Tuesday, April 27, 2010

Agricultural propaganda

I have been unsure how to translate the Chinese word 宣传, usually translated "propaganda," but I've also seen it translated as "publicity" or "advertising." I started thinking about this a couple of years ago when I noticed a crossing guards trying to bring order to crosswalks in Beijing with armbands labeling them as part of Beijing's traffic "propaganda" program.

The role of propaganda in China's strategy is emerging as a concern as China tries to project a better image of itself. A Washington Post article this week describes China's efforts to set up radio stations and newspaper presence in the U.S. China's "Confucious Institutes" promoting Chinese language instruction in the United States have raised suspicions of darker motives among some parents in California.

According to the Post article, "The stations don't broadcast outright propaganda, but rather programming with a Chinese focus and flavor..." The Chinese communist party's more subtle/sophisticated approach to "propaganda" seems to reflect the emphasis on "agricultural propaganda" in a national video conference held April 26 in Beijing.

Minister of Agriculture, Han Changfu, exhorted 600 attendees from agricultural departments to follow General Secretary Hu Jintao's "hold high the banner, focus on the overall situation, serve the people, be creative in reform” in resolutely carrying out agricultural propaganda work. The speech was littered with so many communist party buzz words like "enthusiastically," "scientific," "three rural," and "grasp" that it was almost incomprehensible.

Propaganda master Han Changfu inspects the National Agricultural Exhibition Center following the meeting.

After filtering out the nonsense, the message of Minister Han seemed to be that agricultural officials need to both be aware of public opinion and try to shape it. He said agricultural officials are faced with a new test of learning how to utilize new media like web sites and mobile phones to disseminate information and to track public opinion. Instructions were to promote rural policies through the media and pay special attention to how agricultural disasters are portrayed. (Lately web sites have been packed with articles about how government offices are helping the southwestern drought area and the Qinghai earthquake zone.)

The propaganda may reflect some insecurity on the part of the government, vulnerable to criticism over disaster response and a population that is not as content as one would expect given 11% GDP growth.

Articles about the agricultural propaganda meeting were dutifully carried on dozens of local government agricultural "information" web sites.

An article about Shaanxi Province's hog sector policies is an example of how propaganda is used. The sixth component of policy was to "strengthen propaganda guidance," which included utilizing the provincial newspaper and TV station to "strengthen positive publicity and guide hog farmers and enterprises rational response to market changes." It also included less Orwellian tasks like publishing information on prices and market dynamics.

"Propaganda" or "publicity"? Or is it the same thing? All governments use propaganda; perhaps what makes a difference is if there is a free media that allows alternatives to the government's message to be published.

Friday, April 23, 2010

Foreigners Eat Up the Soybean Industry

In an April 13 article, The Farmers' Daily lists some recent headlines from China's news media about the soybean industry:
“Foreign Companies Eat Up of Our Country’s Soybean Industry,”
“National Soybean Reserves Full, Oil Enterprises Have No Soybeans”,
“The Last Watcher for The Domestic Soybeans Switches Sides,”
“’Foreign bean’ low price attack, Heilongjiang Soybean Industry Collapse”
The article calls these "...media attacks on the soybean industry’s 'collective anxiety.'"

"Foreign Companies Eat Up Our Country's Soybean Industry," published in The Securities Times in February, reveals some of the bitterness against multinational grain-trading companies and the maneuvering to push policies to support the domestic edible oils industry.

The Security Times article begins by blaming the idling of 60% of domestic soybean crushers, ups and downs in price of certain cooking oil brands, and "a lot of strange happenings" on foreign companies "...that control the fate of the entier soybean industry chain."

The reporter learned that the China Soybean Association passed on research materials and recommendations to the government to change the industry's high degree of reliance on foreign companies. The association apparently is the instigator of the soybean industry plan to raise self-sufficiency to 60% that was turned into the State Council at the end of March.

The reporter explains, "...in the last few years our country’s soybean industry faced pressure from low-priced imported soybeans. During last year’s financial crisis, nearly 70% of soybean enterprises in Heilongjiang shut down." An engineer from a Heilongjiang crushing plant reports that his company loses money on every ton of soybeans they process, so they shut down.

An official from the Heilongjiang soybean association said the soybean industry’s problems are all related to four companies: ADM, Bunge, Cargill, and Louis Dreyfus.

