Saturday, January 29, 2011

Why Vegetable Prices Increased

Last week, the Farmers Daily contained a long article explaining why vegetable prices increased in 2010. The article notes that the rapid increase in prices attracted a lot of attention and prompted the central government to issue a series of 16 policies to address the issue. According to the authors, a clear understanding of the reasons for rising prices is necessary in order to make good policies.

Many factors contributed to rising prices. While some regions had unusual weather last year and urbanization gobbled up land, the article insists that supply and demand are basically balanced. Ministry of Agriculture statistics show that acreage planted in vegetables went up 8 million mu last year. Rather, the article points to rising costs in each stage of the supply chain as the main reason. The author argues that rising costs are not unreasonable and points out that profits need to be spread evenly among the various actors--farmers, traders, retailers--to preserve a stable long-term supply chain.

The first reason for rising prices is higher costs of growing vegetables. This is due to rising prices of fertilizer, pesticides, fuel, and plastic sheeting as well as increasing land rent. In Hainan, the rent for vegetable land was quoted at 1200 yuan per mu in 2009, up from 50 yuan in 2005.

Labor costs are also rising. In many areas, labor costs have doubled in the last few years. Vegetable-growing is labor-intensive and must compete with other industries for labor. Rising wages have been the main factor increasing rural incomes, but they also raise production cost.

As a result of urban sprawl, vegetable production has been pushed out of areas on city outskirts and into the hinterland. This raises the costs of transportation and handling. When bad weather disrupts transportation, it's hard to get vegetables into cities, leading to price spikes and high rates of spoilage.

Vegetable consumption is increasing. As more peasants go into cities to work they become consumers of vegetables and stop growing them. Some who stay in their villages have stopped planting gardents, buying vegetables instead. “Statistics” show that aggregate vegetable consumption was 602 million metric tons in 2009, up 24% from 2001.

The average price of a vegetable reflects higher quality and more value-added. The travel and food service industries have raised the value-added and demand for quality, color, and expensive exotic varieties. Investment in greenhouses and irrigation is higher, it costs more to meet safety standards and grow vegetables in the off-season.

The article traces the price of a cucumber from farm to table. A farmer in Shandong sells a cucumber for .93 yuan per jin. His costs include pesticide, seed, water, electricity, plastic sheeting, labor, land rent, depreciation on greenhouses.

The price at the Shouguang market in Shandong is 1.15 yuan, giving the farmer a profit of .22 yuan.

After cleaning, sorting, packaging, and transporting the cucumbers to a wholesale market in Beijing the price is 1.65 yuan. This includes .23 yuan distribution costs and .27 yuan in profit.

The wholesaler's price is 1.8 yuan, which includes his stall fee, labor and truck costs and a profit of .09 yuan.

The retail price is 2.5 yuan. Costs include a stall fee, labor, waste, and a profit of .27 yuan.

Trends in China's Feed Industry

An online posting lists trends for the feed industry over the next five years. It notes that China's feed industry has reached a stage of maturity following two decades of growth. The article describes the industry as one where everyone is trying to expand, resulting in keen competition that will lead to consolidation and a greater attention to raising capital. The article sees consolidation, more attention to raw material costs, forward-integration into livestock farming, and more attention to health, safety, and corporate responsibility.

The article sees rapid consolidation in the industry. It predicts that 30% of feed companies will exit the market over the next five years. In 2009 alone 1321 feed companies disappeared, but there were still 12,291 companies left.

The industry will transition from labor-intensity to capital-intensity. More firms will go into equity markets to raise capital. Small and medium companies will become merger targets.

The feed industry will enter a "high cost era." The price of raw materials will rise as the industry expands production in the face of limited supplies of grains and oilseeds.

The article asserts that the traditional reliance on corn and soymeal as the core feed ingredients is not suited to China's "national conditions." The article describes the corn-soymeal reliances as being dictated by "international grain merchants, spreading their market." Rising prices of corn and soymeal prices are eroding profits on feed. The author asserts that other kinds of grain and meals will become more prominent in the next five years, weakening the corn-soymeal dominance of feed formulas.

The article warns that raw material (grain and oilseed) price fluctuations will become commonplace. In the past, China's prices were relatively stable, but global capital flows are causing more fluctuation in commodity prices. After WTO accession, it's harder to insulate China's market from the global economy.

The author sees forward-integration into hog, dairy, and poultry production as well as other businesses like veterinary medicines and vaccines. Some companies, like Agfeed, have already begun operating large hog farms. The author says vertical integration and control of more stages of the supply chain are necessary to control overall risk.

The scale of production on livestock farms is still relatively small, but this will change rapidly. "With the state encouraging larger scale," the increase in scale and specialization of farms will "surpass most peoples' expectations."

