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.

Thursday, November 18, 2010

This week's grain auctions

Is China running out of corn? Nobody knows since corn reserves are a state secret (see yesterday's post).

On November 16, over 300,000 metric tons of corn from reserves were offered for sale at auctions in four northeastern provinces. Only about 30% of the corn was actually purchased--this is in contrast with the situation last summer when all corn put up for auction was sold.

Corn was mostly from last year’s crop but included corn from as far back as 2006.
Here's what was offered by year the corn was originally purchased:
4,102 mt from 2006 (99.7% sold at 1640 yuan/mt)
50,100 mt from 2007 (37% sold at 1629 yuan/mt)
44,400 mt from 2008 (30% sold at 1569 yuan/mt)
202,400 mt from 2009 (37% sold at 1617 yuan/mt)

Interestingly, Jilin, the largest corn-producing province, only put up 20,000 mt and nearly all of it sold. In Heilongjiang and Inner Mongolia, larger amounts were offered and less than one-third sold. Maybe there is a spot shortage in Jilin.

In Heilongjiang 141,400 mt (99,200 from 2009) was offered but only 14% sold at prices from 1560 to 1650 yuan/mt.
In Inner Mongolia 109,000 mt (30,900 mt from 2008 and 61,000 mt from 2009) was offered and 31% sold at 1640 to 1690 yuan/mt.
In Jilin 20,500 mt was offered and 99.3% sold at 1660 to 1740 yuan/mt.
In Liaoning 30,000 mt of 2009 corn was offered and 17% sold at 1600 yuan/mt.

Grain officials also announced 1.5 mmt of interprovincial transfers of corn from central reserves for this week. About half of that corn was from northern regions: Beijing, Hebei, and Shanxi. The rest was in smaller lots in southern provinces.

Auctions of 99,600 mt of japonica rice were also held on November 18 in seven provinces, but only 14,000 mt sold. This grain also was from years 2006 to 2009. In most provinces all rice offered was sold, but only 7% of the rice offered in Heilongjiang sold and 11% sold in Zhejiang.

The location of reserves is still an issue. It's possible for regional imbalances in supply-demand to occur. The list of rice being offered included a column indicating whether there was a dedicated rail line (set aside by authorities) for transporting the grain. Nearly all of the Jilin warehouses had a dedicated rail line and about half of the Heilongjiang warehouses did; other provinces did not.

Another indicator is whether rice was stored in the open (not in an enclosed warehouse). About half of the Heilongjiang and several Tianjin storage warehouses were in the open.

Wednesday, November 17, 2010

Seven Good Grain Harvests

According to government statistics, China has had seven straight increases in grain production from 2003 to 2010. The Farmers Daily online interviewed three of China's leading agricultural economists to ask them to explain the reasons behind this unprecedented string of big harvests. Guess what? All three stressed that the policies of the communist party and the government were the key factors behind the big harvests.

Han Jun, a top rural policy advisor in the State Council's Development Research Center, said in his interview that China has gone through cycles in grain production over the past three decades, but the 7-straight increases are unprecendented. He calls this a "golden period" and says it is remarkable considering the challenges faced, including this year's bad weather, market volatility, and inflationary expectations.

Han says two-thirds of the increase in production came from rising yields and one-third came from increased grain area.

Ke Bingsheng, president of China Agricultural University, said in his interview that grain area increased by 10% from 2003 to 2009 and increased multiple-cropping account for two-thirds of that increase. Ke also points out that area of high-yielding crops increased--corn was up 30% and rice was up 12%, so a larger volume of output was obtained from a given area of land.

Han and Ke also credit increased production capacity. Han says that human labor, draft animals, and organic fertilizer were replaced by machinery and chemical fertilizer. High quality seeds are planted on 95% of cropland now. Irrigated area has increased.

Song Hongyuan, director of the Ministry of Agriculture's Research Center for Rural Economy, said in his interview that policy was the most fundamental reason for the increase in grain production. Al three economists credit subsidies for giving farmers stronger incentives to plant grain. Song emphasizes the consistency of the subsidies--farmers understood they could rely on the subsidies year in and year out.

Song and Han both emphasize price support policies. The government has a strategy of raising prices at a steady rate year by year, preventing big fluctuations. Song points out that China's grain prices have not fluctuated as much as other prices. Song asserts that price fluctuations are what farmers fear most; they need stability.