He explains: "During the 2004 soybean crisis [when soybean prices suddenly fell and many Chinese companies were caught with contracts to buy soybeans at high prices], domestic crushers faced serious losses, many companies collapsed, and the four foreign companies...bought up over 70% of the shut-down companies. Since then our country’s soybean industry chain was fractured by foreign investment and became subject to them."

The Heilongjiang official thinks government and enterprises need to "...work together to create a set of strong domestic companies, setting up a completely independent industry chain. This way...industry can be promoted to withstand external shocks.”

The vice chairman of the China soybean industry association said they kept their report secret (an internal document) "...since foreign companies have deeply penetrated." The report calls for strengthening the Chinese soybean companies, reducing dependence on foreign companies, establishing an independent price-setting system, forming independent brands.

The Farmers Daily reports on a speech by Cheng Guoqiang (economist at the State Council's Development Research Center) given at an international soybean market conference in Beijing on April 11-12 where he acknowledged the complexity of the soybean industry issue.

Cheng notes, "Public opinion at present is colored by the interests of certain regions and companies."

Cheng explains that limited resources prevent China from supplying enough soybeans to meet its growing demand. In 2008-09, the government supported soybean prices to help farmers, but this raised costs for crushing enterprises, leading to losses and idled capacity. A rising proportion of Chinese soybeans are used for food processing (tofu, soy milk, etc), not oil-processing.

He describes it as "...an intense game between different interest groups."

He adds, "The protection of farmers’ interests needs to be stressed more.”

Thursday, April 22, 2010

Soy Oil Limits: Temporary "Fine Tuning"

An April 15 article in the newspaper of the Peoples Consultative Committee offers a little more insight about what's going on behind the scenes on the new limits on Argentine soy oil imports.

The article gives opinions of domestic soybean analysts who conclude that the limits on imported Argentine soy oil are a temporary trade measure to raise domestic soy oil and soybean prices to encourage farmers to plant more soybeans this spring.

The article begins, "MOC limits on soybean oil imports give the domestic soybean industry a respite from the impact of imports." It reports that many domestic soybean processors that have been idle are restarting operations, and futures prices of soy oil and soybeans have risen since the measures were implemented.

As reported previously here, the article says the Ministry of Foreign Trade and Commerce’s China Food and Native Produce Import-Export Association held a “2010 soy oil import enterprise conference” on March 31 where the Commerce Ministry and AQSIQ representatives said, licenses for soy oil imports from Argentina would be granted through a unified national system instead of the former provincial commerce organizations and strict quarantine and inspection on soy oil from Argentina would be implemented.

Analysts agree that limits on soy oil imports can't have a long-term impact since imported oil is such a small share of the total oil supply. (However, the vice director of the Heilongjiang soybean association hopes that the controls could be expanded to oil from the U.S. and Brazil.)

They also agree that it is a short-term measure. Here's what the Heilongjiang association official said: "The domestic fats and oils situation has been especially weak. In the past two years, the government bought up soybeans and rapeseed, and they have not been able to sell them off, so there is relatively large pressure. This year's soybeans are about to be sown, and it looks like area will decline quite a bit since farmers are more eager to plant corn which is more profitable. If soy oil prices have a long period of low prices, it will undoubtedly have a big effect on soybeans."

The article then speculates, "As a temporary measure, the limit on soybean imports can eventually be abolished. Limits on rapeseed imports can also be loosened."

The Heilongjiang official thinks that, "The limits on soy oil imports relieve some pressure on oil processors and soy bean supply, but the good news that it has held the industry back from the brink of collapse. But it can’t solve the problems of domestic soybeans since domestic soybean processing enterprises want to use imported genetically modified beans with high oil extraction rates." He also thinks the subsidy system needs "adjustment."

"Controlling soy oil imports is a temporary measure for fine-tuning,” concluded the Heilongjiang official.

But imported soybeans account for the biggest share of supply and he opines, "Limits on imported soybeans are the key to success in the battle for soybeans." However, he and others interviewed agree that it's unrealistic to limit soybean imports since the volume is so large. Domestic production is only about 10 million metric tons and about half of those are used for food processing, not oil crushing. In comparison, imports of soybeans were 42 mmt last year.

The article goes on to regurgitate material about the NDRC soybean industry plan that was handed in to the State Council last month.