With living standards rising, Chinese consumers are moving into new stages of consumption. They are interested in health and safety, and they are paying more attention to "green food," organic, and "pollution-free" foods. In the next five years brands considered healthy will grow rapidly.

Companies will pay more attention to "corporate responsibility." The article says that most companies are now in the exploratory stage or just give lip service, but in coming years the corporate social responsibility concept will spread. According to one industry leader, "If you lose sight of social benefits, it's hard to sustain economic benefits."

Feed companies will also expand into service businesses, like [loan] guarantee companies and specialized livestock service companies. Information technology and networking will become necessary tools for feed businesses.

Monday, January 24, 2011

More Capacity; Flat Goods Prices

Last week the National Bureau of Statistics released its annual statistical communique with the first set of macroeconomic statistics for 2010.

News reports focused on the CPI growth of 3.3% and food CPI growth of 7.2%. Food and agricultural products are certainly the main source of price growth in China. Farm prices rose at an even higher rate: 12%-to-13% for grains and oilseeds, 57% for cotton, vegetables 17%, fruit 19%. Hogs were about the only agricultural commodity whose price did not rise.

Energy and metals prices also rose at rates similar to those of ag commodity prices. The housing component of the CPI was up 4.5% and health care up 3%.

Outside of basic commodities there is not much inflation. Manufactured products showed little or no increase in prices. The CPI for clothing was down 1%, durable goods were down slightly, and household goods showed no change.

A related factor is the composition of the 10.3% GDP growth. Fixed asset investment rose 23.8% and real estate investment was up 33%. Of the 39.8 trillion yuan in GDP, 27.8 trillion yuan was fixed asset investment. Exports were up 31%. Retail sales were up 18%, 14.8% in constant prices.

Much of China's growth reflects building capacity. The new factories turn out huge output that outstrips demand and pushes prices downward.

Agricultural GDP was up 4%. With rising agricultural prices and rising off-farm wages, rural household incomes grew more than 10%, faster than urban income growth.

Wen Pleased With New Corn Variety

While in Henan Province to inspect drought mitigation work, Premier Wen Jiabao dropped in to check on corn breeding at the municipal academy of agricultural sciences in Hebi City.

In the institute's exhibition hall met with Mr. Cheng Xiangwen and his colleagues and ther he saw the evidence of their achivements: wooden bowls filled with golden corn seeds. So far, Cheng and his colleagues have developed 11 new corn varieties, including one that received a third-level national award.

One variety, "Jundan 20," was developed by Cheng after 19 years of breeding. It is suitable for close planting, drought tolerant and high-yielding, reaching 700-800 kg per mu. In 2010, this variety was the second-most popular corn variety, planted on 47 million mu, mainly in Henan and other parts of the Huang-Huai region.

Wen Jiabao heard this and exclaimed, “That’s not easy!”

Wen encouraged Cheng: “Henan Province makes the most important contribution to national wheat production, and its contribution to corn production is increasing more and more.”

While riding in the car back to Hebi City, Premier Wen told local comrades that we will give the Jundan variety a new name: "Forever Quality."

Wen Jiabao: Pump More Water!

While General Secretary Hu Jintao was engaged in international diplomacy in the United States, Premier Wen Jiabao was visiting parched wheat fields in Henan Province. Against the background of Henan's serious drought, Wen signaled that this year's big emphasis will be on improving irrigation infrastructure. Indications are that this will be the centerpiece of this year's "No. 1 Document" on rural policy to be released in February.

This year northern China has been experiencing varying degrees of drought. On January 22, Premier Wen visited a high-yield wheat demonstration area in Hebi City of Henan to see the drought mitigation work being carried out there.

Guo Tiancai, a professor at Henan Agricultural University, told Premier Wen that the area had a soaking rain in the fall and the soil moisture is not bad. However, after only 3 cm of precipitation in 100 days drought conditions are serious. An experts group convened to look at the issue thinks that there probably will not be rainfall before mid-February and conditions could become very serious. The only thing to do is to pour water on the wheat fields.

Later that day, Premier Wen rode an hour by car to another wheat demonstration district in Anyang. There, he sat and talked with the peasants about their income, production, medical care and other issues. He told the villagers that this year the government will concentrate on irrigation construction and the rural road network. Farmers will see better days year after year.

Late in the day on january 22, Premier Wen was back in Hebi City where he held a meeting to urge everyone to make drought mitigation the focus of their work since spring is not far off. He said lagging irrigation infrastructure is a big constraint on agricultural development and national grain security. Better irrigation infrastructure can improve production capacity.

Apparently, the Chinese people should look not to heaven for their daily bread, but under the ground. Pumping more water out of underground aquifers will keep the wheat growing, at least for a while.