The seven-year run of big grain harvests reminds me of the Old Testament story of Joseph, who advised the Egyptian Pharoah on grain policy. Joseph interpreted Pharaoh's dream of seven skinny cows eating up seven fat ones as an omen that seven good harvests would be followed by seven bad harvests. Joseph advised Pharoah to store up grain (in the cities) during the good years and then let everyone come to him to buy it during the lean years.

China's Communist leaders would certainly admire Joseph as a wise advisor to a powerful king (the type of career Confucious aspired to, in fact, but never attained) and he developed the first "early warning system" for forecasting the grain market. Another eery parallel is that Joseph was languishing in prison on trumped-up charges when he was called in to be senior grain policy advisor.

Farmers, Please Sell Your Grain

This year's corn has been harvested and it looks like a more or less "normal" harvest, certainly better than last year's that was devastated by drought in parts of the northeast. Farmers have corn but they're not selling it. Prices have been rising in recent weeks, but the market is at a standstill, waiting to see if prices keep rising.

Jilin Province--the major corn producer--announced a "three encouragement, one oversight" campaign for this year's corn marketing season.

Encourage farmers to sell grain, to sell good grain at a good price. Farmers have grain on hand but they are hesitant to sell. Grain departments are to publish forecasts and market information so farmers know the actual situation.

Encourage processors to buy grain according to state policies to solve their production raw materials problem. Financial organizations (banks) should make plenty of credit available to facilitate grain purchases.

Encourage grain enterprises to go into the market according to state policy to buy grain, preventing farmers from experiencing difficulty selling their grain. Grain administrative departments are to carry out a one-time spot-check of grain warehouses to verify how much grain they have. This year, to carry out support price programs, the province designated 160 minimum-price purchase points for rice and 117 provisional purchase points for soybeans.

Market oversight will be strengthened to maintain "orderly markets." There will be a crack-down on hoarding of grain, and everyone should guard against downgrading of grain (to pay a lower price).

State Secrets and Paranoia

We all try to keep secrets from time to time. But in China keeping secrets is a national policy that is the responsibility of every citizen. It's surprising to outsiders what is considered a state secret in China. And this is serious business: many dissidents have been jailed for "revealing state secrets."

I happened to come across a message announcing that all employees of the Jilin Provincial Grain Exchange would be organized to study the revised national law on state secrets. A google search shows that all government organs were carrying out such activities in September of this year.

The purpose was to "seriously implement the 'PRC preservation of state secrets law,' strengthen security secrecy consciousness, raise secrecy quality capability, spread the firm establishment of security concept and secrecy legal concept to all officials, protect national security and interests."

Staff were instructed to design flexible, eye-catching propaganda and put it in prominent positions on the exchange's web site.

Another web site carried a list of 22 pithy slogans, such as "Warmly welcome the revised PRC preservation of secrets law," "The national interest is above all, the responsibility of keeping secrets is weightier than Mt. Tai," "Keeping secrets is preserving security, promoting development," "Do a good job on keeping secrets, studying propaganda is priority and the base for everything else."

And this is not just for officials: "Keeping the party’s and the state’s secrets is each citizen’s legal obligation."

And some paranoia: "Strengthen secret-keeping consciousness, strengthen consciousness of the enemy."

Who do you suppose is the enemy? A strange anonymous posting on a Chinese electronic bulletin board provides a window into the kind of paranoia and strategems that drive the secret-keeping strategy:

"Is someone inquiring about the layout of China’s agricultural fields? This is a state secret! The person inquiring is sinister!! If you know the layout of agricultural fields, you could then use satellite imagery to estimate China’s grain production!! American grain merchants could use that to raise grain prices and threaten China’s grain security!!! Guard against traitors!! Guard against spies!!"

Tuesday, November 16, 2010

Slaughterhouse plans

Earlier this year the Ministry of Commerce issued a plan for reorganizing the pork industry. Now provinces are putting it into action.

