Monday, February 28, 2011

Banks Ordered to Open the Spigot

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 make loans for small-scale rural irrigation and field-upgrade projects.

This is an example of China's practice of coopting banks to carry out policy, and the multiple responsibilities of Chinese regulators. Regulators like this one are expected to regulate the industry but also make sure it carries out government policies. The Bank Regulatory commission was set up about 10 years ago to give banks an independent regulatory authority to make sure they don't pile up bad loans like they did in the 1990s. Now the regulator is telling banks to set aside loans for irrigation projects that have little prospect of generating income to pay the loans back. (Farmers can only be charged tiny fees for irrigation water because charging them full cost would increase their financial "burden.")

This policy would be like the U.S. Federal Reserve--an agency responsible for making sure banks are in sound financial condition--telling banks they have to set aside a certain percentage of their portfolios for loans to "underserved" poor communities. Oh, wait, the U.S. tried this--it was called the Community Reinvestment Act--and it contributed to one of the worst financial crises in history.

Surely it will turn out better in China.

Starch Prices Up on Short Corn Supply

A brief report from 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.

More Soy Crushing Capacity

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 materials and rising prices. At the other end, the flood of finished products creates competition to sell them, driving down prices and squeezing margins. Commodity prices rise; finished product prices fall.

Sunday, February 27, 2011

Combustible noodles burn consumer confidence

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 nation strong and powerful. Similarly, milk with toxins or noodles that catch on fire can destroy the peoples’ confidence."

The writer moves on to connect the food safety crisis with the distancing of food from its natural forms. He suggests there is no need to fear the color, smell, and taste of plain "ecological" food. People can eat the basic "five grains" safely and stay healthy.

Food additives make food more beautiful and tasty, but they change the traditional flavor. Additives are abused by "black-hearted traders" who add toxic substances. "The public blames additives for public incidents of food safety."

He concedes that "food additives are the soul of the modern food additives themselves are not bad; the bad [thing] is the people who misuse them."

For "modern people," the writer acknowledges that "returning to the original ecology of food is not so simple." Food additives are here to stay. People in the food industry people must follow the law. Regulators have to use a full range of risk control.

"'Modern people' can regain trust on the food table."

Unplanned pig roast

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.

"Black Den" Destroyed in Shenyang

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 discovered 149 dead pigs, dyes, other additives and 20 tons of industrial salt.

On February 21, Faku County police stopped a suspicious van and discovered that it contained 27 dead pigs that had mostly died of blue ear disease and another kind of bacteria. They determined that the truck was bound for an illegal slaughterhouse in a village near Anshan City. The slaughterhouse was located in a secluded area on a small street in Victory Village, hidden behind a 2-meter wall.

The dead pigs were found in a 100-square-meter warehouse. Dead pigs were delivered here, then soaked until the skin could be peeled off. Workers added dye, an extender, industrial salt, packaged the meat in cellophane and stuck on a label.

Faku County police said this slaughterhouse had been operating illegally for over two years. They raided it last year and assessed penalties, but it continued its illegal activities. The person responsible for the slaughterhouse had run off and had not been apprehended. The truck driver and his wife were arrested and confessed.

Government to Guide Milk Price

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 system. Heilongjiang has a dual "reference price" and "government guidance price" mechanism for setting "scientific, reasonable" prices. A reference price is determined in each region based on market prices. Then the government sets a guidance price based on the reference price. It's not clear how they do this, but probably the price is set at a "reasonable" level above the reference price. The article describes the guidance price as a kind of minimum support price that guarantees that farmers can make a profit. The price is set "to ensure that all participants in the supply chain benefit."

Heilongjiang implemented the dual-price system July 1, 2010. Before that, the article describes the province's dairy industry in dire terms. Farmers had suffered 20 months of losses, milk prices had fallen, farmers had no confidence and they had culled dairy cattle (following the melamine crisis in the fall of 2008). Raw milk prices had fallen and feed costs were rising. After the guidance price was put in place, the average price rose, farmers started making profits again, and they began adding cows and applying for loans.

This is another example of China's imitation of agricultural policy mechanisms that Americans and others tried out in the 20th century. Chinese policy advisors are eager to adopt 20th-century-style market orders, support prices, target prices with they have convoluted formulas that appear "scientific" and "fair" to farmers.

The basic approach of these policies is a type of "cost-plus" pricing that guarantees farmers a profit as costs go up.

For hundreds of year farm prices have risen more slowly than industrial prices. Are we now in a new era where farm prices will rise as fast as industrial prices?