Shandong: Rising Corn Costs and Prices

The Shandong Province agricultural price information office reported that corn production costs were up 22% in 2010, yet farmers' profits still increased.

Shandong is the second-leading corn-producing province, accounting for 12% of national production. The corn area has been stable since 2007 and the province has undertaken some yield-improvement programs. Corn output reached a record of 19.215 million metric tons (mmt) in 2009.

In 2010, Shandong's corn production was up 1.3% from 2009, reaching an estimated 19.32 mmt, up 105,000 mt or .54% from the previous year. The yield was 438.76 kg per mu (6581 kg/ha), unchanged from last year.

The article says demand for corn from both feed and industrial uses was strong. Price monitoring data show the Shandong price of corn rose from 1.8 yuan/kg in January to a peak of 2.08 yuan/kg in September. Prices fell 4.8% in October as new corn came on the market. Government price control measures kept the price from rising during November and December. By the end of 2010 the average corn price in Shandong was 1.9 yuan/kg (about $7.20 per bushel).

The wheat price has risen above the corn price. This reversed some of the substitution of wheat for corn that occurred when wheat was relatively cheap, increasing corn demand.

The production cost surveys showed that the average sale price of corn for Shandong farmers was 1.94 yuan/kg (about $7.25/bu) in 2010, up 24% from the previous year. The avearge yield of surveyed farms was 475 kg/mu (7125 kg/ha). Profit per mu was 219 yuan per mu.

I calculate the gross value of production to be 922 yuan per mu while production cost was 724 yuan/mu. The article says net profit was 134 yuan but I don't see how they got this number.

They say production cost rose 22.1%. This includes materials and services of 300.54 yuan and labor 441.7 yuan but again the numbers don't add up. The main components of the cost increase were labor, fertilizer and mechanized services. The article says only 10 days of labor are required for corn in Shandong, but wages were up 9.7% to 42.57 yuan ($6.35) per day. Labor accounts for almost 60% of the cost (although they apparently didn't include land rental costs). Fertilizer and pesticide expenses increased. various fertilizer prices were up 7% to 16%. Pesticide expenditures rose 4.3 yuan/mu, up 35%. Mechanized services expenses rose, reflecting rising fuel costs, higher irrigation fees and more use of mechanized cultivation and harvest services. Fuel for agricultural use cost an average of 7.49 yuan per liter ($4.23 per gallon).

Somehow the profit per mu rose 11% despite cost and revenue both rising by similar rates (22% and 24%).

Friday, January 21, 2011

State Corn Purchases--Get Out of the Way!

The Chinese government has begun to purchase corn to replenish its reserves. Normally, if the government were to go into the market to purchase it would have to compete with other purchasers and probably drive prices higher. To avoid this, the government has ordered corn processors to stop purchasing. Sinograin and its related "deep processing" factories stopped purchasing January 15. According to news from the market, all the major corn processors in Jilin Province have stopped buying corn one after another, making room for government purchases to proceed.

The stockstar futures news says, "although reserve corn purchases have started, processors have left the market so there isn’t a lot of competition."

That means all the corn being purchased now goes into state warehouses. Little grain is in commercial distribution channels, tightening the supply in the market. The article says fewer farmers are selling corn ahead of the spring festival.

Another measure being considered is to cancel the subsidy for Chinese ethanol producers. The subsidy is about 1880 yuan per metric ton of ethanol, roughly the cost of a ton of corn in northeastern China (it takes 3.3 tons of corn to make a ton of ethanol). Without the subsidy ethanol production would be unprofitable and production would be cut back. The article estimates that ethanol uses about 5 million metric tons of corn, so it wouldn't have a huge impact but would ease some of the pressure on corn supply.

The article says the government's control measures have stabilized corn prices. If there are big fluctuations, more measures will be implemented.

There are more rumors about potential corn imports from the United States. Some speculate that Hu Jintao will sign an agreement for corn imports during his visit to the United States. Whether those rumors are true or not, the article asserts that imports are not likely to have much impact on the Chinese market. The price of imported corn arriving at southern ports is about 2250 yuan/mt, about 100 yuan more than domestic corn. Adding the tariff and VAT pushes the cost even higher to 2560 yuna/mt. At these prices it's hard to see a lot of corn imports.

Chinese authorities are aware that the corn supply situation in the United States is tight and more Chinese imports could push prices even higher. That's probably the reason authorities have ordered private processors to stop purchasing to make room for reserve replenishment to avoid a scenario of high domestic prices stimulating imports and even higher world prices.