In October, Jiangsu released its plan to consolidate slaughterhouses and set up a nice orderly system of four grades of slaughter and processing enterprises during 2010-15. Slaughter enterprises will be divided into four classes:

4-star: 1000 hogs or more per day capacity
3-star: 500-1000 hogs per day
2-star: 200-500 hogs per day
1-star: 50-200 hogs per day

The government will give unspecified "policy support" to enterprises that can meet the standards for 3-star or higher and give them encouragement and guidance in developing cold-chain facilities and engage in interregional sales of pork. All new slaughter enterprises have to be at the three-star level or higher and have inspection capabilities and testing labs. Their layout, equipment and facilities must be at international standards.

There will be two flagship four-star enterprises with capacity of 1 million head per year, one in a production area and one in a consumption area. By 2015, enterprises with capacity of 500,000 head per year will account for about 40% of the market.

Meanwhile, "backward" small slaughter enterprises with capacity of 50 or fewer head per day will be eliminated. They will be tolerated in remote areas and rural places with poor transportation. There are targets to drastically reduce the number of these small slaughterhouses by 2013 and 2015. Underground slaughter points should be shut down and there should be strict audits of pork coming into Jiangsu from other regions.

There is a nice neat plan for a hierarchy of provincial-, city-, and county-level slaughter enterprises at different grades. They are encouraged to shift from fresh, generic slabs of pork to branded, chilled cuts of pork that are sold interregionally. More pork will be sold through specialized shops and chain stores, temperature controlled warehouses will be built, and distribution enterprises will be nurtured.

All pork enterprises and food service organizations in Jiangsu are to begin using receipts and certificates so a traceability system for pork can be established. The sale of sick and dead pigs will be stopped.

In Tianjin, the 26 designated slaughterhouses will all be outfitted with electronic monitoring equipment in 2011. Departments overseeing food safety will be able to monitor pork from its source to ensure its safety.

Tianjin will " a good job at separating grades of hog slaughterhouses and will give policy support to three-star grade dragon head enterprises." Dragon head companies that meet requirements of the plan will be helped in getting “assurance pork” into supermarkets, standardized food markets and other pilot work. Branded enterprise sales channels will be expanded so that branded meat will account for 60% or more of the market.

Companies masquerading as cooperatives

Vice Minister of Agriculture, Chen Xiaohua, reported at a national meeting that China now has 310,000 farmer cooperatives with 26 million members, about 10 percent of the rural population. According to an agriculture ministry official, farmer cooperatives are intended to overcome the shortcoming of China's household responsibility system--small, scattered farmers need to enter a big agricultural market.

A reporter for the 21st Century Economic Herald found that many of the cooperatives were agricultural companies that had converted themselves into cooperatives to take advantage of favorable policies.

In Anhui Province, the reporter visited the Sanhe Village Tea cooperative that formerly had been a small tea company. In fact, it still had the former company's sign hanging in the courtyard. The cooperative was set up in 2008 and has 200 members and encompasses 200 mu of tea bushes.

A vegetable cooperative in He County, Anhui Province. The cooperative was formed by a company that supplies vegetables to supermarkets in Shanghai.

Some of the members were unhappy with the cooperative's distribution of surplus earnings. The cooperative keeps 40% of the surplus as retained earnings, 30% is paid to members, and 30% is paid to stockholders.

Some members were unhappy that the funds were not evenly distributed among members. As in many cooperatives, four people--the owners of the former company--own most or all of the stock. Some of the members asked, "Is this a cooperative or a corporation?"

In Liaocheng City of Shandong Province, many of the cooperatives have been set up by individuals who want to farm on a larger scale but lack cash for working captial. They set up cooperatives with investments of 200 yuan from members. Reportedly, the shares are now worth 15,000 yuan due to the accumulation of profits.

Why would a company become a cooperative? According to one researcher consulted by the reporter, some township and village enterprises who are having trouble getting financing can get a 200,000 yuan subsidy from the local government by setting up a cooperative. Cooperatives are also exempt from the taxes companies have to pay.

However, the article says that farmer cooperatives are facing severe funding problems. Their working capital needs are much larger than those of individual farmers but they generally cannot get loans from banks or credit cooperatives. Their main source of capital is informal finance or infusions of cash by members.

One cooperative leader (the cooperative is named after him) complained that he had applied for a 2 million yuan bank loan 6 months earlier that had not been approved. He also complained that seed costs have been rising.

