Dim Sums: Agricultural Markets in China

Last month the State Council's "No. 1 Document" announced water projects would be the focus of rural policy. This month the China Bank Regulatory Commission issued a notice on rural financial services which requires rural financial organizations to support construction of rural water projects: building canals, fixing dams, installing pipes and pumps. The Agricultural Development Bank (the government's policy bank for agriculture) is told to increase medium- and short-term loans to large-scale irrigation districts and key medium and small irrigation districts. The Agricultural Bank of China (a sort of private/public behemoth that foreign investors just dumped billions of dollars into through its IPO) is to focus on loans for irrigation infrastructure (canals, reservoirs, pumping equipment) and drinking water construction projects in rural areas. Rural credit cooperatives and postal savings banks (small rural institutions where rural people keep their savings) are to ma...

A brief report from cngrain.com says that corn starch prices are rising. Last month, industrial processors--including starch manufacturers--were told to stop buying corn so the government could procure corn to replenish reserves without having to compete with other buyers. After the spring festival period, manufacturers have low inventories of corn for raw material. Scarce corn is raising raw material cost and pushing starch prices higher as companies resume normal production. On February 25, the price of starch in Jilin Province was 3250 yuan/metric ton, up 390 yuan from the price before the spring festival earlier in the month. In Weifang, Shandong, the price is 3370 yuan per metric ton, up 320 yuan.

The National Grain and Oils Information Center estimated that 18 million metric tons of new soybean crushing capacity may be added in 2011. The average annual increase in capacity since 2005 was 5 mmt, so this year's anticipated increase is unusually large. Annual capacity was already estimated at 95 mmt at the end of 2010. There are 140 plants with daily capacity of 500 mt or more, including 110 with daily capacity of 1000 mt. The report attributes the increase to the effects of China's fiscal stimulus that began in 2008, increasing demand for edible oils and feeds. According to unofficial statistics there are over 20 new large crushing projects planned for 2011 with daily capacity of 60,000 mt. The report doesn't mention the strategy of handing out loans to domestic vegetable oil processors to help them compete with the multinationals. As in most other industry there is huge excess capacity in processing from cheap credit, which leads to intense competition to procure raw...

The latest food safety incident is a report of noodles that catch on fire due to flammable additives used in making them. An opinion piece in the Southern Daily News suggests that noodles that catch on fire are an apt metaphor for the Chinese population's general anxiety and frustration about food safety: he says that consumers' confidence in food has been burned as well. "After the melamine crisis, leather milk, Sudan Red dye [in eggs], bleached mushrooms, who would dare to say that anything on the Chinese table is safe?" The writer focuses on the lack of reliable information. "Since there is a lack of credible food safety information, the public has to rely on speculation and rumors about food safety...if information is not open, there can be no guarantee of food safety, the public lacks confidence." "Food safety is no longer a trivial matter of peoples' livelihood; it is an important affair of the State." "A cup of milk can make a nati...

Last July I posted a report on exploding vehicles . Another report this week is closer to the subject matter of this blog. On the afternoon of February 21 in Shanghai, a truck carrying a load of over 100 pigs suddenly caught on fire . The fire quickly spread to the cab, but the driver escaped. The pigs, of course, could not escape and observers reported their loud squealing. Firefighters arrived quickly and put out the fire. In cleaning up the debris it was determined that 10 of the pigs died of burns or smoke inhalation.

This blog has reported a series of crackdowns on underground butchers who sell meat from dead pigs. These operations are surprisingly resilient and hard to stamp out. Their prevalence reflects the large number of dead pigs and widespread disease problems. In discussing this issue, a recent newsletter on the Chinese pork industry says the death rate is about 30 percent. Officially, farmers are entitled to compensation for disposing of dead pigs but that probably requires a troublesome application process and probably less money than selling to a butcher. These stories provide a window into China's inner workings that give insight about the country's severe food safety and sanitation problems. Authorities in Liaoning Province's Shenyang City broke up a "black den" where dead pigs were butchered , and the meat was dyed, packaged and labeled. This one was described as "especially large" purveyor of pork from pigs that had died of illnesses. The authorities d...

The Ministry of Agriculture is preparing to announce a new system for setting government guidance prices for milk . No details have been announced, but the intent is to establish a mechanism for setting a reasonable milk price. The mechanism will be used in major milk production areas. The article's langugage is vague, but it refers to "closely tracking the price of imports," strengthening analysis and preventing events that impact the industry's analysis. Fluctuations in milk prices--both ups and downs--in 2007-08 led to build-up and culls of dairy herds that contributed to the melamine crisis. Since then imports of dairy products have been robust since consumers who can afford to do so now buy imported milk. There is also a lot of concern about whether farmers are getting a "fair" price--the farm price is just a fraction of the retail milk price. An article from August 2010 describes how Heilongjiang Province has been trying out a similar milk-pricing syst...

According to the 21st Century Business Herald , the Chinese government's eagerness to restock its corn reserves could lead to corn imports about mid-year. In 2010, the government auctioned off large amounts of corn to prevent prices from rising. Now they want to restock their warehouses. According to one analyst, Sinograin, the company managing the government's reserve, plans to buy as much as 36 million metric tons for reserves this year. In January, Sinograin started trying to buy corn for reserves in the northeastern provinces. The initial plan is to buy 11 mmt by March, of which 9 mmt is to be purchased in the northeast. The government thinks they need to add to reserves to cool off inflationary expectations. Problem: if the government goes out to buy corn, it has to compete with other buyers, pushing prices even higher. Farmers are not eager to sell to the reserve purchasers because they pay lower prices than other buyers. Solution: tell other buyers to stop buying. State-...