Tuesday, January 18, 2011

Busting Butchers; Buyer Beware

In 2010 the Chinese government announced a crackdown on illegal butchers who slaughter sick or dead hogs and breeding sows. Local newspaper accounts reporting on the raids reveal that underground butchers are widespread, hard to stamp out, and the story highlights the degree of uncertainty modern Chinese consumers face as the number of intermediaries between them and the source of their food increases. It seems to be a classic case of a "lemon market" where no one knows whether the food they're buying might be fake or dangerous.

On November 10, a 50-person enforcement team from commerce and police departments in Hengyang City, Henan province, swooped down on a village in a convoy of 6 vehicles rode at 2:30 am, "wearing helmets and neatly dressed," where they found an illegal butcher operation with lights blazing in a village house. They seized 11 sick pigs and slaughtering equipment.

The head of the city industry-commerce bureau enforcement team triumphantly pronounced that “The 'strike hard on underground slaughter special activity' has been in planning for a while and has won a great victory!”

However, this official's comments reveal the continued prevalence of underground butchers. The official describes them as "...entrenched in strategic terrain" and "hard to combat."

Dead pigs in Guangxi Province

The underground butchers in Hengyang are so brazen they were distributing flyers in the local market inviting vendors to "go underground." So many pigs were being slaughtered illegally that the city's legal slaughterhouses were operating under capacity, at less than 300 hogs per day.

"Hengyang City is firmly destroy the stubborn group, purifying the market, letting the city population eat 'worry-free' pork." However, one wonders whether the crackdown is for the benefit of consumers or to protect the monopoly of the legal slaughterhouses.

On August 26, a similar 2:30 am raid was conducted in Tunlu village, near Nanning in Guangxi Province. This raid also required a 50-person team to storm a smelly wooden shed where seven men wearing rubber boots were slicing up sick, dead pigs and old sows. The butchers fled in all directions when the raiding party arrived, apparently eluding all 50 of the officers. They seized 49 sick or dead pigs and culled breeding sows plus a freezer full of pig feet.

According to the Nanning enforcement officer, the sick or dead pigs may carry germs. The breeding sows may have hormones in their bodies that could be dangerous to old people or children if they eat them. The enforcement team reported seeing a procession of motorcycles and three-wheeled carts arriving to pick up pork to deliver to markets, fast food restaurants, and factory cafeterias.

The Nanning official assures readers that "most" of the pork in local markets is safe. Pork from dead and sick pigs only constitutes a small part of it. He advises people to buy pork from legal markets and supermarkets where pork is "relatively" safe. This was the first of a series of crackdowns to be conducted during the mid-Autumn festival season last fall.

A December article about another raid near Nanning reveals more about the fake pork issue. This raid turned up 3 sick hogs being butchered in one village and a freezer crammed full of putrid pork in another. According to the officials, seasoning will be added to this meat to cover up the nasty taste and then sold to restaurants or school cafeterias.

This article asks why underground butchers are so resilient. There are substantial fines on the books for people caught selling bad meat, but when underground slaughterhouses are raided no one will admit to being the boss and the "owner" of the building cannot be located. Apparently, village officials don't cooperate with enforcement personnel. Sick or dead pork doesn't pose an immediate threat to consumers' health, so many people don't try very hard to crack down on the illegal butchers.

When butchers in Guangxi noticed authorities were cracking down, they began butchering only a few hogs at a time to evade detection, keeping their inventory hidden.

There is a strong profit motive involved. Sick, dead, or culled hogs can be bought at low prices and sold at slightly less than the market price. Thus, the profit per kg is high.

The practice of passing off pork as beef highlights the "buyer beware" phenomenon that pervades the Chinese food market. It seems that the meat from culled sows is being sold in the market as beef. The sows can be bought at 6 yuan per kg and sold as beef at 36 yuan per kg. The article says it is hard to tell whether beef is real or fake. Consumers say it's authentic beef if it has a grassy smell.

The uncertainty is heightened when authorities may be complicit in the business. While the raids described above apparently brought along journalists to make sure they got publicity, a solo journalist in Anhui Province investigating on his own didn't get far. After getting a tip from "Old Zhang" that sick pigs were being slaughtered and sold, an investigative reporter in Hefei City spent late nights poking around a slaughterhouse outside the second ring road.

He entered the slaughterhouse and saw pigs that appeared to be sick, with red rashes and large growths on their abdomens. He struck up a conversation with a worker, pretending to be interested in buying pigs. The worker told him the price was relatively high, at 9 yuan per jin, but they also had some at 6 yuan. But when he asked whether they had sick pigs for sale, the worker became suspicious and bellowed, "What are you up to?" and chased off the reporter. The intrepid reporter then spent the wee hours peeking through the window and saw a dead pig hanging from the ceiling.

