Tuesday, May 31, 2011

Idle Land Phenomenon

An article making the rounds of Chinese web sites this month describes the phenomenon of idle farm land.

Driving through rural Hunan Province, the reporter sees farmers hard at work in their fields transplanting rice. However, Zhou Dapo's fields are still asleep, several mu of paddy land covered in weeds. Similar idle fields are evident nearby.

Mr. Zhou is a longtime resident of Spring Lake Village near Changsha. He spends most of his time in the city working, but he took several days off to come home to buy fertilizer. Traditionally, Hunan farmers plant two crops of rice each year, but Zhou is preparing to plant a single crop this year.

Mr. Zhou explains that these days it's cheaper to buy rice than grow it yourself. Last year, two rice crops on 1 mu brought about 650 kg of rice worth about 1700 yuan. After paying for seeds, fertilizer, pesticides, planting and harvesting, the net income is about 800 yuan. If you count the labor and management, you make nothing. Many of Zhou's neighbors are spending most of their time working elsewhere and leaving their land idle for part or all of the year.

The idle land phenomenon is also evident in Jiangxi where there are some large swathes and scattered patches of idle land. One Jiangxi farmer observes that fewer people are growing rice in his village. Some just raise enough to feed their family. The farmer reports that others don't bother with the hard work; they can collect about 100 yuan from the government in subsidies without planting anything.

A survey in Jiangxi's Huang County found that about 12% of the land was idle. That didn't include land shifting from 3 rice crops to 2 or 2 rice crops to 1.

A 2007 survey report on idle land in Hunan said this is a common problem nationwide. However, the report found that the place with the "most serious" problem in Twin Peaks County had only 1.3% of its land completely idle. The big concern was what the report called "hidden idle land"--the switch from 2 rice crops per year to 1. It said this occurred on 20% of the land in some villages and as much as 80% in some villages. Some officials told the surveyors there was no problem with idle land in their area because they gave the farmers subsidies, but the surveyors observed idle land on both sides of the road.

Another problem detected is farmers who are not too serious about farming. They are described as returning to the "depend on heaven to eat" mode of peasant farming. A professor from Renmin University calls this a "lazy field" phenomenon and complains that farmers don't practice intensive farming.

The Renmin University professor blames the problem on low grain prices. He claims that grain prices are 10 to 20 times higher in Japan and South Korea. He is dissatisfied with the minimum price policy and thinks China's grain prices should be 5 to 10 times higher than what they are now.

The Hunan idle land survey report makes more conventional suggestions. The Hunan report recommends making it easier to rent land and improving the subsidy system. The Hunan report criticizes grain subsidies for becoming a welfare payment. The report says you get basically the same subsidy whether you plant one rice crop or two. It praises localities in Hunan that gave more subsidies to farmers who planted two rice crops. One county set up a 1 million yuan award fund that gives 50 to 200 yuan per mu to "large grain farmers" who consolidate fields and plant two rice crops.

Monday, May 30, 2011

Mechanizing the Wheat Harvest

Fields in Henan crowded with combine harvesters, hopefully not crashing into one another. This was probably a carefully orchestrated photo-op.

The Ministry of Agriculture has been aggressively promoting mechanization of agriculture. Today's China Grain News web site praises the organization of interregional wheat-harvest teams now at work in Henan Province. Minister of Agriculture Han Changfu calls them China's "Number One Sickle" at a ceremony launching the "battle" for the summer grain harvest.

The ceremony to kick off the wheat harvest was held at 10 am on May 30 in Tanghe County of Henan Province, a major wheat-producing area. After the ceremony the wheat combines took off into the fields. The awe-struck reporter gushes over the line of combines busily harvesting the golden wheat fields.

The article reports that there are 490,000 combine harvesters working on the wheat and rice harvests this year, 20,000 more than last year. They expect the number of interregional harvest teams to reach 310,000. The wheat harvest is 88% mechanized, up 2 percentage points. Mechanization of corn planting is 77%, up 1 percentage point. "What's the significance of 1 or 2 percentage points?" the article asks rhetorically. According to local farmers, it used to take 2 or 3 days to bring in the wheat, but now it is done with just "a bag of smoke."

Young ladies hand a goody bag to a combine driver as he prepares to enter battle in the wheat fields. These are probably college students enlisted to staff the wheat harvest ceremony as part of their "practical training."

The main objective of the mechanization drive is to reduce the time between harvesting wheat and planting a corn crop for harvest in the fall. According to the article, new technology and modern equipment can save time and labor in the whole series of tasks needed for the wheat harvest and corn planting. The reporter says he saw a very interesting phenomenon--large combine harvesters leading the way, closely followed by small seeding machines. "This unusual combination is fighting the summer production battle across the landscape of the central plain's wheat-production area."

Sunday, May 29, 2011

"No Problem" is a Problem

In a short article in Value China, an author named Zhang Xujing shares some valuable management tips that highlight common problems in Chinese management that anyone doing business with China should be aware of. Dim sums has a hypothesis that "no problem" problem is at the heart of China's food safety dilemma.

Zhang Xujing observes that managers often go to the factory or wherever production takes place to see what's happening on the ground. When the manager asks employees how things are going, the inevitable answer is "no problem" (in Chinese, "mei you wen ti").

