing production contracts.

Another strategy is to utilize "nongrain" feeds to fully utilize resources. This includes straw and other residues from crops, silage, hulls, meals, bran, dregs and other industrial and livestock product byproducts. The report estimates that China uses 210 mmt of directly-consumed or ammoniated ensiled crop residue, which replaces about 50 mmt of feed grains. Dregs from production of wine and hard liquor total 19 mmt and byproducts from beer 41 mmt; this is said to be equivalent to 10 mmt of soy meal. The report says these resources need to be better-utilized as feed.

The report recommends more use of high-amino acid feed formulations that can reduce protein content in hog feed by 3 percentage points. It is estimated that such formulations could reduce China's use of protein feeds by 7 mmmt. China is now the main producing country and exporter of amino acids, so the report points out that the base is present to pursue this approach.

Another strategy is increased use of complete formulated feed. It is said uniform use of commercial feeds conserve grain compared with farmers mixing feed themselves.

It says feed mills are the key actors to make the industry more efficient. But in recent years some feed mills were not profitable and "encountered operational difficulties" as feed raw material prices rose higher and livestock profits were low.

The report's suggestions include a whole range of subsidies for companies. Companies should be given financial support for integrating with farmers, utilizing nongrain feeds and low-protein formulas. It recommends tax breaks and subsidies for feed mills to help them spread use of formula feed.

The report recommends that the government adopt a flexible, cautious attitude toward grain. It emphasizes coordination of grain shipments from north to south, with northeastern grain shipments "radiating outward" to include Southeast Asia. The last sentence elliptically seems to be saying "we might need to import corn." It says, "at the same time utilize the price difference and freight cost advantage of foreign feed to import feed at appropriate southern ports to meet the domestic grain deficit."

Friday, December 3, 2010

Official: 250 mmt Feed Output in 2020

According to the latest issue of China Livestock and Veterinary Bulletin, Liu Xiaoyu, chairman of COFCO's feed department and vice-chair of the China Feed Association, estimated this year’s feed production may surpass 150 million metric tons (mmt). The increased demand contributes to the recent increase in corn demand and increased corn prices and volatility.

China’s feed output last year was 148 mmt. Liu estimates that national feed production will rise to 250 mmt by 2020. That's an increase of 100 mmt, or 10 mmt per year!

Liu said, “COFCO’s feed output now is 700,000-800,000 mt, and could rise to 6 mmt in five years.” While COFCO is a huge player in China's grain and feed market, this number suggests that it accounts for a tiny share of feed output.

As for this year’s surging price of corn and other agricultural commodities, Liu says it was related to extreme weather, natural disasters, worries in the market about corn production, plus inflationary expectations. However, he adds that China’s corn supply and demand are still overall balanced.

2010 Grain Output Announced

Today the National Bureau of Statistics announced its estimate of grain production for 2010.

"According to sample surveys and complete statistics" grain output for 2010 totaled 546.41 million metric tons (mmt), an increase of 2.9% from last year. Sown area in grain totaled 109.872 million hectares, an increase of 886,000 ha or 0.8% from last year.

Grain yield was 4973 kg/ha, up 103 kg. which I calculate to be a 2% increase. The report attributes the yield increase partly to a 1.3-million-hectare expansion of corn, a crop with high yields.

Overall, 20 provinces had increases in grain production and 11 had decreases. In the thirteen primary grain producing provinces 2010 grain output was 411.85 mmt, up 14.75 mmt or 3.7% from last year.

Most of the increase in this year's production was in the northeastern provinces (Jilin, Liaoning, Heilongjiang) and Inner Mongolia. This region's grain production was up 13.93 mmt, an increase of 13.4%. Total output for the four northeastern provinces was 117.79 mmt. The report says that the increase in northeastern production was relatively large because the region recovered from a drought that cut production by 8 mmt last year (in 2009).

The southwestern provinces had a very serious drought this year during the winter and spring. In the three provinces hit hardest by the drought--Guangxi, Guizhou and Yunnan--their combined early rice production fell by 2 mmt, but their fall grain crop was up 433,000 mt.

Jiangxi and Hunan also had decreased production due to "disasters."

Summer grain (mainly wheat and early-season rice) output fell due to the southwestern drought, but fall grain production was up, bolstered mainly by the recoveryin the northeast. Summer grain was planted on 27.421 million hectares, an increase of 38,400 hectares but summer grain output was 123.1 mmt, down 390,000 mt. Early rice area was 5.794 mil ha, a decrease of 76,100 ha and early rice production was 31.32 mmt, a decrease of 204,000 mt. Fall grain area was 76.657 mil ha, an increase of 924,000 ha. Preliminary statistics show that fall grain output was 391.99 mmt, an increase of 18.01 mmt.