Wheat stocks-to-use ratio for China has been 40-to-45 percent in most years since 2005/06. Source: China grain net. "If you have grain in your hand, then your heart can be at ease." This proverb is constantly quoted in articles on the importance of grain policy. A China grain net article offers reassurance that the drought affecting wheat is no reason for panic because the government has built up big stocks of grain that it can use to stabilize the market. The government's big grain reserves are described as a "silent weapon" already in use in fighting the global "grain war." According to the article, China's stocks-to-use ratio for wheat has exceeded 40% in recent years, far above the global ratio. In 2010, the state's cumulative purchases of wheat, corn and rice for reserves totaled 24.58 mmt, and rapeseed and soybean purchases totaled 10.28 mmt. Since 2004 the wheat harvest has been good. In 2010, winter wheat output was 108.79 million met...

The loss of farmland to urbanization and the low productivity of much of the remaining agricultural land are dual problems constraining China's production capacity. An article last year from China's Ministry of Land Resources called for addressing these problems by pushing a new compensation system for protecting cultivated land. The system recognizes that farmers play the key role in preserving farmland. Basically, wealthy provinces and regions with little farmland transfer funds to agricultural areas which are used to pay farmers to keep farming their land. Village and township governments also can get funds to encourage local officials to protect farmland and for investments in land improvements. The system can be implemented at various levels: prefecture, province, and national. The Land Ministry article called for emulating the system set up in Chengdu and setting up a system at all three levels. Such systems have been set up in pilot regions. A national conference, also s...

Chinese agriculture has long been starved of investment, but signs are that more capital will be flowing into agriculture in coming years as policymakers try to upgrade rural financial services and invest in big agricultural projects designed to modernize agriculture and raise productivity. On February 18, the China Development Bank (CDB) and Ministry of Agriculture signed a memorandum of understanding for financial support of agricultural and rural development during the 12th five-year plan (2011-2015). CDB is a state-owned policy bank which mainly funds big infrastructure projects and state-owned companies, often with an overseas orientation. Loans supporting anti-poverty projects and agricultural "dragon head" enterprises have also been a small part of its lending portfolio for a while. The bank already has an agricultural and rural development loan portfolio of 19.47 billion yuan (nearly US$3 billion). China Development Bank - Ministry of Agriculture signing ceremony for ...

In discussing food security Premier Wen Jiabao and Minister of Agriculture Han Changfu have recently adopted the line, "Chinese peoples' rice bowl must be in the hands of Chinese people," to emphasize that foreigners cannot be trusted to feed China. They may want to re-think that idea. Two more food safety scares--"cadmium rice" and "leather milk"--have surfaced this week. Scientists at Nanjing Agricultural University estimated that rice contaminated with the heavy metal cadmium is sold in about 10% of the markets in China. The Ministry of Agriculture plan for testing milk this year called attention to the practice of mixing toxic protein material extracted from leather products into watered-down milk. Cadmium from industrial and mining waste is absorbed from the soil into rice kernels. Official testing identified excessive cadmium as early as 2002. A Nanjing Ag University professor and his team did their own testing of samples from various markets aro...

China's wheat-producing areas are experiencing a serious drought. According to surveys by the Ministry of Agriculture , as of February 7, 99.63 million mu (6.6 million hectares) of wheat area in Hebei, Shanxi, Jiangsu, Anhui, Shandong, Henan, Shaanxi, and Gansu Provinces had been affected by drought. The affected area accounts for 36% of the wheat area in these 8 provinces. The Ministry has already launched grade-2 drought-mitigation work and experts work groups have been sent to give technical guidance. On February 7, Minister of Agriculture Han Changfu went to Hebei and Shandong Provinces to inspect drought-mitigation work. He stressed that each level of agriculture departments must pay great attention to drought migitation. The “Drought Mitigation Work Program” issued on Feb 8 ordered strengthening of irrigation measures in the eight provinces . This includes speeding up distribution of funds for repair of reservoirs, digging mechanized wells and other repair and maintenance pro...

Shandong Province's agricultural exports surged by over 30% in 2010 to nearly $14 billion . Customs statistics from Shandong show exports of vegetables totaled $4 billion, and were up 75%. Garlic exports doubled in value to $2.2 billion, accounting for half of the vegetable total. Shandong Province is by far the leading province in agricultural exports, so these statistics will reflect changes in national totals. This surge in exports is remarkable given the concern about tight supplies and rising prices last year. It illustrates China's addiction to exports and a compartmentalization of the domestic and export markets. Standard economic theory would predict that short domestic supplies and rising prices would divert products from exports to the domestic market, yet China's exports soared despite bad weather, urban encroachment of farmland, and double-digit increases in labor and land costs. Rising domestic vegetable prices and lack of vegetable supply in major cities be...

In an online article on February 1, Minister of Agriculture Han Changfu laid out China's grain strategy for the twelfth five-year plan. The plan is ambitious, complex, multi-pronged, innovative in some ways, entails significant government intervention and essentially aims to reshape Chinese agriculture from a primitive peasant activity to an industrial sector. Han describes the next five years as a crucial period for transforming the Chinese economy. He reports that Party leaders have clearly stated that grain security is of the highest importance for national security and maintaining peoples' livelihoods. Han reports that China faces many resource constraints--shrinking land and water resources--and cannot rely on international markets to feed its massive population. According to Han, "The Chinese peoples' rice bowl cannot be in the hands of others." Han says that China must rely on the principle of basic self-sufficiency to maintain grain security. He acknowled...