Zhang insists that "no problem" is not an acceptable answer. He outlines two scenarios to explain his point.

The first scenario is when an employee says "no problem" when in fact there is a problem. Managers often ascribe this to employees' dishonesty, but it also arises from a management organization that gives employees incentive to cover up problems. An employee may be afraid to admit that problems exist since it would reflect badly on him, he would be held responsible and subject to punishment or downgrade. That means employees keep problems hidden, preventing them from being detected and preventing the company from improving its performance. Problems become entrenched, employees get used to them, and eventually the problems are just ignored.

Second, the author insists that an answer of "no problem" can reflect an attitude of complacency and stagnancy. There is always room for improvement. A "problem" is the difference between the current state of affairs and the ideal. There are always problems to be solved. "No problem" means the bar has been set too low.

The author recommends that managers change their mindset. Managers should not act like police who are out to punish employees responsible for problems. The objective is to solve problems and prevent them from recurring. Managers should see every problem as an opportunity for improvement. He recommends a Toyota-style approach to management based on continuous improvement and problem-solving (that was all the rage in U.S. management circles about 20 years ago.)

This article points to some very old tendencies in Chinese organizations--the reliance on rewards and punishments and a tendency for loyalties to be horizontal (to family, friends, neighbors) rather than vertical (to the company's or organization's goals). In this context, "no problem" becomes a game of hide and seek for auditors, regulators, and even a company's own management. Problems get hidden and are allowed to fester until they blow up.

Chongqing's Brazil Deal

Several days ago, the New York Times ran an article about Chinese investments in Brazilian soybean projects. The dim sums blog got curious and read a little on what the Chinese press says about this investment.

Dimsums read up on a $2.4 billion deal struck by Chongqing Grain Group in April with officials of the state of Bahia, one of at least two China-Brazil projects agreed to so far. The Chongqing project, set to begin construction this month, included construction of a soybean crushing plant, a soybean warehouse and a fertilizer factory. It is expected to employ 1,000 local people (presumably Brazilians). Soybeans are to come from an area covering 200,000 hectares.

More background about the project is given in an August 2010, article in the Chinese press announcing that the deal was in its final stages of approval by the National Development and Planning Commission.

The company behind this project--the Chongqing Grain Group--appears to be a company descended from the grain and edible oils bureaucracy. Most of the article consists of quotes from Wang Jianjun, vice chairman of the company. Apparently, this article is another example of company propaganda masquerading as news but it gives us some insights about what's behind the project.

Mr. Wang's explanation of the impetus for the project reveals a latent central-planning mentality. Mr. Wang explained, “Chongqing each year produces 100,000 mt or so of edible oil, but consumption is 350,000 mt, so that leaves a 250,000 mt deficit that has to come from outside the municipality." There is no mention of plans for marketing the soybean meal which provides a big part of the revenue from soybean crushing.

The Times article inferred that China imports soybeans were for animal feed, but in fact the Chongqing project is aimed at getting vegetable oil. Wang Jianjun said that this project will fulfill Chongqing's demand for edible oils in 3 to 5 years and supply some to sell outside the municipality.

Mr. Wang also said that soybeans from the project itself would only fill 45% of Chongqing's vegetable oil deficit, and the rest will be filled by importing other Brazilian soybeans. Mr. Wang explained, “After it’s completed, the Brazilian base will become the company’s platform for importing Brazilian soybeans; we can close the deficit by purchasing soybeans from the surrounding area.”

The Chinese article on the deal emphasized that Chongqing citizens would get the soy oil at a very cheap price ("价格将更便宜"). Mr. Wang, the company official, explained that the company can ship soybeans from Brazil to the Chinese port at Zhangjiagang and up the Yangtze River 350-yuan cheaper than they can ship soybeans from northeastern China. Moreover, the higher oil content of the Brazilian beans (20%) makes them even cheaper.

Two-thirds of the Chongqing Grain Group deal was to be financed by loans from the China Development Bank, a mammoth government-owned policy bank that specializes in financing foreign investments by Chinese companies--the "going out" campaign.

Why are Chinese companies spending vast sums to build projects in Brazil? Wouldn't it be cheaper to just buy soybeans on the open market? One reason may be the ingrained need for control and planning.

Another clue is revealed near the end of the Times article: "Farmers [in Brazil] say they share Chinese officials’ goal of breaking the stranglehold of international trading companies like Cargill and Archer Daniels Midland."

Chinese officials frequently complain that the "ABCD companies" [ADM, Bunge, Cargill, Louis Dreyfuss] dominate and manipulate the grain and oilseeds industries. A 2008 English article in China's Economic Observer blaming high commodity prices on the ABCD companies provides a glimpse of the vitriol. One of the goals of the "going out" strategy is to build up China's own multinationals who can escape the supposed dominance of the ABCD companies.

Some history: a sore point constantly cited in China is supposed price manipulation in 2004 that bankrupted Chinese soybean crushers in China. Describing the events in 2004, one anonymous Chinese scholar quoted in the Economic Observer article said the demise of Chinese soybean crushers was due to their own internal problems, not conspiracy theories. According to the anonymous scholar, over 1,000 soybean crusing companies--most affiliated with local governments--popped up in the space of two or three years. In the scholar's opinion, it was inevitable that these companies would fail since there were so many, each with a small market share, and they had "backward technology and management."