Historically, farmers made a profit by increasing their productivity and expanding the scale of production to reduce unit costs. If prices are guaranteed to rise whenever costs rise, farmers lack incentives to find ways to cut costs.

Saturday, February 26, 2011

Replenishing Corn Reserves Pressures Market

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-owned companies like COFCO were forbidden from buying corn in the northeast and industrial users in Jilin Province were ordered to stop buying corn in January. Now, 70 industrial-processors in Heilongjiang province have been ordered to stop buying corn until April 15. The government is checking to make sure traders buying corn for reserves are actually qualified to do so (to prevent speculators from masquerading as reserve purchasers).

The article emphasizes that Sinograin is having a hard time buying corn. Farmers are not satisfied with the price offered and expect prices to go higher in the future.

Last year China imported 1.57 mmt of corn, but imports stopped in the fall after the new corn harvest came on the market. The increase in U.S. corn prices last fall made corn imports too expensive. According to one trader in the south of China, imported corn is now about 400-yuan-per-ton more than domestic corn. However, with the added pressure on demand from restocking reserves, many are expecting corn imports to resume mid-year. The article points specifically to COFCO, the state-owned company which holds 60% of the corn import quota, as a potential importer.

Wednesday, February 23, 2011

Grain in hand, heart at ease

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 metric tons (mmt), up 1 mmt from the previous year. Over the past 30 years there were two occasions when wheat production plunged about 12.5% (in 1980 and 2003) but these declines were just a fraction of reserves.

In 2010 the government aggressively sold grain reserves into the market to stabilize prices. There were 180 grain auctions of rice, corn, wheat (including imported wheat), and soybeans totaling 80.8 mmt sold. In addition there were 2.8 mmt of special sales and 4.26 mmt of inter-provincial transfers to bolster grain reserves in grain-consuming regions.

As proof of the government's ability to stabilize prices, the article points out that global wheat prices have shot up nearly 50% since December but China's cash prices rose only 5%. Futures prices have risen about 16%.

The wheat strategy of “self-sufficiency + state reserve adjustment + small foreign trade” will not change for the foreseeable future.

Preserving grain supply and stabilizing grain prices are important matters for the nation's economic development and social stability. If you “have grain in your hand” then you can have “no panic in your heart.”

Monday, February 21, 2011

Land Protection Compensation System

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 sponsored by the Land Ministry, held in Wuhan last November heard reports from five provinces (Hubei, Zhejiang, Hunan, Sichuan, Guangdong) and five cities (Wuhan, Haining, Chengdu, Hengyang, Foshan) describing their experience with land protection compensation mechanisms.

Regions are classified as agricultural land deficit areas (urbanized, rich regions) or agricultural land surplus areas (rural agricultural regions). Some land is designated as "basic agricultural land," and "permanently" agricultural. Funds are raised by setting aside proceeds from rental fees and taxes on users who have converted agricultural land to other uses. Intergovernmental financial transfers are made to rural governments. Farmers in "permanent" agricultural regions "are the main recipients of direct payments" for protecting agricultural land. There are also rewards for local governments that protect farmland since "some local officials lack enthusiasm for protecting farmland." Yunnan Province's No. 1 Document for 2011 included land compensation provisions like this.

This mechanism demonstrates that China is a policy wonk's dream-come-true. The mechanism is laid out in academic journal articles like this one from Nanjing Agricultural University's college of public management, describing externalities, Pigouvian taxes, property rights, and sustainable development. It's easier to adopt elaborate technocratic policy mechanisms when no one has to vote on them. The trouble comes when every local government adopts it on paper but then forgets about it and goes on with business as usual until the cadres from Beijing come down for an inspection tour.

Saturday, February 19, 2011

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 memorandum of agreement on cooperation in the 12th five-year plan

The memorandum commits the bank to support the plans to modernize agriculture during the five-year plan. Details are vague but the plan broadly entails moving toward an agricultural sector with more investment, better financial services, and Chinese companies investing overseas.

One of the new emphases is to improve rural financial services, including rural banks, insurance, and loan guarantee companies. No specifics are given, but CDB might make loans to these entities and provide technical advice.

The article makes references to investment in pilot demonstration projects. This likely entails CDB making loans to companies or local governments to build agricultural infrastructure like water/irrigation projects, reservoirs, livestock housing, "ecological" farms, seed companies, greenhouses, logistics and storage facilities, waste treatment, and research infrastructure.

CDB is also a chief supporter of China's "going out" strategy. It already has US$420 million in loans to Chinese agribusiness companies investing overseas. This agreement plans to add more support for such companies in order to "utilize overseas resources."