A local government enforcement officials accompanied the reporter to the slaughterhouse. The reporter noticed that some pigs at the slaughterhouse were much smaller than their usual slaughter weight. He was told that these were not sick pigs; farmers were worried that their pigs would not survive the severe hot weather and sold their pigs early. As for the sick pigs he saw in the slaughterhouse, he was told some pigs get sick on the way to the slaughterhouse. All the sick ones are separated and disposed of safely.

When asked about the cheaper 6-yuan pigs, the official denied that they were sick, saying the idea was "nonsense." The official acknowledged that there were sick pigs around but the inspectors found them in the slaughterhouse and their carcasses were burned. The reporter was left puzzled about why some pigs were cheaper.

In the end, the reporter's investigation could not obtain any conclusive results. An eyewitness assured him that sick pigs were slaughtered but the reporter could find no proof.

Finally, a November 2009 article from Lanzhou reports on fake mutton used for kebabs that are popular in winter. A Mrs. Wang bought some mutton to make soup, but a nasty brown foam formed and it gave off a foul odor. Her husband told her it was not real mutton--it was fake.

The reporter went to the Lanzhou market to look for fake mutton. He asked vendors if they had any mutton cheaper than the going price of 15 yuan per jin. One vendor told him that if anyone offered him mutton for 10 yuan he shouldn't eat it because it would be fake. Some people mix goat, meat from dead sheep, poor quality meat or pork mixed with sheep fat and dyed dark red and pass it off as mutton.

The reporter bought some lamb kebabs from a small restaurant and felt that the kebabs did not taste like real lamb. Sure enough, the restaurant operator openly admitted that he passed off pork as lamb.

"It’s no secret, everybody uses it," said one shopkeeper. "What does it matter if it’s not lamb; it doesn’t harm anyone!"

Lamb sells at wholesale for 12.5 yuan per jin and kebabs sell for 0.8 yuan each. In order to make money restaurants buy cheap frozen pork that has been stored a while for several yuan per jin. The color and taste are not good. They use sheep fat or lamb flavoring, mix it with meat tenderizer and soak it overnight, "and it becomes fresh meat." They say it's hard to tell the meat is fake. According to the article, this kind of meat is the first choice for many mutton stalls.

An article from Zhengzhou last week reported on a man who was upset that lamb kebabs bought in supermarkets and convenience stores had pork mixed in with the lamb. However, in this case the ingredients were listed on the package which included a QS government certification and the company's contact information. The person at the company answering the phone claimed to be a salesman and not knowledgeable about the issue; it was a question of whether the food standard allowed mixing pork with lamb. Still confusion, but at least there is progress in getting past the trickery and deception.

If labels are truthful and accurate, the next step is for the buyer to know what to beware of.

Companies' Republic of China

When the Peoples Republic of China was founded it was mainly a country of peasant farmers. Sixty years later, the Chinese communists are obsessed with companies and giving them a multitude of subsidies and tax breaks carefully designed to entice them to industrialize the backward agricultural sector. This strategy of "industry feeding agriculture" and "cities supporting the countryside" sometimes appears carefully-crafted, but it changes from year to year depending on what crisis has popped up.

Ironically, a Farmers Daily article about Yunnan Province's "No. 1 Document" for this year emphasizes tax breaks, interest subsidies, and favorable access to land for agribusiness companies that lead farmers out of poverty to become full participants in the modern global economy. While this is only a provincial document, the provisions of bigger investment and integrating companies with farmers seem to be a general strategy for the 12th five-year plan that begins this year.

The document calls for pouring more money into agricultural investment. During the 12th five-year plan Yunnan will expand its "agricultural industrialization fund" by 200 million yuan annually. At least 30 percent of the net proceeds from converting rural land to state-owned urban land and revenue from the tax on using rural land should be reinvested in agricultural infrastructure.

"Dragon head" agribusiness enterprises get lots of tax breaks, loans, and help with accessing land. Several provincial financial organizations (banks and credit cooperatives) will earmark 20 billion yuan (about $3 billion) in loans for dragon head companies at concessionary interest rates with interest subsidies from the provincial government. The loans are targeted for storage, processing, and marketing, company technology development and setting up "production bases." Since this year's crisis is expensive vegetables, the support is focused on nonstaple commodities (i.e. vegetables, fruit, meat, etc).

After years of neglecting rural lending and pouring rural savings into cities, there is now an adventurous push to offer creative rural finance and risk management products. Yunnan is encouraging banks to set up special credit funds for purchase of special agricultural products like tobacco, tea, rubber, walnuts. Banks are encouraged to offer "innovative" financial products, move forward with setting up agricultural loan guarantee companies, and the province will push ahead in enticing insurance companies to offer [subsidized] crop and livestock insurance. They are continuing the "struggle" to establish a Yunnan Province agricultural insurance company. The document calls for investment in a new "loan risk compensation fund" for dragon head enterprises. There are new short- and medium-term securities and "collective debt" instruments for small and medium enterprises.