Now, small local companies like Chongqing Grain Group are trying to go head to head against the ABCD companies in Brazil. The thinking of the Chongqing Grain Group chairman outlined in the article portrays old school central planning mentality of filling in cells in spreadsheets that will probably not hold up against Harvard MBAs. These bureaucrats/managers have carved up China into self-contained provincial markets with fixed "demands" for each product that have to be balanced with supplies using a socialist cost-plus approach to pricing.

Why will companies like Chongqing Grain Group succeed in Brazil while similar companies failed on their home turf in China? Because they're armed with billions of dollars in cash this time?

Tuesday, May 24, 2011

April grain inventory check

In April a nationwide check on grain inventories was ordered. I have found results from surveys of onfarm grain inventories from a random selection of local price bureaus online, but there is no compilation of national or even provincial data. There is not much about grain reserves either.

Dimsums blog reviewed nine reports from counties in Shandong, Liaoning, Gansu, Jiangsu, Hubei, Henan, and Jiangxi. The reports are based on reports from samples that range from 9 farms to hundreds, and they include average grain inventories held by farm households as of April 1, 2011, production and sales of grain over the past year.

It is impossible to generalize the results. The average grain inventory varied from 26 kg in Nanchang City of Jiangxi to over 2700 kg in Shanghe County in Shandong. Attitudes about holding grain are clearly in a state of flux. In Nanchang the report says local people have gotten used to selling their rice as soon as it's harvested. In some other places they say the farmers are holding on to their grain, hoping for higher prices.

In Shanghe, about one-third of farm households held over 3000 kg of grain, but 14% didn't have any grain and 12% had 1-500 kg. According to the Shanghe report, people over age 50 still have a strong inclination to store grain, while young people are more apt to sell it. One reason for selling quickly is the high moisture content of newly-harvested wheat (presumably because it's heavier).

On the other hand, the Shanghe and Dalian reports say the frequent droughts and natural disasters in recent years increases the inclination of farmers to hold grain. In Shanghe and Dalian inventories increased more than 20%.

Many reports said grain production fell in 2010. In the Wuhan region grain production was down 20% due to a winter drought in 2009, spring flooding in 2010, and hail during the summer. Wuhan farmers' early rice production last year was down more than 30%.

In Binzhou of Shandong, farmers' grain inventories were down over 40%, but here it was apparently due to higher sales stimulated by higher prices.

In Tacheng, Xinjiang Autonomous region, farmers sell all their wheat after harvest, then buy grain for consumption as they need it. In Shanghe, they say family grain consumption is going down as people diversify their diets and most of the working-age people go out to work elsewhere. Shanghe's average grain inventory is more than enough for a year's consumption. In Nanchang, farmers are accustomed to buying milled rice as they need it.

The report from Zhanghe Prefecture in Gansu Province is rather grim. It says grain reserves there have been falling since 2004 and are now down to about 1 1/2 months consumption, less than half the level recommended by the State Council. Each year, 100,000 mt of grain has be shipped in from elsewhere to meet the annual consumption of 340,000 mt. Most grain stocks here are held by farmers. Their average holding this year is 211 kg of wheat and 161 kg of corn. Wheat inventories were down 39% this year. Wheat production fell 9%.

There are differing stories on marketing channels. Some reports say that farmers sell their grain mainly to private traders. They say the traders are "flexible", can come to their homes or even their fields to purchase. The traders in Changzhou, Jiangsu Province, are said to be well-informed. Several reports also say that farmers prefer to sell to private traders because they are less interested in quality standards than are state-owned enterprises. Several reports recommend that state-owned enterprises emulate the better service provided by traders.

On the other hand, farmers in Tacheng sell 95% of their wheat to state-owned enterprises. Farmers in Xinjiang may be more motivated to sell since their subsidy is based on the number of kilograms of wheat they sell. In most other places the subsidy is based on their historical land base. In Fuyang of Anhui the increased minimum prices for wheat and rice reinforced farmers' expectations of rising prices and their grain inventories are up 77% this year.

In Changzhou, the report says most farmers work in local factories and have plenty of money so there's no rush to sell. They can take a wait-and-see attitude to see how prices go before selling.

It's hard to draw firm conclusions from these reports. The wide variation is a reminder of the difficulty of collecting statistics in such a diverse country. It's clear that rural China is a big place that's in the midst of rapid change. Everything is true somewhere in China. Nothing is true everywhere in China.

Sunday, May 22, 2011

Wheat Overcomes Drought

The new wheat crop in Henan Province's Xinxiang City

A team from China Grain Net conducting a wheat tour last week reported that the crop appeared to be in pretty good condition. Last December and January there were histrionics about the wheat region being hit by the worst drought in 50 years, but it looks like the crop will be as big or bigger than last year as long as weather is OK between now and the harvest.

A farmer named Ma in northern Henan's Xinxiang City told the inspection team: “now the weather is pretty good, it looks like this year’s harvest will not be bad at all!”

Ma's fields, totaling 7 mu (a little over 1 acre), are in the northern plain of Henan, near the Yellow River. In this area, access to irrigation is pretty good, and Ma's crop was irrigated twice to stave off the effects of the drought.