According to the article, loans are now much easier for individual farmers to get. Postal saving offices and banks are giving out "micro loans" of 100,000 yuan or less to farmers. However, the article warns that many cooperatives are on the brink of collapse due to the financing problem.

Thursday, November 11, 2010

Privatizing? the Grain Industry

According to a brief article from China Securities News in October, the number of state-owned grain enterprises has fallen by nearly half since 2004. The reporter learned from the Grain Bureau that there were over 18,000 state-owned enterprises in the grain indsustry at the end of 2009, down more than 16,000 since a "property rights breakthrough" in 2004, with steady structural change and industry-upgrading as the objective. Since 1998, state-owned grain enterprises have shed 2.67 million employees, an 81% decrease.

That doesn't mean the grain industry has been privatized. According to the report, from 2006 to 2009 state-owned enterprises accounted for 57.8% of national grain purchases. "After reform of the grain market...state-owned enterprises continue to play a leading role in grain purchase."

Since the beginning of 2007 grain enterprises have earned good profits. State-owned grain enterprises' net assets (equity?) totaled 81.7 billion yuan at the end of 2009. Their assets were up 14 billion yuan from 2004 despite decreasing in number by nearly half and losing 81% of their employees. Now that's consolidation!

Upward Pressure on Milk Prices Deja Vu

Caijing Magazine's website reports today that an official with Yili, one of China's largest milk companies, said that the dairy industry is about to raise prices as the peak season for milk consumption arrives. The industry has been under rising cost pressure since August, presumably due to rising raw material prices, and profit margins have been shrinking.

The vice director of Guangzhou City's milk office told the reporter that the industry is under great pressure and probably cannot avoid raising prices. They will probably concentrate on raising prices for premium high-value products. Factors behind the price increase include rising prices for raw milk and consumers' rising income and acceptance of higher prices.

Comment: current conditions are strikingly similar to those of 3 years ago. In the fall of 2007 milk prices rose rapidly and the Chinese government imposed price controls. The rising costs and booming demand put pressure on margins and sent companies on a scramble to find low-cost milk suppliers. This occurred about the time melamine adulteration became rampant (the pattern of sick infants was recognized in mid-2008, about 6-9 months after prices shot up).

Wednesday, November 10, 2010

Students Sent Down to Countryside

"You must learn from them."

In Chongqing Municipality, the 1970s program of sending students "down to the countryside" is being revived. The "climb the mountain, go down to the countryside" program sends university students to "learn the actual situation at the grassroots."

According to the Chongqing Evening News, the purpose of the program is to improve the general quality and practical capabilities of students. "Practical training is necessary for students." The cartoon above shows a teacher urging the apprehensive student to learn well from the peasant, worker and soldier.

A clip from the local news shows students being mobilized to go down the countryside to plant trees, learn from peasants, workers and soldiers, do social surveys and other activities for no less than four months. The clip also displays footage from the 1970s "Great Cultural Revolution" period when "young intellectuals" were sent down to the countryside.

Another article explains that practical learning is necessary for students only concerned about scoring well on exams. Then the article notes that building up the countryside has been a focal point of government policy in recent years. The number of university graduates has increased a lot and this talent should be employed everywhere. By learning the actual situation in the countryside, students can get a different perspective. Future officials--today's university students--will gain an appreciation for the needs of peasants and the countryside.

Getting practical education

Tuesday, November 9, 2010

A New Litter of Dragon Heads

China's agricultural sector is made up of scattered, fragmented peasant farmers who have an average of about 1 acre of land broken up into 4-to-5 small plots. The government's "agricultural industrialization" strategy involves linking up these small farmers with strong agribusiness companies who provide them with a marketing channel and a source of technical and market information.

These agribusiness companies are called "dragon head" enterprises. The dragon is a benevolent creature in Chinese mythology, and "dragon head" refers to the traditional dragon dance in which a series of dancers insider the dragon costume follows the dragon head in a nice orderly line. The company is a "dragon head" that leads the farmers into the market. The farmers don't need to know where they're going; they just follow the dragon head wherever it goes.

The government designates companies that meet criteria for size, success, technical capability, and promise for "pulling along" farmers in the dragon dance by giving them a market for their products and providing technical information. (Each class of "dragon heads" no doubt also represents hundreds of banquets and gallons of liquor as well.) There are dragon heads with designation at the national, provincial, and city level.