Empty Villages, Vacant Fields: Jiangxi Village Life

In 2008, a reporter visited a village in northern Jiangxi Province where she found most of the population had left to work in cities. Many of the fields were abandoned, but one old lady told her to keep it quiet so the government won't stop sending subsidies. The article gives a grim snapshot of life in China's countryside.

Vacant Fields

The reporter noticed as he drove along the road that many of the fields were abandoned and covered with weeds. The head of the village explained in forceful terms that the land in that area is too hilly to use mechanized equipment so no one wants to cultivate it.

The village head sarcastically offered his assessment: "Who are you going to interview? This is just a dead village!"

Statistics from the township showed that 15,461 mu of land was cultivated, but the local statistician told the reporter the statistics “may be inaccurate” since these numbers are estimates sent in by villages to the township government, and they don't have anyone to go out and verify them.

The reporter went to the local grain purchasing station to check on the grain production situation. Upon reaching the grain station, he startled an old man who was hard of hearing. The director wasn't around. There was a sign on the gate saying it was a grain station, but it looked like a factory. He finally found the director hanging out at the gas station across the street.

The director explained that the grain station basically doesn't operate any more because not much grain is produced. They only bought 5,000 kg of rice in 2007, about a tenth of what they purchased a decade earlier. At that time the warehouses were full and they even piled grain in the courtyard.

The town's vice mayor said that about a third of the farmland was uncultivated. The land that is cultivated is tended mainly by people over age 50 who grow crops for their own family's food. There isn't much of a surplus to sell.

The village official mockingly asked the reporter, "What use is your report? Can it make them plant their fields?"

All Gone

The official explained that about 90% of working-age people had gone out to work elsewhere, leaving only old people and children. Their village of 100 households had shrunk to 50 people, half of them children. The reporter saw only seven working-age adults: the official, some shopkeepers, a teacher, and a construction worker filing a wage dispute at the township government office.

According to statistics, half of the local population is working elsewhere. Nationally, as of January 2007, there were 120 million were working or doing business in cities and another 80 million working in their own locality.

A villager named Li recalls the old days when the whole family was busy with farm work--even the 4 and 5-year-olds would carry water and seedlings. There was always work to be done. But now it's different. Everyone's door is closed. The kids are in school and the old people are down at the store chatting. People don't visit much; everyone goes to bed early at night. You hardly even hear a good fight any more.

A Villager's Budget

Li describes farming as grinding drudgery. You barely make enough to cover your family's expenses, nothing more. He and his wife, both in their 50s, planted 10 mu of rice paddy and 9 mu of dryland last year, including rice, sweet potato, jute, soybeans, and rapeseed. They grossed less than 10,000 yuan, and their net income was 3,000 yuan (about $450).

A Mr. Liu arriving at the train station told the reporter a farm family's budget. A family of 4 would get 7 fen of dryland and 1 mu, 5 fen of paddy fields per. Dryland can be planted in sweet potato and vegetables that are eaten by the family or fed to pigs. Rice land yields 700 jin or so per mu, which gives you about 500 jin of husked rice. In one season you get a few dan (1 dan = 50 kg) of sweet potato that can feed one pig, 800 jin rice and government subsidies.

Liu sums up, "Your gross income for the year is one pig, 2400 jin of rice, and 100 or so yuan of subsidies." He calculated the gross income as over 5700 yuan, before deducting living costs.

He estimates his minium living cost: farm inputs cost 200 yuan, 136 yuan for his child’s dormitory fees, household monthly expenses of 50 yuan or so, 400 jin of grain, a total of 1470 yuan. Purchasing pork for guests at the new year is a one-time expense of about 15 yuan or so. If you eat pork 10 times a year, that will cost 150 yuan. Buying your two kids clothes costs about 100 yuan. This way, one year’s living costs is around 1900 yuan.

Liu's surplus after living costs is 3800 yuan, if he grows 3 crops of rice a year. But this is assuming you have a strong worker that can plant two mu or more three times a year, no easy task. If you grow two rice crops, the work load is lighter but income is also lower. On top of this you have to give gifts, and there are collections for things like contributions to road construction or temple repairs.

Another villager: "Only the useless people do farming here, struggling for a living. People who go to college or start businesses are the 'able people.'"

A Migrant's Budget

Mr. Liu is working as a painter at construction sites in Wuhan. He gets room and board on-site and as much as 75 yuan per day ($11) and 8 days off per month. His monthly income is as much as 2000 yuan, sometimes as low as 1000 yuan in bad times. “I can generally earn 10,000 yuan to bring home,” he says.