Spraying pesticide on the wheat crop in Xinxiang

At Hengyang City, a grain warehouse boss estimated that this year's local wheat crop would be about 3.25 mmt, up 200,000 mt from last year. He said the area usually produces about 20% high-quality wheat, and if the weather is good from now on the crop's quality and volume could be similar to last year's.

Another team found similar conditions in the southern part of Henan.

These fields in Hebei Province are uneven because they are divided up among different farmers who plant different varieties. The farmers call it "two-story wheat"

The next day, the team visited Liaocheng in Shandong province, a major wheat-producing area that the government designated in 2000 as a pilot area for producing high quality wheat. Liaocheng is also expected to be up to 2.74 mmt this year, saved by irrigation during the drought. In Dezhou, another major agricultural area in Shandong, this year's wheat area was estimated to be up 6% and the yield up 2% from last year.

Managers of grain warehouses in several areas said they don't have that much room for the new crop. In Liaocheng City of Shandong, only about one-tenth of the warehouse space is now free, and space is said to be tighter than last year. A trader in Henan who was buying 1500 kg of wheat from an area encompassing 4-to-5 villages said he will have to beginning selling old-crop wheat to clear space for the new crop.

A Shandong farmer sells wheat he has had in storage since last year

In Gaocheng City of Hebei Province a recently-built government warehouse has a capacity of 100,000 metric tons. Last year they bought about 40,000 mt of wheat and only about 30,000 mt of space is free. The warehouse expects to buy 45,000 mt of this year's wheat crop.

In Hengyang, some people in the business said that probably more wheat would be used by local flour mills this year. Transportation costs are high and the local mills have excess capacity, so the wheat would probably be milled locally rather than shipped out to other regions.

In Hebei Province the team found flour mills operating at full capacity. However, a warehouse official in Gongcheng complained that the flour-milling industry in Shijiazhuang City has become extremely competitive. Several big companies have opened mills, raising the competition to buy wheat. Yihai Kerry (Wilmar), a Singapore Company, is singled out for having built the biggest plant. (China Grain Net regularly complains about Wilmar's recent forays into wheat and rice milling.) In this area the purchase price by flour mills is just under 1.10 yuan/jin.

Wheat prices peaked in March or so, and declined in April. The trader in Henan said the current price of about 1.10 yuan per jin is about where he expected it to be. Many farmers were hoping for a price above 1.10 yuan, but processing enterprises expect it to stay steady. Farmers are not optimistic about the prospects for a higher price.

In Gaocheng City, the premium for high-quality wheat is increasing, reflecting its relatively scarcity. Last year common wheat sold for about 1.02 to 1.05 yuan/jin and quality wheat sold for about 1.10 to 1.20 yuan. This year the prices are expected to be 1.07 to 1.08 yuan for common wheat and 1.35 yuan for quality wheat.

Interviewing a grain trader in Gaocheng City of Hebei Province

Traders say they are watching carefully to see what the government's new wheat policy is for this year. That will be the key to what happens to the price.

With the prospect of warehouses selling off inventories and a good harvest, it sounds like conditions are lining up for downward pressure on wheat prices...a very different situation from what was expected in January.

The wheat harvest has already started in Hubei Province

Tuesday, May 17, 2011

Time for Truth in Statistics?

Ma Jiantang, the head of China's National Bureau of Statistics, paid a visit to the rural survey statisticians in Gansu Province this month where he urged them to preserve truthfulness and correctness in statistics. These are the "sacred duties" of survey teams at each level.

Ma Jiantang gets the "actuality" for Gansu's rural survey team and gives them some pointers on raising labor productivity. It only took 14 people to look at this patch of dirt.

As most people know, the quality of China's statistics are highly questionable. The statistical system was set up under central planning and still bears the legacy of that era, when statistics were reported up from one level to the next. The national bureau has little control over local statisticians who often inflate numbers to make their province look good. Statistics were a means of validating the success of the leaders' policies, not a way to find out what's actually going on out there. Statistics wasn't even a recognized discipline in universities until the 1990s.

We can perhaps detect some of the problems by parsing Mr. Ma's instructions to the statisticians. Below are some of Ma's exhortations followed by a possible interpretation in parentheses.

Ma urged them to have a sense of being a "national team." [The national statistics bureau and the local survey teams are actually supposed to be working together. Tell us true figures, not exaggerated numbers that make your province look good.]

Ma urged them to have a sense of "actuality." [Don't fake the numbers to make your leaders look good, to meet targets, qualify for subsidies or to hide problems.]

"Raising the truthfulness and reliability of grain production data...is the sacred duty of each level of statistical organization." [Would you please tell us how much grain is really being produced? Who really believes that grain production went up 7 years in a row when huge swathes of land are being turned into malls and industrial parks and only old people and children are left in the villages to do farm work?]

"...statistics organizations must go into the countryside, into the fields, to the households, understand agricultural input situation, crop planting structure and production situation..." [Don't sit in your office and fill out the survey questionnaires with fake numbers; go out there and actually count things!]

Ma told them to strictly perform independent investigation and independent reporting. [Don't let local government or company leaders tell you who should be in your sample, or tell you what the results should be, and don't let them massage the numbers.]

This article is one of several about Ma Jiantang's visits to local areas to exhort statisticians to improve data. According to the article, "...implementation of statistical modernization is a central objective of statistical development reforms during the twelfth five-year plan period." Perhaps we can look forward to accurate statistics from China.