There are hundreds of national-level dragon heads. A new set of 59 companies were named national-level dragon heads in October. The Ministry of Agriculture has a monitoring and assessment system that checks up on dragon heads every two years and adds new companies or removes the designation from those that no longer qualify. The new set of dragon heads are from just about all provinces, but seems to be heavily weighted toward the northeast. There are 16 from the three northeastern provinces while many other provinces only have one or two. They include various meat, rice, flour, fruit juice, milk, "food," "biological," and pharmaceutical companies. Most seem to be based in small cities. It includes a poultry company in Da'an City of Jilin Province, the New Star pork company in Zigong City of Sichuan, and the North Andrew company in Yantai of Shandong, one of the top four apple juice exporters.

The dragon heads are an example of China's curious approach that uses private companies to carry out government policies and strategies. The announcement of the new dragon heads states " it is hoped that these enterprises...will seriously study implementation of the communist party central committee and state council’s projects and policies for advancing agricultural industrialized management."

The final paragraph reads like a laundry list of China's new economic strategies. The dragon heads are supposed to compile experience from the world financial crisis and ways to help farmers increase their incomes. They are to help change the mode of development, "stabilizing" the external (foreign) market and expanding the domestic market, upgrading product structure, innovating, and absorbing new technology. They are instructed to improve product quality and safety, build industrial chains, develop standardized production, and pay attention to farmers' interests.

The dragon heads are to strengthen their ability to "pull along" farmers from an expanding radius, promote stable agricultural development and rural prosperity and harmony.

The dragon "dance" may be an apt metaphor. To some extent it is a choreographed dance for show since dragon heads often just go through the motions in their assigned responsibility to help farmers.

Monday, November 8, 2010

Debt Burden Replaces Tax Burden?

Over the past decade, "lightening the peasants' burden"--reducing taxes and fees assessed on peasants--has been one of official mantras for rural officials. The "agricultural tax" was phased out nationwide between 2004 and 2006 and officials are not allowed to impose arbitrary fees and taxes.

Last month, the State Council held a meeting to discuss this year's investigation of peasants' burden. It involves the Ministries of Agriculture and Finance, State Council Rectification Office, National Development and Reform Commission, State Council legal office, education ministry, and news media.

The investigation will concentrate on village administration and finances, including assessments, fund-raising, and contributions of labor for public works and infrastructure projects. It will investigate assessments or requests for donations from village organizations by government departments or units.

While the elimination of taxes on peasants has been publicized as a great benefit to farmers, the reduction of tax revenue left rural governments seriously short of funds to operate. At the same time, there is a big campaign to "build a new socialist countryside" and upgrade all kinds of infrastructure. Consequently, many (most?) villages and townships are mired in debt. This problem is not discussed much.

Materials from a communist party official from Shijiazhuang in Hebei Province distributed for a meeting on village administration reveal the serious scope of the problem. He says 86.5% of Shijiazhuang's 4,351 villages have debts totaling 1.6 billion yuan, the equivalent of $235 million. And my understanding is that villages aren't legally supposed to borrow money.

The official links the debt problem to the tax elimination. He says the average village's collective income fell from 73,000 yuan to 28,000 yuan after the agricultural tax was canceled. He estimates that a village, on average, needs about 120,000 yuan for village affairs, schools, running village enterprises and other expenses. The official says, "Village debts seriously affect their ability to develop."

There has been a big influx of subsidies from the central government for infrastructure building, education fees, and "awards" for grain- and pork-surplus counties, but not enought to fill the financial hole. There is also an effort to eliminate the township level of government and cut back on public payrolls, but this is not moving very fast. The outstanding debts owed to rural credit cooperatives, banks, government departments, and individuals leave them short of funds too.

Friday, November 5, 2010

Bottom-up Organic farming in Wash Post

A November 1 Washington Post article describes young professionals in Shanghai who are trying to become organic farmers. Interesting piece with nice photos.

The Washington Post article describes "bottom-up" organic farmers in the western mold of educated people who want to get back to the land. The organic "movement" in China is mostly a quite different "top-down" mode--government agencies and companies see a market and a way to improve food safety and then rent land from farmers or organize a bunch of farmers into a "production base" to grow organic food. In the industrialized "top-down" approach used in China the farmers have little concept of what organic agriculture really is.