There are a host of tax incentives to entice companies to invest in agricultural-related business. Dragon head companies get a waiver of the business tax for a series of services: mechanized cultivation, irrigation, pest control, plant protection, agricultural insurance, technical training, animal breeding and disease control. Companies are exempted from the land occupancy tax if they use the land for agriculture, forestry, or aquaculture. Agricultural vehicles and fishing boats are exempt from the vehicle tax. Companies using the "company + farmer" integration model pay lower income taxes. Self-produced agricultural products are exempt from the value-added tax (VAT), and agricultural equipment, seed, saplings, fertilizer, and pesticide are also exempt. Tax bureaus are encouraged to adopt a pilot "tax separation system" which takes a portion of agribusiness tax payments and returns the funds to local governments in the (county? town?) where agricultural raw materials were procured.

The province says authorities will fast-track approval and give subsidized loans for investment projects by agribusines companies in poverty areas. Dragon heads that make investments of at least 20 million yuan in poor regions will get "awards" of 3% to 5% of the project's value.

There is also an incentive to export. Agribusiness companies that manage to generate at least $10 million in exports get an award of 1% of the export value from the provincial agriculture department.

We're not finished yet. Companies also get help getting approval to use land for agricultural storage, processing, or market construction projects. Rural land designated for construction can be used for livestock or poultry housing, aquaculture, or factory-style farming, as long as it complies with all the other national and local regulations.

Finally, agribusinesses get discounted electricity rates and they are assured access to coal and fuel they need.

The article says these company-support policies constitute only 5 of the Yunnan "No. 1 Document's" 31 points, but they are expected to "spawn a harvest of hope."

Wednesday, January 12, 2011

Corn Import Prospects

An article on the web site discusses the prospects for importing large amounts of corn this year. According to customs statistics, 1.6 million metric tons (mmt) of corn was imported during 2010, mostly for feed manufacturing.

When the first import contracts were signed, the domestic price of corn was 1850 yuan/mt and the cost of imported corn was 1750 yuan/mt, a profit of 100 yuan. Now, "due to national subsidies, inflation and other influences," the domestic price is up to 2050 yuan/mu and the landed price of imported corn has gone up too.

The article reports that some in China are calling for a waiver of the 13-percent value added tax on imports to reduce their cost.

The article also reports that the Chinese and Argentine Ministries of Agriculture reached an agreement for China to import 5.5 mmt of corn from Argentina, apparently over 2 years. Some kind of agreement was signed by Chinese inspection and quarantine authorities to allow the Argentine corn into the country as long as it is among the 11 approved genetically-modified corn types. This agreement allows China to compare price and quality of corn from multiple countries and pick the best. The article says COFCO had to return a cargo of U.S. corn because it contained an unapproved genetically modified variety.

[update: Today, Reuters reports that Chinese authorities are denying any deal with Argentina to import corn.]

The article says appreciation of the Chinese currency can offset the rise in imported corn prices. Since April, the price of U.S. corn has gone up 82% but the Chinese yuan has appreciated just 3.5%. A faster appreciation would benefit Chinese importers.

Guizhou Price Subsidies and Regulations

Cold temperatures in Guizhou Province are making transportation difficult and causing increases in the prices of some necessities. Guizhou officials have announced subsidies and regulations to address the rise in food prices.

A "Price Adjustment Fund" has been set up. Trucks transporting fresh ag products can get subsidies, there are awards to agricultural markets so they can eliminate vendor fees and subsidies for warehouse costs. There is a "hog slaughterhouse subsidy mechanism," and a subsidy of 30 yuan per head to transport hogs out of production areas to designated slaughterhouses.

Local officials are to make sure basic foods are available, ensuring that vendor stalls in markets are manned and do not run out of stock. There are subsidies to help poor people buy coal and there are subsidies to farmers in coal-producing areas.

Another thrust is to monitor and regulate prices. Vendors in Guiyang's 8 supermarkets and 47 wet markets have been ordered to keep prices for basic vegetables like cabbage, radish and lotus at no more than 1 yuan in supermarkets and no more than 2 yuan in the wet markets. Inspectors are to go out and monitor prices. Merchants are not allowed to collude or artificially raise prices to "unreasonable" levels. Inspection teams are being organized to go out and make sure no one is breaking the rules.

Another article making the rounds on livestock news sites describes a truck driver's heroic 20-hour trek from Yunnan to Guiyang bringing a load of 500 pigs to boost the city's supply.

Tuesday, January 11, 2011

What Prompted DDGS Antidumping?