Sunday, May 15, 2011

Factory Farms on the Horizon?

A recent article about the hog industry highlights a quiet structural shift toward big farms that also signals a major change in the social and economic fabric of rural China.

In Taihe County during the 1980s and 1990s, nearly all households raised hogs--some to sell and some for the family's own consumption. But now only a few households in each village raise hogs because it's hard to make money. The reporter cites a similar situation in Yunnan, Henan, and Anhui Provinces.

An expert on the hog industry at Guangzhou's Zhongshan University attributes the disappearance of "backyard" hog farms to several fundamental changes in farming. "Backyard" farming is based on the small-scale farm structure and availability of slack labor. He says that the relaxation of constraints on land transfer has led to consolidation of land, and migration of young people to city jobs has eliminated the slack labor traditionally used for raising hogs. The shift from traditional local breeds to imported breeds and disease epidemics are additional deterrents to small-scale production. Imported breeds are more expensive, are designed to be raised on expensive purchased feed (instead of slop and waste), and must be kept in clean conditions since they are more vulnerable to disease than are traditional breeds.

This article says commercial-scale farms have been quitting too. The reporter cites the example of Mr. Liu, in Jiangxi’s Jian County with over 10 years in the business, slaughtering over 3000 head per year. Mr. Liu quit last year, saying, “When I started out I could make money, but in the last five or six years I didn’t make anything.” He said the profit is eaten up by rising feed costs on one end, but he also complains that monopolization of the local slaughter industry has led to downward pressure on hog sale prices as well.

The reporter adds, "In fact, now farmers in many provinces are losing money raising hogs, being replaced with a few large enterprises that slaughter 1000 head or more." The reporter describes this as the beginning of a major consolidation process: "a small drip converging to a big river."

Food safety scandals are putting pressure on the industry to consolidate. The chairman of the Shuanghui Company--implicated in the scandal regarding use of illegal feed additives in March--announced that the company will shift from being a "killer of pigs" to a "raiser of pigs." He pledges that the company will construct a 500,000-head hog farm to meet one-third of the capacity of every 1.5-million-head slaughter house the company builds. The rest of the hogs will come from commercial-scale hog farms and farmer cooperatives.

A Xinhua opinion piece is skeptical that Shuanghui can create food safety by creating this kind of "pork industry empire." He says Shuanghui may not shy away from high costs of raising pigs, but it would reduce competition, add unnecessary costs to pork. He argues that one company alone can't save the market and bring about safe food--in the end government oversight is needed.

An opinion in "The Masses Daily" says Shuanghui's logic seems reasonable but doesn't stand up under scrutiny. Whether or not illegal additives are used is not a matter of who raises the pigs. The reporter points out that soon after the incident many pointed out the many postings on the internet offering the illegal "lean meat powders" like clenbuterol. How could a big company like Shuanghui not be aware of it? A news report revealed that hogs generally have 30%-40% lean meat but Shuanghui demanded 70%. Farmers added the clenbuterol to meet Shuanghui's standard for lean meat. With these incentives, "the company's own pigs may not be safe." The author asks rhetorically whether Shuanghui will also build its own feed mill and vaccine factories? [Actually, yes they do.]

Friday, May 13, 2011

Rice Strategy: Industrialization or Planning?

An article on the China Grain Net web site describes the Sinograin Company's efforts to implement the official strategy for modernizing Chinese agriculture in Hunan Province's rice industry. While the strategy could have been cobbled together in an MBA classroom, its basic elements bear great similarity to pre-1980s collective agriculture dressed up in industrial clothing. Is this a step forward toward a market economy or a disguised return to central planning?

Sinograin is the Chinese government's company in charge of maintaining grain reserves. Its widespread network of subsidiary companies operate warehouses, purchasing stations, and grain mills in major grain-producing areas. Hunan is one of the top rice-producing provinces. Sinograin has a branch in Hunan with 38 local subsidiaries. Sinograin also controls the China Grain Net web site where the article appears. The article is basically advertising Sinograin's approach to encourage wider adoption since this is a "model" program. The methods described have been appearing in many government-sponsored articles and policy statements this year. While the article is propaganda, it gives a concrete example of what Chinese authorities are trying to do to upgrade the quality of grain, improve productivity, reduce toxic pesticide residues, and rationalize fertilizer use.

The strategy emphasizes the formation of a "complete industry chain," from field to table that integrates input supply, production, purchase, processing, packaging, branding and distribution to consumers for a "multiple win" industry.

The strategy integrates the local Shengxiang ("Flourishing Hunan") company with a Ministry of Agriculture project to create a "1 million mu quality rice corridor" in an area surrounding Changsha, the capital city of Hunan. State bonds funded new rice storage facilities and a 200,000 mt rice-milling plant was constructed as part of the project.

The strategy bears many similarities to pre-1980s collective agriculture. The "company + base + farmer" strategy includes forming scattered plots into large contiguous fields where farmers use the same inputs and seeds, apply pesticides in a coordinated manner, plow and harvest together, and jointly market their rice to the local Sinograin subsidiary.