It’s hard work. He only eats pork about twice a month. He works 8-9 hours per day and spends his free time resting. His wife and child are at home planting rapeseed and food grain.

In Mr. Liu’s view, large-scale farming is more risky than working as a migrant. He can’t get rich as a migrant worker but he can guarantee food and clothing for his family. Returning from Wuhan is a joyous time for him; he is bringing his child snacks and new clothes. He plans to save money from working for several years and then do something else.

The way to make money is to send out your sons to work. In the village there was an old person with 5 sons. “In the new year, 5 sons came back from migrant work, each one brought me 2000 yuan, new money.” This 63 year-old man, 59 year-old wife have 5 sons and 7 grandchildren, ages 1 to 12.

The reporter spoke by phone with a woman who had worked as a migrant 4 years and earns 900 yuan a month with meals and housing provided by the factory, spending every day in the factory floor.
She was seemingly in awe of the reporter: “You work in an office?”
“Yes” was the reply.
The migrant followed up, “You just have to type on a computer?”
After a pause: “Wow!”

This place rocks

While cities have lots of ways to make money, a few quarries are the only visible moneymakers in this area. The quarries were started by an investor from Zhejiang, with a stream of nearly 100 trucks carrying away stone to the cement factory in the county town. Each truckload earns about 200 yuan, or 100,000 yuan per day.

Many villagers are critical of the quarries. One shopkeeper told the reporter, these trucks became the township’s “Pearl Harbor” about 5-6 years earlier. On the roads there are one-meter-wide potholes left behind. They see their area’s resources being transformed into money for the Zhejiang boss’s purse with no advantage for them. They have to endure the heavy trucks going back and forth and the dust.

Heartwarming policy

A 61-year-old lady grabbed the reporter and said, "Sister, let me give you a wake-up. Don’t say we have vacant land, understand? The central government's policy is so good--with subsidies and raising prices--we don’t want them to think that we don’t plant crops and are lazy! Then they will stop giving us subsidies. She was clearly worried about it.

This lady often works in the fields, and last year she collected 20 yuan for rice seed subsidies and 20 yuan for grain and comprehensive input subsidies. She’s not sure how the subsidy is determined. Her husband, 60-year-old Wang, was not sure either. But they do know they had already received the new year’s subsidies deposited in their bank account in the first quarter (before planting any crops).

In 2007, the grain direct subsidy was 11.8 yuan/mu; comprehensive subsidy 19.2 yuan/mu; good seed subsidy, early rice 10 yuan, middle rice 15 yuan, late rice 7 yuan. If a farmer planted 3 rice crops, he could collect 63 yuan per mu. There are also subsidies available for rapeseed, breeding sows, and returning cropland to forest.

The lady praised the subsidies: "The government’s policies are really good, it doesn’t matter how much, it’s better than nothing, heartwarming!" Her biggest concern is that the reporter will tell that the laborers have all gone and the remaining people leave land vacant, and the subsidies will stop.

Wang Jian, another villager, also asked with trepidation, "If the central government decides these subsidies are useless, will they stop them?"

Friday, April 16, 2010

Wen Jiabao: Subsidies for Expensive Fertilizer

Premier Wen Jiabao spent several days in the countryside of Anhui inspecting wheat and rapeseed crops, posing with farmers for photographers, being all-round good guy, and promising more subsidies.

A translation of a brief article below. The video is here.

I'm from the government and I'm here to help

"From April 9th to 11th, Communist Party Central Committee Political Bureau Standing Committee and State Council Premier Wen Jiabao inspected the crop conditions in two districts of Anhui Province. He went to villages to visit with common people and made field inspections of agricultural processing companies and the Huai River project site. He held a meeting where he listened to the views of grassroots-level cadres."

"Fengzui Village in Bengbu has 2600 mu of cultivated land and 2800 people. In the morning of April 9, Wen Jiabao visited wheat fields in the village. Green wheat sprouts were already tall. Some villagers were in the fields spraying for weeds. He pulled a couple of wheat plants to check them. Local officials told the premier that this year the district’s wheat area will be 6% higher due to early preparations for cultivation, field management grasps reality, overcoming the effects of cold weather, the wheat is in better shape than last year. If there is no major natural disaster, wheat harvest will be good. Wen Jiabao said, grain must have a good harvest, in the final analysis relying on 'good policy, energetic work, help from heaven [the sky]'. Good policy brings forth more human effort."