On December 28, China announced an antidumping investigation against imports of U.S. distillers dried grains with solubles (DDGS), the by-product of ethanol production which is used as an animal feed ingredient. An earlier post is here.

A January 10 article on the site offers some speculation on what may have prompted the investigation of DDGS.

The article describes how burgeoning demand for protein among Chinese feed mills prompted the imports. U.S. DDGS has better quality and lower price than domestic DDGS. DDGS imports are not subject to quotas nor limitations on GMO content, so compared with corn, “import problems are relatively easy to solve, the purchase method is relatively convenient.”

The article emphasizes competition between imported and domestic DDGS. The author points to a declining trend in Chinese DDGS prices during 2010 that coincided with the imports. He claims that the declining income from the DDGS byproduct combined with high corn prices has squeezed profits for Chinese alcohol producers.

China's DDGS is produced mainly in the north, and transporting it to feed mills in the south is costly and inconvenient. According to recent reports, “Southern feed companies have stopped buying northern DDGS”. Low-cost imported DDGS “pounded” domestic alcohol companies, squeezing their market share.

"With the volume of imports rising, many domestic feed companies have developed a degree of dependence (依赖性 yi lai xing) on imported DDGS." The author warns that this could repeat the experience of the soybean industry if not brought under control.

The article raises the possibility that DDGS imports could actually contribute to price inflation. If domestic alcohol producers lose income from DDGS, he suggests that they might have to raise prices on their primary products.

Apparently, the author hasn't considered that possibility that limiting the supply of raw materials to feed mills will raise the cost of feed and hence raise the cost of meat.

The author worries about the effect of DDGS on "food safety." There is no way of knowing whether U.S. DDGS contains a type of genetically modified corn that is not one of the 11 types approved for import to China. If an unapproved type of GM corn is fed to livestock or poultry, "it could affect human health."

Finally, the article concludes that the DDGS investigation will "control" and "stabilize" the domestic price of DDGS, preventing financial losses. If the investigation fails to reduce the volume of imports, domestic companies may end up in a new "predicament."

Sunday, January 9, 2011

Drought in Henan

China continues its run of unusual weather and drought problems.

Dry, cold weather this winter has created drought conditions in much of Henan Province. Rainfall from October through December was less than 50 mm. This is 86% less than usual. Area suffering from dry conditions in Henan totals 15.86 million mu (about 2.6 million acres) and 167 million mu (275,000 acres) are suffering serious drought conditions.

There has been some snowfall in Sanmenxia, southern Luoyang, and northern Nanyang, but not enough to alleviate the drought conditions. According to weather departments, the recent cold air, wind, and low moisture have created an unfavorable outlook for the drought situation.

The Provincial government has ordered local officials to pay close attention to irrigation to save the wheat crop. On December 31, the Henan Finance Department issued 50 million yuan ($7.5 million) in dought-mitigation funds, including 20 million yuan ($3 million) in aid from the central government. The cumulative total spent for drought mitigation in Henan is 200 million yuan ($30 million).

The drought primarily affects winter wheat, Henan's most important crop. The last two months (since the crop was sown) are said to be the driest for the fall-winter wheat season in 50 years.

On January 3, Henan farmers irrigate wheat using water from a newly-dug well.

In other weather news, farmers and officials in Heilongjiang Provinces are taking measures to save livestock from the extremely cold weather there. There has been widespread rain and snow in southern China which has raised transportation costs of hogs, raising prices.

Friday, January 7, 2011

Our Pigs Do Aerobics

An article in the Xian Daily promotes the opening of a new specialty shop selling "luxury" pork at 60 yuan per jin, roughly five times the price of common pork. This article appears to be an advertisement masquerading as journalism, but the shop's existence indicates an emerging demand for premium-priced niche products that have perceived health benefits.

The meat comes from a special local breed of pig called "guan zhong black pig." As you might guess, its hair is black. The black hair is said to make the pig's meat more healthy by helping it absorb more sunshine, ultraviolet rays, and keeping them warm. A "Healthy Farm"'s web site announcing its acquisition of black pigs says they are hybrids that feature fast growth, disease resistance, healthy meat, and a feed conversion rate of 2.8:1.

Guanzhong Black Pigs frolic in the grass near Xi'an

The "ecological livestock" company supplying this pork practices what might be called extreme animal welfare in the way they raise the pigs. The reporter describes rows of blue-roofed barns with a "stadium" on the hill where pigs "do aerobics" under the tutelage of human "coaches" who are required to spend a minimum amount of time (20 seconds?!) with each pig daily. The company requires pigs to listen to music after eating and get plenty of exercise. Staff distribute "toys" to the pigs for them to play with to keep them in a good mood. They frolic in the barns or in grassy areas, chasing each other around.