Saturday, November 27, 2010

Feed Industry Meeting Discusses Trends

The quarterly feed industry development meeting was held in Changchun on Nov. 26. The vice director of Ministry of Agriculture's livestock office described this year's feed industry development as "overall not optimistic." The meeting reported feed output statistics that reveal a big shift toward formula feed and discussed consolidation in the feed milling industry.

The feed industry is on a general upward trend, but this year it faced numerous natural disasters (droughts, floods, disease?), pig prices were low in the first half of the year, and raw materials for feed are in short supply.

Commercial feed production for January to August of this year totaled 90 million metric tons (mmt), up 5.7% from last year. There was a big change in the composition of feed. Production of complete formula feed increased 9.3% while production of feed concentrates was down 9.6% and feed additives were down 7.1%.

The change in composition represents a shift from the traditional practice of farmers mixing raw grain with concentrate feed (containing mainly protein) and additives (trace elements, vitamins, antibiotics) with raw grain from their own farms or purchased locally. The report calls this "a vanishing trend."

The shortage of feed raw materials is cited as a big issue facing the industry. This year corn supplies were short and quality of corn was down. The report says reduced corn quality induced medium and small-scale farmers to switch to complete formula feeds instead of mixing grain with concentrate feeds.

The report singled out the domestic shortage of protein as a "key issue" facing the industry that emerged during the 12th 5-year plan period. Specifically, it noted that 75% of soybeans and 70% of fish meal are imported.

The report says the quality and safety of feed is improving. There have been no feed safety incidents [e.g. no one was poisoned by toxic feed additives like melamine or clenbuterol]. In 4141 quality tests of feed, the compliance rate was over 93%, up 3 percentage points from last year. Very few forbidden substances are being detected in feed. Tests of 1237 samples found no clenbuterol; just one sample out of 1024 samples of "protein material" tested positive for melamine. Government departments have increased their monitoring of feed and companies are doing their own checks.

The industry is described as highly competitive--"white hot" in some regions. Companies are under cost pressure from rising raw material and labor costs. Some companies that posted huge growth rates in 2008 and 2009 slowed down this year.

Consolidation and industrialization are related trends. The report says the "threshold has to be raised" for feed companies--small companies need to be eliminated. The report says small companies are especially under pressure from rising costs. Large conglomerates are expanding, refurbishing their equipment, and opening retail chain stores [for meat or feed?].

Science and technology and personnel training are emphasized. Companies like Wen's group and Haid are praised for their programs offering technical services to farmers, loan guarantee services, sponsoring cooperatives and centralized purchase of feed.

Friday, November 26, 2010

Soybean farmers left behind in price surge?

An article in the Daily Economy News reports that soybean farmers are complaining about the government's efforts to control commodity prices.

Corn, rice, and other prices have gone up this year and now the government is trying to stop prices from climbing. The soybean farmers' complaint is that soybean prices didn't go up as much as other prices and now they won't have a chance to catch up with other commodities.

According to He Shuwen, head of a soybean cooperative in Heilongjiang Province's Heihe City, soybean prices are about 1.9 yuan/jin this year, up from 1.87 yuan last year. This is not much compared with 10-percent increases for corn and rice. With the government trying to control prices, he says the 2-yuan price farmers hope for will be hard to attain. He says a lot of farmers are considering switching from soybeans to rice in response to the price difference.

Meanwhile, the government is reporting that rural household income is rising rapidly. In the first three quarters of this year, the government says rural incomes grew faster than urban incomes. The Ministry of Agriculture thinks the main reason is the government's decision to increase the minimum prices for wheat and rice, which influenced other prices to increase.

Not mentioned by the article, but lurking in the background is a looming conflict over China's price policies. Chinese officials want to keep farm prices rising in a slow, steady manner. They can do this for wheat and rice prices. But they cannot control soybean prices since they are set in the world market. Consequently, if officials try to manipulate wheat and rice prices, they will eventually be out of kilter with soybean prices which follow the forces of world supply and demand, not the whims of the National Development and Reform Commission. That's why China's domestic soybean-crushing industry is disappearing.

Price Expectations Freeze Up China's Grain Market

Grain purchase station in Anyang

This week Sinograin Net posted a report on a survey team's visit to Anyang in Henan Province, a major wheat- and corn-producing area in the northern part of the province. The team's interviews with grain purchasers reveal that the recent measures taken by the Chinese government have had a minor effect on cooling off corn prices on the demand side. However, expectations of higher future prices and less dependence on income from grain are motivating farmers to hold on to their corn. Officials are blaming speculation and trying to root out "speculators" from futures markets, etc., but the lack of corn in the market--despite a good harvest--is due to speculation by millions of farmers. And the expectation of ever-rising prices has been built in by government policies.