The project apparently aims to bring "order" to rice marketing by linking companies directly with farmers and purchasing rice under contract. The chairman of the Shengxiang company explains that they have set up local purchase stations where farmers can "conveniently" deliver rice. In the demonstration area each village authorizes 3-to-5 individuals as rice purchasers. The villages rice fields are divided up and each purchaser is allocated an area where he/she is authorized to purchase rice.

Delivering rice to the company in Hunan.

The government sees itself as unable to provide the services farmers need, so its strategy is to rely on companies and cooperatives to perform the function of extension service--spreading seeds, techniques, inputs, and training--with help from the government.

The article about the Shengxiang company emphasizes the role of a model cooperative that was set up by the company two years ago. It makes sure to note that various provincial and Sinograin leaders have come to inspect the cooperative and pay a lot of attention to it. The cooperative has received many awards and is designated as a model cooperative.

The cooperative uses a "five unified" strategy to standardize and coordinate the farmers' production and marketing. [This is standard rhetoric repeated by virtually all Chinese cooperatives.] They formulated a variety plan that determined which varieties should be planted in each area. Each township set up pest control teams, everyone used the same low-toxicity pesticides and they applied them in a coordinated manner. The cooperative set up a pesticide sales network. Extension stations provided the cooperative members with soil fertility testing to determine appropriate fertilizer formulas, and fertilizer was purchased in bulk at discount prices. The cooperative formed machinery service teams and carefully planned which fields would be plowed or harvested each day. The cooperative members jointly market their rice to a miller who produces a brand of rice named after the cooperative.

Personnel from China Grain Net visit the cooperative's high-grade rice demonstration area

The article highlights four large grain farmers who are models for others to emulate. These farmers got special soil fertility testing and instruction and received fertilizer delivered directly to them. The cooperative offers grain-drying services to solve the large farmers' problem of drying grain in the sun [farmers typically spread their rice on a road, courtyard, basketball court or other open space to dry in the sun--large farmers probably can't find a big enough space to do this.]

Mr. Zhou Yi, the party secretary and general manager (in that order) of the Hunan branch of Sinograin lauds the cooperative as a bright spot and breakthrough in modern agriculture that promotes increased grain production, higher income, pulls along farmers, stablizes grain prices, and makes a needed contribution to social harmony.

Tuesday, May 10, 2011

Price policy erodes grain quality

A blog post on the China Grain Net site points out that support price policies create a mismatch between the types of grain Chinese farmers are supplying and the types of grain that the market demands.

When China was just worried about pumping out enough carbohydrates to feed the population, "grain" was a generic commodity. As the food system became more sophisticated, flour millers needed different kinds of wheat with varying degrees of gluten and protein to make instant noodles, breads, crackers, pasta, etc. Rice also has become differentiated--long grain, short grain, "fragrant," etc.

Traditionally, policymakers focused on getting maximum volume of grain. The blogger points out that this tradition continues with the minimum support price polices for wheat and rice that have been in place since 2004 (it actually started in 2005 for wheat). The policy sets support prices for low-quality grains but does not offer premium prices for high-quality grains. Consequently, there is not much of a price premium for high-quality grains. The premium is critical since high-quality grains tend to have lower yields per hectare. The policy gives farmers incentive to plant high-yielding low-quality grains instead of high-quality grains that have a growing demand. The blogger concludes that, after 6 years, the policy has pushed quality grain out of the market.

Several years ago a drought in Henan produced poor quality wheat crop which the government bought up at the support price. This year the government has been pushing farmers to plant more early season rice in southern China. Early rice has long been supported by the government even though people don't like to eat it--it often ends up as animal feed. The moisture level in corn is usually too high, resulting in high levels of mycotoxins in Chinese corn that sickens or kills livestock.

This year grain prices are generally well above the support prices and rising. The blogger says that the faster rate of increase in price of quality grains shows the erosion of their supply due to the policy. Inventories of imported high-gluten wheat are nearly exhausted and the price is rising faster than the price of common wheat. Japonica rice is in short supply and its price has risen faster than any other grain this year.

Monday, May 9, 2011

Pork at Luxury Prices

These pigs graze on grass and wild fruit all day, listen to music, and their meat sells for 160 yuan per jin

As China's food safety scandals rock the industry, entrepreneurs are jumping in to supply high-priced foods designed to win the confidence of health-conscious consumers looking for safety and certainty.

A recent commentary on the new phenomenon of "sky-high pork," discusses some important changes in the Chinese food system. In past years, "green" and organic food came on the market at premium prices, but now a whole range of foods produced in various ways with safety and health benefits are available at sometimes outrageous prices.

The article describes the experience of Ms. Liu who went to a shop to redeem a 500-yuan gift certificate and found she could only buy about 2 jin of hormone-free spare ribs and a couple of small kidneys for that amount. Other examples are pork from pigs fed "ecological" tea leaves and Chinese medicinal herbs.

The author asserts that consumers' food safety fears distrust of poultry, egg, and meat products is "a breeding ground" for this kind of high-price pork, and it will "ultimately destroy China’s livestock industry."

The author laments that there is no assurance for consumers that these "sky-high" prices are really warranted. He asks, rhetorically, "How can you tell there are no antibiotics or hormones in 'green pork' or 'organic pork'? Is it really more healthy than common pork?"