"Wen Jiabao asked everyone what problems they still have. One villager said recently fertilizer prices were increasing rapidly. Wen Jiabao said: 'Fertilizer, fuel price fluctuations are related to international oil price increases. If the oil price increases, agricultural input prices will also increase, and the government can give farmers subsidies.'"
Wen Jiabao checking farmer's subsidies

Premier Wen Jiabao checks a farmer's subsidy records to make sure he got all the cash he had coming to him.

Wednesday, April 14, 2010

The Strategy Behind China's Rejection of Soy Oil

This month, Chinese officials began blocking imports of soybean oil from Argentina, claiming that the residues of solvents used in the oil-extraction process exceeded safe levels. This is a major problem for Argentina’s fragile economy which relies on revenue from an export tax on soy oil, one of its main exports.

Articles in the Chinese press reveal that the blockage of soy oil is actually the first step in a calculated strategy to build a Chinese “national team” in the vegetable oil industry—thinly disguised protectionism. [China’s rejection of rapeseed imports due to sudden discovery of ‘black leg’ fungus could be connected to the same strategy since it encompasses all oils and oilseeds.]

An April 6 article from the China Grain and Oils Food Information Net links new soy oil standards to a “Oils and Oilseed Industry Development Plan (2009-2020)” that the National Development and Reform Commission (NDRC) delivered to China’s State Council in late March. The main point of the plan is help beleaguered domestic vegetable oil producers compete with foreign companies and increase China’s self-sufficiency in vegetable oil from less than 50% at present to 60% by 2020.

The article says that a meeting [presumably held by government officials] with about a dozen companies was held on March 31 to discuss the tightening of standards in order to cut off soy oil imports. Industry insider was quoted as saying “limiting soy oil imports is probably the first shot fired in the counterattack to protect soybeans.”

According to one individual from a large futures trading company, the Commerce Ministry meeting already decided that the quasi-government Food and Agricultural Import and Export Association will tighten the standard for residual solvents in imported soy oil from 300 ppm to 100 ppm.

A manager at COFCO’s Zhangjiagang edible oil refinery said, “Since the solvent residues in this range basically have no effect on humans, the country hasn’t [previously] stressed this standard for imported soy oil.”

Moreover, beginning April 1 new applications for import licenses for soy oil from Argentina must use a new method issued by the central government’s Commerce Ministry. Each province must stop using their own methods for approving the licenses.
An unnamed individual from Jiusan Co. [a large domestic oil processor in Heilongjiang Province] said this could be the first step in a strategy for protecting the domestic oil processing industry. He explains that the limiting of oil imports is aimed at increasing use of domestic soybeans. He also speculates that protection could be extended to soybeans:“In the future it’s very possible that soybean imports will be limited.” The article adds the caveat that this limit could be localized [i.e. southern provinces that don’t grow soybeans may be exempt].

A March 27 article from the Economic Observer explains that the NDRC oils and oilseeds plan “…is a response to the threat of foreign companies in the grain and oil industry.” The Economic Observer reports that experts familiar with the plan say a group of pillar oil-processing companies must be nurtured to achieve the targeted 60% self-sufficiency rate by 2020.

China imports unrefined soy, palm, and rapeseed oils, large quantities of soybeans which are crushed to make oil and animal feed, and some rapeseed (canola). In 2009, China imported 8.16 mmt of vegetable oil and 42.55 mmt of soybeans and over 1 mmt of rapeseed oil. These imports of oils and oilseeds are the equivalent of 560 million mu (37 million hectares).

An individual from the China Grain Industry Association quoted by the Economic Observer points out that China simply doesn’t have enough land to be self-sufficient in vegetable oils: “We would need [33 million hectares] of land plus more water resources to achieve self-sufficiency in oils and oilseeds.”

The Grain Industry Association guy acknowledges that China’s strategy has been to import vegetable oils so the country can focus its land resources of growing grains like wheat, corn, and rice that are considered more strategic: “This is an impossible task, as to some extent the reliance on edible oil imports is a strategy for preserving security in the main grains.”

The NDRC plan reportedly stresses the diversity of vegetable oils. An NDRC official who participated in putting together the plan said soybean, palm and rapeseed oil made up 82.5% of China’s edible oil supply in 2008, but soybean oil alone accounted for over 54%. He says the crux of China’s low self-sufficiency rate in edible oils is “overdependence on soybeans.”