Wednesday, February 16, 2011

"Leather Milk," "Cadmium Rice"

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 around the country and found results similar to those in 2002. The problem is widespread and more serious in southern China. It seems to mainly affect rural people. Rice from Nanjing markets was found to have excessive cadmium but the team said it came from outside the Nanjing region. "Super rice" is especially prone to contamination because its highly developed root system absorbs more from the soil. Acidic red clay soil in southern China poses a higher risk.

Potassium dichromate and sodium dichromate are chemicals used to soften leather. They contain a carcinogen. The chemicals are added to milk that has been watered down in order to pass tests for protein content.The cadmium has been linked to bone disease. People in some villages in Guangxi and Zhejiang have a strange condition where they lose use of their legs. Some have blamed the cadmium contamination for this but the link is not scientifically confirmed.

"Leather milk" problems were first discovered in Shandong in 2005 when the local commerce bureau declared that the market had been taken over by milk with protein powder added. The bureau said that milk with no illegal additives had a hard time entering the market. At that time the Shandong commerce bureau discovered over 28,000 contaminated milk products from 200 small milk producers. Its use in the feed industry was an open secret, often added to imported fish meal. In 2006, a nationwide check found 38 companies adding the protein chemical.

"Leather milk" also has been found in Shanxi and Hebei. A stockpile of "leather protein powder" was found in a Zhejiang dairy in 2009.

A Tsinghua University sociology professor remarked that Chinese society has deteriorated to a point where every industry has its self-centered methods. He calls it a systemic problem where depravity produces clever people who are counterfeiters by nature, lacking honesty, while real honest people suffer the consequences.

Maybe you shouldn't trust Chinese people with your rice bowl after all.

Wednesday, February 9, 2011

Fighting the Drought

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 projects, digging emergency wells, and diverting or trucking water in to spread on fields.

The central government spent 1.2 billion yuan on anti-drought working, supporting 600 county-level drought service teams. It allocated 800 million yuan in drought aid, anti-drought commodity reserve funds of 200 million yuan and early delivery of 6 billion yuan in rural drinking water safety funds.

The January 27 National Grain and Oils Information Center report didn’t seem too worried about the wheat situation. They said the effects on the wheat crop are inconclusive at this point. They claimed the seedlings were in better shape than they were during the drought 2 years ago. Wheat prices have not been rising much.

The government has big reserves of wheat. The government has been offering reserve wheat for sale but not much is selling. On January 26, 4.5 million metric tons of reserve wheat were offered for sale but only 164,000 mt sold.

Sunday, February 6, 2011

Exports Boom Despite Rising Domestic Prices

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 became a big worry for Chinese officials last year (see last week's post on vegetable prices), yet vegetable exports were up 75%. Garlic was one of the most prominent commodities attracting concern about rising prices last summer, yet exports more than doubled.

Exports of other categories were up too. Shandong's seafood exports totaled $2.96 billion, up 17.8%; fresh and dried fruit and nuts $740 million, up 16.6%; fruit and vegetable juice $470 million, up 30.9%.

These statistics reflect the value of exports. Part of the increase reflects higher prices, but these big increases also reflect massive increases in volume. Domestic vegetable prices were up 20%-to-30%, so a 75%-increase in value implies a big increase in export volume in the neighborhood of 50%.

The Qingdao customs bureau ascribes the increase to rising vegetable prices and recovery of the world economy that boosted demand in Japan and Europe, the two biggest markets for Shandong's agricultural products. Shandong’s 2010 agricultural exports to Japan totaled $3.53 billion (up 24%), to EU $2.43 billion (up 18.6%), to Southeast Asia $1.93 billion (up 52.6%). Exports to the U.S. were up 25% to $1.38 billion. Last I checked, Japan's economy was still stagnant, Europe was having a financial crisis, and the U.S. economy has had only a sputtering recovery. Trade with Southeast Asia has been booming due to the new free trade agreement with ASEAN.

How do we reconcile the big increases in Chinese food prices and concerns about vegetable shortages with soaring exports? What we may be seeing here is a process of domestic prices (which have been extremely low until now) rising to align with global prices. Another important fact is that the value of agricultural raw materials only accounts for a small share of the value of these exports. Nearly all of these products have significant value added in processing, logistics, and margins for exporters. Big investments in processing plants drive these exports as much or more than the low cost of vegetables, fruit and fish.

Sure, it's efficient that China's agriculture is moving toward its comparative advantage in vegetables, fish and fruit. In an economist's perfect world, exports of these products would pay for imports of grain which is expensive in China. But Chinese officials don't want to let go of grains (see yesterday's post on the 5-year plan for grain).