There is no reliable government oversight of merchants offering these products. He says, "merchants use consumers' worries about pork to hype their 'concept,' ... reaping huge profits. Whether it’s really green, organic only the merchant really knows." When consumers have doubts about the products the only information they receive is promises from the merchants.

The author is also concerned that the rich may be able to pay for food safety while the common people are left to eat unreliable food supplied by "black-hearted" merchants. He worries, "I’m afraid it will be the special privilege of the rich to eat green and organic products."

Then the author asks why hormone-free pork should be more expensive in the first place. He points out that this is going back to the way pork is naturally produced, so why should it be more expensive? "Natural" should not equal "sky-high price." He points out the irony of a natural product being used to create a profitable "consumer novelty." "Who will walk the path of man-made pork," he asks.

A separate article discusses the high-tech Netease Company's plan to open a massive pig farm that the CEO, Ding Lei, has called a revolution in the industry. The Netease plan is an odd combination of high-tech industrialization and "back to nature." Pigs will be fed organic feed and taught to excrete precise amounts of manure daily in certain locations.

The Internet company plans for complete transparency and extreme traceability by putting the entire hog production process online. Farmers will be able to learn all their techniques and consumers will be able to log on to a web site to track the life of a pig from birth to slaughter. The Wall Street Journal called it a Facebook for pigs.

People in the pork industry don't think much of the plan. Professor Liu, the vice chairman of the animal husbandry association, doubts that many people really want to know that much about the life of a pig. "Even the strictest traceability systems in northern Europe don't trace individual pigs," he says. And the cost is too high.

Netease brought in a human habitat design team from the elite Tsinghua University to design the pig farm to achieve precise control of temperature and humidity, and "let pigs live a comfortable life."

The plan aims to develop Chinese breeds of pigs to break the cycle of importing European and North American breeding hogs. However, Netease is beginning with specially-selected breeds imported from Japan.

Professor Liu, who has designed 60 or 70 pig farms, is puzzled by Netease's approach. He says habitats for humans and animals are completely different. He says, "No one breeds their own hogs any more."

The Netease farm, to be opened in Zhejiang Province's Anji County, will sell pork at premium prices. It is another project aimed at testing the high end of the market.

Is Internet engineering ingenuity what the pork industry needs, or is the old-timers' skepticism justified?

Thursday, May 5, 2011

Apple Bubble Bursts

In the fall of 2010 prices of nearly all agricultural commodities in China were surging upward. But now prices are starting to crash downward. One of the most prominent examples is given by an article about the apple market in Yantai of Shandong which describes the bursting of an "apple bubble."

Describing the frenzy after last fall's harvest, the head of an apple association in Yantai said, "Seemingly overnight traders came from all over the country calling out for Yantai apples." The head of an apple company described it as "unbelievable," and prices reached levels he had never seen before in 20 years. Others described the prices as "outrageous."

In the fall of 2010 it seemed inevitable that apple prices would keep rising. There was a general inflationary trend, and a drought in apple-growing areas of China's northwest had reduced the quality of the crop in that region. Everyone was getting into the apple business, including people who formerly raised pigs or traded garlic. Traders from the northwestern provinces came to Shandong looking for apples. Small farmers speculated on apples too. Some traders bought apples while they were still on the trees.

What the article doesn't mention is that the price of exported apple juice skyrocketed to near the record levels reached three years ago.

Many of these people bought up apples and stored them in warehouses, thinking the price would keep going up. Many of the people who jumped into the business didn't know the industry. They bought apples with little regard for quality.

People with experience in the business say there is a cyclical pattern in the apple industry: two years of profit followed by a year of losses. True to form, apple prices fell this spring. Apples that were purchased for 3 yuan per jin last fall and put in storage can sell now for only 2.7 yuan.

The high prices have slowed the demand for exports. One Shandong company that sells apples mainly to southeast Asia, has exported only 4000 mt this year, down from their usual pace of 7000 mt by this time of the year.

Chinese consumers also balk at the high prices. One Shandong entrepreneur noticed that consumers in Shanghai were bypassing large apples for cheaper small ones.

The crash in prices of apples, cabbage, garlic and other commodities undermines many of the inflation stories. People interviewed in China call for more "coordination" in the industry between farmers, traders, and consumers. There is a notion of "three spaces" bandied about in China--that consumers can accept higher prices and higher revenue is to be shared between farmers and middlemen.

How about getting the government to put out accurate agricultural statistics? Last year there were rumors of a bad apple crop in the northwestern provinces but provincial officials insisted that the crop was good. If accurate information about the crop had been disseminated for traders and farmers to make informed decisions, maybe there would have been less chaos and confusion in the industry last fall.

Tuesday, May 3, 2011

New Countryside Conflict in Henan

Apartments under construction at Anxi Village

Villagers in Henan have issued a public appeal for help in their struggle against the seizure of their land for an apartment complex and thuggery of communist party officials. The incident opens a window on the exploitation and coercion used to allocate resources when the market mechanism is not allowed to operate.

The incident took place in Anxi village, about 9 miles north of the county town of Jia County in Henan Province. The village has 180 people still living there, mostly old people and children, and just 67.8 mu of land (about 11 acres), not enough to meet basic food needs.

According to the villagers' appeal, township officials devised a plan to build a complex of 5-story condominiums, supposedly as housing for villagers as part of the "new countryside" construction program. The developer of the project was the party secretary's nephew.