The plan aims to promote production of other oilseeds. Economic Observer quotes from the plan: “non-GMO soybean planting area [will be] stabilized at [10 million hectares] and the supply of peanut, tea oil [shan cha or ‘mountain tea’], sesame, cottonseed, sunflower oils will be increased through measures like policy-style subsidized loans and comprehensive subsidies.”

Expert opinion is described as “cautiously optimistic.” The China Grain Industry official points out that peanut meal cannot replace the huge amount of soymeal co-product from soy oil processing which is an important feed ingredient for meat, egg, milk, and fish production.

Officials envision boosting companies like COFCO and Sinograin as a sort of “National Team.”

The Economic Observer explains, “From the long-term view, China must seek a stronger voice in the international grain and oils market and improve domestic industry development, a set of globally competitive large edible oils companies are needed. Such large companies are an essential part of China’s unique approach to macro adjustment.”

Another participant in formulating the plan told the reporter, the most substantial support given to these companies will be “Loans to the companies at subsidized interest rates for 5%-8% of approved investment.”

One industry insider observes a contradiction in the plan’s other major target—to reduce “backward” excess production capacity by 20%. He notes that many large edible oils companies were closely involved in the plan’s formulation. While actively lobbying for their own interests, these companies were traveling around the country looking for places to build new factories and “capture more territory.” At the same time COFCO and Sinograin were offering advice on eliminating excess capacity they were building large factories in Zhenjiang, Dongguan, and Tianjin. Meanwhile the medium and small oil-processors are branded as the “sinners” responsible for “backward” excess capacity.

Will this turn out any better than China's efforts to build a "national team" in soccer?

Friday, April 9, 2010

Illegal butchers in downtown Shenzhen

A couple of weeks ago, an article about chaos in pork slaughter in rural areas. It seems that this also happens in one of China's wealthiest cities under the noses of inspectors.

Reporters for the Yangcheng Evening News uncovered a underground pig slaughtering operation in downtown Shenzhen. The reporters traced the pork from the wholesale market in Shantou to the retail market, following trucks to the source of the pigs and watching men carry the illegal pork into the market in plastic bags under the noses of market inspectors. The results of the investigation are troubling for Shenzhen residents, but they also cast doubt on China's food safety measures.

This is nothing new. Illegal slaughterhouses and sale of sick or dead pigs has been a problem for years. There is a system in place that is supposed to prevent such things from happening, but it is possible to evade enforcement without too much trouble since the enforcement is not very good.

Here is a summary of the investigative report from Yangcheng Evening News. The report is very detailed and meticulous and lengthy, but worth reading to see how unscrupulous rings of traders can evade inspectors.

On March 6, readers called the Yangcheng Evening News to report that there was an underground slaughterhouse below the flyover at the intersection of Lucky Dragon and Honey Lake roads. At 11:24 that night the reporter went to the place and found it quiet. He followed Xiaoshan road to look under the bridge and saw a truck parked there. On the ground was a vat and pig manure was on the small road. As the reporter entered Yanshan road, he saw several people hidden among the trees.

At 2 am the reporter returned and saw a procession of trucks entering and exiting. The grunting of pigs could be heard coming from some of them. One person said the trucks contained sick or dead pigs, and said as many as 200 pigs are butchered here every night.

There were about a dozen men on both sides of the Xiaoshan road and they seemed wary of the arrival of the reporter’s car. The reporter found that there were two butcher operations hidden among the trees and heard squealing pigs.

About 1 am on the night of March 12th, the reporter staked out a point where he could watch the butchers. He saw a large vat with a fire underneath it and two red plastic tubs filled with water. On the ground there was a lot of waste water and blood. On another side of the vat was a wooden pen containing seven or eight pigs, some pigs lay still on the ground. Three men were busy working. There was a pool of water about 10 meters from the vat, and next to that a hair removal machine. There were four carcasses lying on the ground next to it.

At 1:31, one man was sharpening a knife on a stone while another brought a pig from the pen, and it was butchered as the reporter watched. A man carried the pig to the vat, leaving a trail of blood. After leaving the pig in the water for some time, he pulled it out and laid it on the ground. Another man came to remove the hair. About five minutes later, the slaughter was complete and the carcass was loaded on the truck.