Chongming Island, where the farmers are operating their farms, is an interesting place. It used to be carved up into state-owned farms and a lot of Shanghai residents were "sent down" there during the cultural revolution. Now it has become a big eco-showcase for Shanghai, complete with lighted map and comprehensive plan.

Monday, November 1, 2010

Machines for Cattle: Where's the Beef?

A farmer herds his cattle in Hubei Province, august 2009

Mechanization is one of the measures China is pursuing to modernize its agricultural sector. Since 2004, there has been an expanding subsidy program to encourage purchase of all kinds of agricultural machinery.

This is a profound change in the rural ecology of China. Traditionally, crops, livestock, and people existed in an interlocking cycle that supported huge numbers of people on a very limited land base. Farm work was performed by a combination of back-breaking labor by people with the help of water buffalo and cattle. In exchange for their work ploughing for a week or two and various other tasks, the cattle got to loaf around and wallow in rice paddies the rest of the year. When their useful life as draft animals was finished, they were turned into a beef dinner.

The mechanization program actually has a slogan of “machines replacing cattle (ji dai niu)” that has the objective of eliminating the use of draft cattle. Based on an online search of news articles, Hubei Province seems to be the most ambitious. In Gong’an county, since 2008 they have eliminated precisely 6,235 cattle and replaced them with 3,558 pieces of equipment bought with subsidies. The county has 62 village and 3entire townships where draft cattle have been completely eliminated.

In Jingzhou, party members and state farm cadres have been instructed to set a good example by eliminating their draft cattle. As of October, the district had eliminated 5762 cattle but that was just 28% of their goal. In Jingzhou they're on the lookout for people who kill their animal and then buy a new one.

Gansu officials boast that their “machines replacing cattle” plan has resulted in declining numbers of cattle and “farmers’ dream of cultivating land without cattle is coming true.”

The urgency of getting rid of cattle is motivated by public health concerns. The “machines replacing cattle” program is led by the “schistosomiasis control” leadership group in Hubei Province. Schistosomiasis is a potentially deadly parasitic disease spread by freshwater snails and affects as many as 1 million people in China. Schistosomiasis, also known as "snail fever", was widespread in the 1960s when sanitation was particularly poor. There has been a resurgence of the disease in recent years.

According to a 2004 Xinhua article, “In the coming years, China will work to improve people's awareness and prevention of schistosomiasis infection, change traditional farming method and lifestyle, screen rural residents and animals infected with the disease and offer appropriate medical treatment.” In September, Vice Premier Li Keqiang announced a renewed campaign to fight schistosomiasis following the summer's flooding.

The disease is most common in the provinces along the Yangtze River, centered around Hubei. In Gong’an County, infected cattle are being slaughtered and farmers can be compensated 1200 yuan per animal.

The mechanization program potentially has important implications. Obviously, China’s agriculture is becoming more petroleum-dependent. Instead of relying on local sources for energy (food) for people and draft animals, petroleum must be brought in from overseas.

The “machines replacing cattle” program could also have implications for China’s meat industry.

China’s beef has traditionally come predominantly from cattle used for draft purposes. China doesn’t have enough pasture to raise heifers and calves profitably. Land is too scarce to just grow grass. Moreover, the cycle for raising cattle to market weight is 2-3 years, too long for Chinese farmers to wait for a return on their investment. You can earn a lot of money working off-farm in the time it takes to raise a calf to market weight.

An insightful 2008 report from the China Livestock Industry Association calls attention to a widespread abandonment of beef production by Chinese farmers and declining cattle inventories in many places. Many slaughter facilities are closed or running far below capacity. According to the report, farmers are only willing to raise cattle if they are dual-purpose—for draft and meat. Many farmers are unwilling to raise cattle just for beef.

If draft cattle are replaced with machinery, they are unlikely to be replaced by cattle raised strictly for beef. This means short supplies of beef and high prices for beef. This means either China will import beef or expensive beef will induce Chinese consumers to substitute other meats and protein sources. This may already be happening. Chinese beef prices have been quite high since 2007 and beef consumption is largely limited to niche-type restaurants—McDonalds, hot pot, Muslim restaurants, Brazilian barbeque, and stead houses—in most of China.