Last March the town residents committee signed a rental contract that requisitioned the entire 67.8 mu of land for the project from the No. 2 group of the Anxi village. The contract stipulated that the land would be rented long-term. The compensation for villagers was set at 500 kg of wheat.

After spring festival this year the villagers refused to sign a land rental agreement stating that they voluntarily transferred the land. They complained to upper level authorities. The township authorities sent thugs door to door to force the villagers to sign. They smashed cell phones, broke furniture, and caused general "lawlessness."

The town government and developer, worried that the villagers would cause trouble, hired thugs to patrol the construction site day and night. The developer hired thugs to threaten the villagers that complained. He said, “The land is occupied by the state, whoever makes trouble will get trouble, them and their whole family.” A villager living elsewhere was phoned with a warning: “don’t go home to make land claims. You'll get your hair pulled, slapped around, legs broken.”

The apartments were supposedly built for villagers. The apartments are advertised for sale at 650 to 1600 yuan per square meter, but housing in the county city sells for about the same price. Villagers went to inquire about purchasing the apartments at a favorable price, but they were sent to the developer who said the price is fixed and there is nothing he can do about it.

Promotional material for the apartments
On December 6, 2010, villagers appealed to the Henan Daily for help. A reporter investigated and wrote an article. He found one building already completed and 5 under construction.

The reporter visited the sales office for the project where he was greeted enthusiastically by a salesman. He said the units were nearly sold out. A purchase contract said the land was provided by the Anliang Town New Countryside Construction Office.

A person calling himself the local communist party branch secretary was in the office. When asked what he was doing there, he explained that the developer was an outsider and didn't understand the local situation. He and other party secretaries often are in the office to explain policies to buyers. Villagers told the reporter that many outsiders came to buy these apartments.

The next day the vice-mayor of the town explained to the reporter that this was a new countryside construction project. The town had stopped approving new housing land for several years and this project was constructed to meet the housing needs of villagers. Eligible villagers could apply to buy one of the houses. New cultivated land would be created through land swaps later (how? by tearing down the villagers' old houses?) He said these houses are not for outsiders and there was no developer handling the project--it was being done by the local construction bureau. The vice-mayor said the land was not zoned as farmland. The farmers who wanted to plant crops on it didn't know it was zoned as construction land.

When the reporter asked how the income from the project would be distributed, the town official said the building standards were relatively high and there would be no surplus to distribute.

Villagers say the town leaders blocked distribution of the newspaper containing the article about the dispute. Officials built a wall around the disputed land. On December 22, when villagers went to ask for an explanation, the developer hired thugs to beat up four of the villagers, who were put in hospital. One lady living in the county city heard her 3 mu of land had been seized, and went back to the village for an explanation. The thugs threatened her, saying, “If you come back here we’ll break your legs, don’t ever come back.”

On April 7, villager Cheng Manqiang and others complained to people in the provincial capital. The town vice party secretary made 10 phone calls, making threats to stop them from complaining to upper levels. Town officials and the developer were introduced by a friend at the Zhengzhou City Tax Bureau to someone at the provincial Ministry of Land Resources. For 1.8 million yuan he declared that it was nonarable land that can be converted to construction use land, quashing the villagers' complaint.

The villagers' appeal said that Anliang Town’s government leaders forced them to sign a “land rental contract” and “land requisition agreement”, colluding with the developer to illegally build the housing estate. They "...used gangs to assault us, damaging the image of the party in the eyes of the village masses. We strongly hope that upper level leaders and news organizations can know our situation, carry out an investigation, preserve legal responsibility and return the land we live on."

Sunday, May 1, 2011

Population on the Move

Last week the preliminary results of China's 2010 population census were released by the National Bureau of Statistics. The population of the mainland was estimated at 1.34 billion, an increase of 74 million since 2000.

China's population growth is slowing. The average annual rate of increase during 2000-10 was 0.58 percent, almost half the growth rate of about 1 percent between 1990 and 2000.

China is urbanizing. The population was almost 50 percent urban. The urban population grew by 207 million from 2000 to 2010. The rural population dropped by 133 million.

China is a country on the move. 221 million people (16.5 percent) were living in a city different from their legally-registered residence.

Coastal provinces and several other border provinces sucked in people from the interior provinces. Guangdong Province is now the most populous region with 107 million people. In 2000 Guangdong was number 3, behind Henan and Shandong. Guangdong added nearly 18 million people during 2000-10. Zhejiang, China's number 2 commercial center, was second in population growth, adding over 7 million. Shanghai and Beijing each added about 6 million people and posted the fastest population growth rates of about 40 percent over ten years. Tianjin grew about 30 percent.

Shandong, Hebei, and Jiangsu Provinces each added 4-to-5 million people during 2000-10, but their growth rates were about 5-to-6 percent, about equal to the national average.

Hubei, Sichuan, and Chongqing each lost 2-to-3 million people between 2000 and 2010. Anhui's population also declined. The population barely changed in Guizhou, Gansu, and Jilin. In other interior provinces--Henan, Hunan, Heilongjiang, Liaoning, Shaanxi, Guangxi--population grew at relatively slow rates of 2-to-4 percent.

Growth rates were a robust 12-to-15 percent in several western provinces--Xinjiang, Ningxia, Qinghai, and Tibet.