At 2:13 am, a truck pulled up to unload pigs. Of the 8 or 9 pigs, two lay motionless in a corner of the truck. About 20 minutes later a man pushed the pigs off the truck and they were lying on the ground. These pigs made no sound as they were butchered.

During the hour the reporter watched, the men butchered nearly 20 pigs. When the reporter returned at 5:46, the men were packing up their equipment and leaving.

Each night many trucks delivered pigs to be butchered. On March 15, the reporter tracked the truck with license plate Guangdong BGW717 to Huizhou’s live hog market. The reporter saw the truck stop at a market stall where the driver talked briefly with the seller. After loading the pigs, he drove the truck to a dark corner where he opened the door and two men loaded two more pigs on the truck.

The reporter recorded the license numbers of the trucks going in and out. In less than half an hour, 40 trucks with license plates beginning with B were recorded, including the B82W82 truck seen at Lucky Dragon Road slaughter house in Shenzhen.

The reporter followed a truck to the underground butchers in Shenzhen. Half an hour later, the pig carcasses were then delivered to Shenzhen’s Futian wholesale market. No one stopped the truck during this process. The requirements that pigs entering Shenzhen from outside have to be inspected and meat sold in the market must go through inspection and other procedures are empty air.

During the night on March 12,reporters were posted at various intersections to track the trucks leaving the illegal slaughter point. At 2:00, a truck with BGW717 license plate came out of Xiaoshan Road, and the reporter sent the license number by cell phone to his colleagues waiting at various places. One reporter saw this truck approaching the Futian wholesale market. The truck stopped about 200 meters outside the market. Two men approached, and unloaded 5 or 6 hog carcasses and began cutting them up. More and more trucks delivered pork, and both sides of the road were lined with men cutting it up.

At 3:30, the reporter entered the meat section of the market. A truck from a [legitimate] meat company was parked at the entrance, and each vendor unloaded one carcass from it. An inspector was there to issue inspection certificates. These vendors use small carts to deliver the carcasses to their stalls where they cut them up further.

Meanwhile the underground butchers’ meat outside the market had quickly been cut up and placed in plastic bags. One man walked toward the market carrying two bags, and placed them on a cart near the entrance. After several such trips, a man came from inside the market and pushed the cart to the rear of stall no. 35. The vendor at that stall pulled pork out of the bag and placed it on the counter for sale. In this way, two entire carcasses are brought into the market two bags at a time, like ants moving a house.

At about 5:00, the reporter saw that all the underground-butchers’ meat out side the market was gone. At about 6:00, meat stalls started their sales. This whole process was carried out under the noses of the market security persons, but no one inspected or checked the underground pork.

One knowledgeable person from a [legitimate] meat processing plant said illegal pigs can evade market supervision. Some pork gets inspection certificates by false pretenses. An enforcement person from the bureau for the district heard the reporter made unannounced visits to the underground butchers and acknowledged that there were 3 or 4 underground butchers and their intricate network, but said enforcement is hard.

If reporters can find the holes in the pork inspection system, why is it so hard for the inspectors?

Thursday, April 8, 2010

Ill-timed pork policies

Livestock industry news is all about widespread losses among hog producers. According to one article, right now a small farmer would lose 158 yuan raising a 110-kg hog.

The "hog cycle" is one of the best-known and most persistent economic phenomena in agriculture. Some of the sharpest economists have been working on ways to smooth out the hog cycle since the early part of the 20th century.

Since 2007, China has probably taken more measures to deal with the hog cycle than has ever been attempted, but Chinese officials have not been able to tame the cycle. They are now buying frozen pork for reserves and announcing that hog prices have stopped falling, but ill-timed subsidies in 2007-08 caused the industry to over-expand and create excess capacity.

From January to March of this year, hog prices plunged while feed prices have been creeping up. Consequently, the ratio of hog to grain price is now below the breakeven point of 6:1, and an article from Jiangsu says it's down to the "red line" of 5:1. Hog producers say they lose 150-200 yuan on every hog, so they're cutting back on inventories. Producers of feeder pigs are slaughtering some of their sows, which will make it hard for the industry to rebound if prices improve. Small-scale farmers are quitting, but those who have lots of cash are persevering through the downturn.

These conditions are similar to those that prevailed in 2006. Farmers were experiencing very low prices following a big build-up in hog inventories when avian flu induced many consumers to switch from poultry to pork in 2004. Many sows were slaughtered in 2006. When "blue ear" disease hit in 2007 with an already-tight supply, prices soared 50-70%.