The Sinograin team learned that this year's weather in Anyang was more or less normal, and both wheat and corn production were up from last year. The quality of the corn crop was better this year too. There was little rain after the corn harvest, so farmers had plenty of time to thresh and dry their corn. Moisture is down and less corn is being lost to mold this year. The team also noticed that ears were better-filled with kernels this year.

Mr. Dong, operator of a grain purchase station, told the team that the station’s current purchase price for corn with 15% or less moisture is .96 yuan/jin (1920 yuan/mt; $282/mt). [This works out to about $7.30/bushel; by comparison U.S. cash corn prices in the North Central region are in the range of $4.97-$5.10/bushel this week]. The team learned that other stations were paying similar prices.

Mr. Dong said the corn price was down slightly, about .01-.02 yuan/jin from the last period. This reflects a decrease in purchase prices by starch processors and feed mills in neighboring Shandong Province. Traders come to Anyang to buy corn on behalf of these companies, so their actions drive demand for corn. Recent policy changes, including specifically a tightening of credit that reduced working capital, led to a drop in corn purchases by the big Shandong companies.

Further interviews revealed that farmers are holding their corn off the market. A farmer named Li said he was selling some corn to generate cash, but many in his village still were holding a lot of corn. Farmers actually reduced their volume of sales in response to the recent price drop because they anticipate a return to higher prices later, maybe to over 1 yuan/jin ($7.60/bu or so).

The role of grain in the rural household economy has been fundamentally changed. Farmers no longer rely on grain sales for their income since off-farm wages and work opportunities have increased a lot in recent years. Their improved cash flow situation lets them hold grain off the market if they want; they don't need to sell their grain immediately to generate cash.

Grain prices have been rising in nominal terms in recent years, but wages and other commodities have been rising faster. Farmers still view grain prices as "depressed" because they haven't risen as fast as other prices.

A Sinograin grain-purchase station in Anyang

Interviews with wheat purchasers in Anyang show that the government's policy of raising minimum prices year after year has helped cement in place expectations of rising prices. The government has already announced a minimum price for wheat for next summer that is about 6-percent higher than this year's. Wheat purchasers say that expectations of higher wheat prices are locked in at all levels--farmers, traders, users--because the higher price for next year has already been announced.

A corn trader trying to buy for Shandong customers said that, despite the recent dip in prices, the outlook for corn prices is for a rising trend. He said that means the price dip presents a good buying opportunity.

Wednesday, November 24, 2010

Apple prices rising too

An early November article from the Pingyin County price bureau in Shandong Province reports that prices for local apples have been rising quickly since about October 20. Like a number of other commodities, a weather-related supply disruption in combination with the current inflationary climate have lured traders and speculators and prices are spiraling upward.

In Hongyuanchi Town, the October retail price for “Fuji” apples is 4.4 yuan/kg, up 22.2% from September and up 37.5% year-on-year. The report offers five reasons for climbing prices.

The first reason is a drop in production in the northwest. There was a late spring and hail in apple-producing areas of Gansu and Shaanxi earlier this year. This affected apple blossoms and reduced production. The report says the amount of apples coming into the area from other regions has dropped a lot.

Second, the purchase price of apples was up to 0.4 yuan this year and costs of transportation, storage and other services have risen. Third, there was a typhoon and heavy rain in Hainan and elsehwere, which disrupted transportation of apples.

The fourth and fifth reasons are related. There has been panic-buying of apples elsewhere in China and some people are hoarding the fruit. Most of the apples from this year's harvest have been sold and merchants holding apples in cold storage will only sell for a premium price.

A November 19 article from the Gansu Daily compares the rising apple price situation to that of garlic. This year many apple traders came to villages in Gansu and made agreements with farmers to buy apples in advance while the fruit was still on the trees. Merchants paid farmers 500 yuan in advance to buy a farmer's entire harvest for 2.8 yuan per 500g. While the price went up later, farmers were satisfied because the price was higher than the previous year.

Local farmers say virtually all apples were sold shortly after harvest. They are now in the hands of traders. The traders' strategy is to hold on to the apples until spring festival when they hope to sell them for an even higher price.

Why the panic? In the area of Gansu visited by the reporter this year's harvest was down 50 percent. Two reasons are given for the fall in production. One trader says it's a natural cycle: a big apple year tends to be followed by a small one. A second reason is the late spring and hail that affected blossoms.

The reporter saw the effects of late frost in poor quality apples for sale in the local market. They are scarred, discolored and bruised. One farmer selling her apples at a low price of 1.5 yuan per jin said they had to sell 2000 jin of bad quality apples at 0.3-.4 yuan per jin to an apple sauce factory. They had to cut out the rotten parts with a knife.

Meanwhile, in Yantai--a big apple-producing area in Shandong--prices of apple tree saplings are soaring as farmers expand in response to the soaring apple prices. Prices will probably be depressed again in a few years when weather is normal and all these new trees start bearing fruit.