This contrasts sharply with usual methods--conventional farmers have been known to give their pigs sleeping pills to prevent them from burning calories and make them gain weight faster.

The farm has a 40-mu plot of alfalfa to feed the pigs. They raise them to slaughter weight in 10 months or more (2-to-3 times longer than common hogs), "strictly using natural techniques."

The meat is purported to be healthier than common pork. It has more intramuscular fat, unsaturated fatty acids, and moisture. The meat is said to have fewer toxins due to the pigs' greater absorption of sunlight. It is supposed to be easier to digest and it keeps better when frozen. (Maybe the meat is healthy, but visiting the company's web site will give you a virus!)

The new shop's opening on January 6 attracted many customers who listened to the salesperson's explanation of the "black pig" pork's benefits. They were impressed with the red color and tenderness of the pork. They were enthusiastic about the pork despite its high price.

The black pigs are part of a growing niche for pork from local breeds. Another article cites the rapid growth of 土猪 (tu zhu, literally "soil pig") local breeds. The article reports that production has been growing in areas like Chongqing, where the local Rongchang breed is being promoted. It identifies Guangdong and Shanghai as places where sales are growing. Shanghai launched a plan last month to promote breeding of local pigs and a company in Guangdong promoting local pigs recently had an initial public offering of stock. Also, see a post about wild pigs in Gansu from last January.

Wednesday, January 5, 2011

Shandong's Price Control Mechanism

Shandong Province announced a new mechanism for controlling agricultural prices to start this year. The system's goals are to stabilize agricultural prices and protect the interests of both the urban poor and farmers, while "tilting" the benefits of rising prices toward farmers.

The system is referred to as "one fund, one reserve, two guarantees." The "fund" is a special fund for agricultural product subsidies. The "reserve" refers to a complete commodity reserve system that is intended to buy and sell commodities to stabilize prices. The "two guarantees" refers to income thresholds for receiving welfare payments that links subsidies for low-income people to the rise in prices. Details on the program are sparse.

The "tilting" of benefits is not explained. It is probably intended to somehow prevent speculators and traders from earning all the profit when prices are rising.

Other measures for reducing agricultural prices include reducing fees for highway tolls, rail transportation, entry fees at wholesale markets and supermarkets' slotting fees. It also calls for continued price controls for fuel and gas for fertilizer factories to maintain the supply of fertilizer.

A Peoples Daily article earlier in 2010 calls for a better mechanism for controlling agricultural prices. The article calls for more commodity reserves. Apparently, bureaucrats will know exactly the right time to buy and sell reserves to even out market prices. The article hails the sale of sugar, frozen pork, and even live sheep reserves into the market this year.

The article also praises seven provinces' subsidy mechanisms that links payments to increases in prices. In June this year, Guangzhou gave temporary commodity price subsidies of 30 to 50 yuan per month per person for 3 months. A lady named Zhou got 450 yuan and immediately bought her daughter a package of milk. Ms. Zhou said, “If there was no subsidy, we couldn’t make soup in our home.”

Monday, January 3, 2011

God is Mean, Government is Nice

A propaganda article promoting the Chinese government's vision of "modern agriculture" in the new 5-year plan introduced a model farmer named Hu Guoping. Once, Mr. Hu says, his ambition was to go to university and get out of the countryside. But he now considers himself fortunate to have enjoyed a "golden period" for farmers over the past five years. The government's great policies are making his dream of modern agriculture come true.

Six or seven years ago, when the reporter interviewed Hu, the farmer had trouble scraping enough funds together to plant his crops. Today he runs a 100 million-yuan business, is the biggest grain farmer in Jiangxi Province, has 500 employees, and is preparing to start up operations in Africa.

In 2004, the government started giving favorable policies for farmers. In 2005, having seen the policy change, Hu began renting more land. When the government announced that the 2600-year-old agricultural tax in 2006, farmer Hu was so excited he couldn't sleep at night.

When farmers who had contracted their land to him wanted it back, he tore up their contracts and gave it back. He passed on all the money from the government, not keeping even one fen. Now he helps farmers by selling them quality seed (it seems he runs a seed company) and teaching them new techniques. He said, "I have to support modern agriculture to help farmers see how they can get rich."

In 2008, when the Party said land rights would be unchanged for a long time, all Hu's worries were dispelled. He went out and rented more land. Now he has huge tracts of farmland and ponds for raising crabs and fish.

Agriculture is an uncertain business. Hu says, "We farmers always say that we depend on heaven to eat." Hu elaborates: "There are two heavens. One heaven is God; the other heaven is the government."

Hu Guoping makes it clear who is responsible for his success: “God controls the weather; the state controls policy. God’s temper grinds us down, but the state’s policy lets us farmers get more and more benefits...modern agriculture is promising!”