The government panicked. They doubled the subsidy for sows from 50 yuan to 100 yuan per head, paid a "fine breed" subsidy, introduced sow insurance subsidies, waived income taxes for corporations entering hog farming, subsidized vaccinations, and made cash payments to major pork-supply counties. At the same time, high prices and profits attracted lots of investment in the hog sector.

Supply increased throughout late 2007 and 2008, and prices fell nearly as fast as they had risen. By May 2009, the hog-grain price ratio was down to the breakeven level and consumers were worried about eating pork as swine flu was on the rise. Prices recovered in the summer and fall and started dropping again at the end of 2009.

According to one article, here's what some pork producers are saying: "In 2007 and 2008, the government gave farmers subsidies, but last year and this year there were none." A local official said, after the state issued subsidies hog inventories clearly increased, so there were no subsidies given last year or this year.

THe official said prices are falling because supply exceeds demand. Some in the industry attribute the fall in prices to widespread disease which induces farmers to sell off hogs and causes buyers to lower their price given the high probability that the hogs they're buying are sick. Disease--another parallel with 2007.

Will there be another shortage of pork later this year, followed by another round of subsidies? The pork roller coaster never seems to stop.

Monday, April 5, 2010

Do Middlemen Produce Any Value?

The Ministry of Commerce announced that its "Farmer-Supermarket Linkage" pilot program will be expanded this year. This innovative program, begun last year by the Commerce, Finance, and Agriculture Ministries, arranges for supermarket chains and other agricultural companies to purchase farm produce directly from producers.

The idea is to reduce marketing costs by cutting wholesalers and traders out of the supply chain. The cost savings are distributed to farmers, consumers, and retailers. Farmers get a higher sale price, supermarkets purchase at a lower price and they pass on savings to consumers through a lower retail price. The Commerce Ministry says it supported 205 projects last year, which on average raised farm prices 15% and cut retail prices 15%, bringing benefits to all three parties: farmers, consumers, and enterprises.

The losses sustained by traders and wholesalers--most of whom were probably poor farmers a few years ago--apparently don't matter. The program reflects the Communist Party's dim view of middlemen--they can be cut out of supply chains with no loss to society.

A local Beijing newspaper reports an example. At a Wu-Mart hypermarket outlet in Beijing, consumers are lining up early in the morning to buy sweet red strawberries that had been growing in greenhouses in Changping County just a few hours earlier.

The report says that the traditional supply chain is for farmers' strawberries to be sold to traders at local wholesale markets, then resold to wholesalers at larger markets before entering the supermarket. A 10% mark-up is added at each stage. The direct purchase program reportedly allows farmers to get their harvest to the retailer faster with less waste, while the strawberries are fresher and more flavorful. A farmer told the reporter that they have been selling over 100 kg. of strawberries daily, valued at 4000 yuan, since the direct sales to Wu-Mart began March 1.

At first glance, the linkage program makes a lot of sense. There is a lot of waste in food marketing. Farmers often have a big harvest that goes to waste because there is no purchaser.

However, the unspoken premise of the program is that the middlemen do not perform a valuable function (and therefore do not deserve to be compensated). This fits in with Marxist ideology where value is derived only by creating material objects. In fact, traders and wholesalers do perform a function by tracking down berries in far-flung corners of rural China and getting them to the markets where they are demanded. If you cut them out of the supply chain, someone has to perform this function--who does it?

In the direct linkage program, the matching of suppliers and retailers is subsidized by local officials who organize meetings to do this. In Beijing, the local agricultural and commerce commissions organized a strawberry season launching meeting in January where Wu-Mart signed agreements to purchase directly from two villages in Changping and a grower in Xiaotangshan (probably associated with the extension station there). Interestingly, the Beijing wholesale market management commission was part of the meeting where arrangements were negotiated to cut wholesale markets out of the supply chain.

In ideal circumstances, the program looks good, but central planning looked good when it was on the drawing board in the first half of the 20th century. Small scale traders are "chaotic" and hard to control, but they also provide flexibility needed in a dynamic and unpredictable market. What happens if the growers have more product than the contracted supermarket can take? What if there is a drought or pest infestation in the designated supply region--where will the supermarket get strawberries then? In both cases, the "chaotic" traders and wholesalers will probably step up to balance supply and demand.