A farmer buys some new apple trees

Tuesday, November 23, 2010

Do Livestock Farms Benefit from Higher Prices?

Chinese officials tend to be fixated on grain. They have been pointing out that rising grain prices are good for farmeres. But what about livestock farmers? For them higher grain prices increase their costs.

A Harbin Daily reporter went to the local market and found prices had risen quite a bit this year. He went to the countryside to learn whether livestock farmers are benefiting from the high prices.

A farmer named Wang in Yuanbao village is the largest hog farmer around; he raises about 2000 hogs a year and has invested over 2 million yuan. Wang told the reporter that in 5 years of raising pigs he had earned money two years, lost money two years, and one year it was completely futile. Early this year the price for hogs was just 4.2 yuan per jin and he lost 200 yuan on every hog.

In July, the hog price went up to 5.8 yuan and he was making money again. However, corn and soy meal prices went up too, narrowing his profit to 0.5 yuan per jin--about 100 yuan per head and about enough to pay the interest on his bank loan.

In the last few days the hog price has surged to 7.2 yuan. Wang says he can earn 300 yuan per hog now. This is the best profit he's seen in 5 years and he can now recoup some of his losses from earlier this year. He can earn about 200,000-to-300,000 yuan, but after deducting labor and interest there's not much of a profit left. Wang says the benefits for him from rising prices are not too obvious.

Feed is the biggest cost for livestock farmers and corn is the biggest component. This year the corn price for hog farmers in Heilongjiang has risen 0.2 yuan per jin and soymeal is up 0.45 yuan. That doesn't seem like much, but it raises the feed cost 125 yuan per head.

Another farmer raising beef cattle says the higher corn price costs him an extra 400 yuan per head. A dairy farmer says the rising feed cost keeps his profit from going up. An egg farmer says the higher feed costs increases his cost by 5 yuan per bird. He says it takes him over 10 months to recover his costs, and in the remaining month-and-a-half he can earn about 50,000 yuan.

Monday, November 22, 2010

China Tries to Keep Commodity Prices in Check

The latest news suggests that Chinese officials are watching commodity prices, hoping they don't go up too fast, trying various measures to cool off markets, and saving direct price controls as a last resort.

Destroy commodity price increases

On Nov. 19, the State Council announced 16 measures for addressing price increases that include boosting agricultural production, "coordinating" purchases and sales of commodities through the "governors' grain bag" and "mayors' vegetable basket" responsibility sytems, waiving tolls for trucks carrying ag commodities, and boosting oversight of prices, costs, and markets.

Vice-chief of the Grain Bureau, Mdme. Zeng Liying, has made one of her usual appearances to reassure the public that China has plenty of grain on hand and there is no reason for prices to be shooting upward.

Ms. Zeng says that it's now clear that the fall harvest was another good one. The supply of corn, rice, and soybeans in the northeast is much better than last year. Grain inventories are "relatively ample." Winter wheat production totaled 217.6 billion jin (108.8 mmt), up 2 billion jin (1 mmt), the seventh increase in row. She says grain supply and demand are basically in balance, and supply-demand factors do not warrant the current increase in prices.

Ms. Zeng says that "complex factors" are behind the rise in grain prices. Increased demand is driving corn and japonica rice price increases. Other factors include rising production costs, inflationary expectations, surplus liquidity, influence of international market effects, and speculation.

She addressed the corn market specifically: "...we are closely watching the corn market price, and will undertake appropriate market controls at the appropriate time to keep corn prices reasonably stable."

"What about corn imports?" asks a concerned individual. Well, she says, customs statistics show that corn imports totaled 730,000 metric tons for January through August. She points out that total consumption of corn is about 150 million tons, so the imports do not play a major role in the market. Importing is a decision made by companies if they need corn and market prices are attractive. Ms. Zeng says the Chinese market doesn't need imported corn to balance supply and demand.

But wait, Ms. Zeng says, the rise in grain prices is not so bad. Higher prices are good for farmers because it raises their incomes and improves their incentives to plant grain. However, the government is watching prices closely and will not allow sharp increases in prices. Thus, officials are holding off on controlling prices, balancing the benefits of rising prices for farmers against the threat of food price inflation.

When questioned about what price-control measures the government may take, Ms. Zeng falls into bureaucrat-speak. The government will monitor the situation closely, sell reserves into the market, preserve orderly markets, publish information, and coordinate the "orderly" purchase by users from grain-deficit regions in grain-producing regions (i.e. northeast).

When asked about whether futures markets can stabilize prices. Ms. Zeng is pessimistic. Chinese farms are too small to utilize hedging strategies and she implies that futures prices in China don't reflect actual market fundaments. More improvement and development is needed.