Can China produce more of everything on a shrinking base of land, water, and organic matter in the soil? Keep in mind also that vegetables and fruits require much heavier doses of agricultural chemicals. Do we have an ecological train wreck in the making here?

Saturday, February 5, 2011

China's 5-Year Grain Plan

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 acknowledges that "some comrades say importing grain is like importing land and water," but Han insists that China cannot become dependent on imports; China can only use imports "as an adjustment mechanism." He maintains that China must adhere to the basic strategy of 95% self-sufficiency in basic grains like rice, wheat and corn.

Han then launches into a long report on China's grain development strategy for the next five years.

The basic supply-demand situation, as reported by Han: wheat is in surplus, corn is in balance, rice is "tight," japonica rice is in deficit. The japonica rice deficit is being addressed by converting land into rice paddy in the northeast and switching from indica to japonica rice in provinces like Jiangsu and Anhui. Other projects include spreading high quality wheat varieties, raising corn yields and spreading special-use varieties, increasing high oil content soybean varieties, preventing loss of soybean area in the northeast, developing soybean production in the Yellow-Huai River region, and spreading intercropped soybeans in the south.

Cultivated land area is to be held at the "red line" of 1.8 billion mu and grain area at 1.6 billion mu. Most of the increase in production will come from raising yields and productivity. There is an ambitious set of projects listed that include breeding, spreading technology, upgrading fields and infrastructure, mechanization, and subsidies.

Traditionally, southern China was the country's breadbasket, but now the focus is on the north--especially the northeast and Inner Mongolia--to feed the rest of the country.

The 31 provinces are classified into 13 grain-surplus provinces, 7 grain-deficit, and 11 balanced provinces. Efforts will be concentrated on the surplus provinces and on about 1,000 grain-surplus counties. But none of these areas can relax grain production, "grain production must not be allowed to fall again."

One strategy underway is to create 400 million mu of "high-standard" fields. By improving fertility, building irrigation channels, using water-saving irrigation equipment, small-scale rain-collection facilities, building roads for cultivation and harvesting machinery, returning organic matter to the soil, leaving straw and stubble on fields, and treating continguous plots as a big field authorities think they can raise yields 100-200 kg (per mu?).

Since "seed is key to increasing grain production" an overhaul of China's weak and chaotic seed industry is planned. This entails more regulation and government guidance to create a set of large companies as industry champions with large subsidiary production bases, combined production and research, nurturing an integrated modern crop system, with national seed industry science and technology innovation capability. Note "national" seed industry--multinationals need not apply unless they plan to turn over their technology to a Chinese partner who will breed seeds with Chinese characteristics and Chinese patents.

The strategy calls for big development of a new professional pest control and prevention system that was launched last year. It seems to involve setting up pest control stations that disseminate biological pest control techniques. Authorities reckon China loses 6-to-7 million metric tons of grain to pests each year.

There is a new farmer training program designed to retrain elderly farmers left in villages emptied of young people. They can get a "green certificate" from free training. The program aims to develop "new-style farmers" that include larger-scale farmers, machinery entrepreneurs, and science experts. training will support farmer cooperatives and dragon head enterprises and encourage migrants to return home "with technology and capital" to start rural business ventures.

Mechanization is another mainstay of the modernization strategy. Subsidies for machinery purchases will be strengthened. The focus is on mechanizing rice-transplanting, corn harvest, and subsoil preparation.

Han concedes that science and technology alone cannot raise grain production. They have to pay attention to the price mechanism. In the past administrative methods were used to push farmers to plant grain; now farmers must be enticed by subsidies and high prices.

Han says prices are most important to enticing farmers. Authorities have to balance the interests of farmers and consumers to find a suitable price. The price for grain is to be raised steadily year after year, following costs, but not rising so much it ticks off urban consumers. Some new policies may be on the horizon: Han says "we should learn from foreign countries' experience and explore target price policies."

The "four subsidies"--direct payment for grain producers, quality seed subsidy, general input subsidy, and machinery purchase subsidy--will be strengthened and improved. The direct payment will be raised and adjusted to mobilize farmers' enthusiasm; the seed subsidy will be raised and spread to more crops. Subsidies will be "tilted" toward larger farms and cooperatives.

Chinese authorities are also using intergovernmental transfers to entice local officials to make sure grain production doesn't fall off. The financial awards to grain-surplus counties will be increased, and government investment funds should be "tilted" toward grain-production counties. Officials are setting up an interregional compensation mechanism that will match up grain-deficit and -surplus counties and ensure that production areas "don't eat losses." Officials are to get both political recognition and financial awards for making sure their farmers "grasp" grain production.