An article from the Daily Business News reports that this year's wheat purchases are down from last year. State-owned companies are getting a shrinking share of the grain as they have to compete with private-sector purchasers.
Grain bureau officials in Dezhou, a district of Shandong Province, describing this year's wheat purchase, said, "This year's volume is not that big, less than usual."
According to grain bureau statistics, wheat purchases in the 10 major wheat provinces as of July 5 totaled about 16 mmt, about half the amount that had been purchased last year at the same time (31.9 mmt).
The article doesn't explain why purchases are down so much this year. Perhaps last winter's drought had a bigger impact on wheat production than officials have been willing to admit.
The article concentrates mainly on the falling share of state-owned grain enterprises. This has been a common theme on the China Grain Net site since last year.
So far, state-owned companies have bought 64% of the wheat purchased. Last year it was 86%. In Shandong, state-owned company purchases so far total 10 mmt, down 2 mmt from last year.
A Shandong grain bureau official explains that there are many individual traders in the market as well as feed mills and some flour mills buying wheat. This year state-owned grain enterprises are having a harder time getting loans because the Agricultural Development Bank has tightened lending standards. Interest rates are higher too.
State-owned grain enterprises are not purchasing wheat to support prices either since the market price is higher than the minimum price set by the government.
Of course, grain bureau people warn that their weakened ability to buy grain could threaten the country's grain security. There is some speculation that the government could adjust its purchasing policy as it did during a similar period in 2008. At the end of 2008, the government rolled out a series of orders for provisional grain purcahses to support the market during the world financial crisis. [Could we be facing another one of those?]
Sunday, July 31, 2011
Saturday, July 30, 2011
New VAT Method for Ag Processors
China's tax bureau has published draft regulations that award a new tax break to agricultural processors. It raises the rate used to deduct the "purchase VAT" on agricultural raw materials from 13% to 17%, in effect reducing the value added tax paid by agricultural manufacturers. The regulations apply to dairy and edible oil manufacturers as "pilot" industries (implying that the plan is to spread it to all agricultural processing industries).
Like many countries, China has a value-added tax (VAT) which assesses a tax on the amount of value added at each stage in the industry chain. Each manufacturer calculates the difference between the final value of his products and the value of raw materials, and pays 17% of the difference as tax. The calculation is complicated by the taxation of unprocessed agricultural products at a lower rate of 13%.
Under the "old" method, a dairy product manufacturer's VAT is calculated as:
VAT = 17%x(value of dairy products manufactured) - 13%x(value of raw milk used)
So, 1000 yuan in dairy products produced from milk purchased for 500 yuan would be assessed a tax of 170-65=105 yuan.
This assumes that a 13% VAT (65 yuan) was already paid on the raw milk (more on that later).
The new method will be:
VAT = 17%x(value of dairy products manufactured) - 17%x(value of raw milk used)
So the processor deducts a larger amount for the hypothetical tax already paid on raw milk or other raw materials, reducing his/her tax burden. In the example above, the new VAT would be 170-85=85 yuan, reducing the tax by 20 yuan.
Rearranging the equation for the "old" method with a little algebra:
VAT = 17%x(dairy products - raw milk) + (17%-13%)x(raw milk)
Under the old method, the processor pays 17% of the value he/she adds to the raw milk plus an extra 4% (17%-13%) on the value of the raw milk (50 yuan in the above example). In theory, under the old method the processor pays for the lower VAT rate for agricultural producers. The new method shifts the 4% burden to the government.
The official rhetoric says the main purpose of the new regulation is to reduce this excess tax "burden" on agricultural processors, thus encouraging more processing of agricultural products and making processors more competitive.
An article discussing the implications of the new VAT method for edible oil manufacturers shows that it's much more complicated than this.
First of all, little or no VAT is actually paid on domestic agricultural products. Companies, cooperatives, and farmers who sell agricultural products they produced themselves are exempt from VAT. That encompasses nearly all agricultural products. Agricultural processors get to deduct the "purchase VAT" whether even when no VAT was actually paid. They write out their own receipt and deduct the hypothetical VAT.
The article calls the "purchase VAT" a "virtual" deduction since the value of (domestically-produced) raw materials does not in fact include any VAT payments. One industry analyst interviewed for the article calls the VAT deduction a "hidden subsidy" for agricultural processors.
One of the purported reasons for the new method is to reduce "cost pressure" on agricultural processors. However, several Chinese edible oil processors quoted in the article say the new regulation will have little or no effect on them. The chairman of Longjiang Fuliangyou Co in Heilongjiang Province said, "It will have no effect on our factory, since our production is tax-free."
The new method is actually most beneficial to processors that use imported soybeans. The VAT system as a whole discriminates against imports, and the method mainly benefits companies using imported raw materials since they bear the biggest actual tax burden. One person quoted in the article calls edible oil the most-taxed industry. Imported soybeans are assessed a 13% VAT on their gross value including the 3% tariff (the tariff on imported edible oils is 9%).
A futures trader gave his opinion: "Since the VAT on imported soybeans is relatively large, the new method is directed at importers."
The article suggests that the new method is mainly intended to stop cheating and fraud in VAT payments. The actual computation of the VAT leaves a lot of room for fraud. The regulations list a whole range of exceptions and special accounting methods. Since VAT is usually not paid on agricultural raw materials, processors usually issue their own receipts that they use to document their input VAT deduction. Analysts quoted in the article say the new rules reduce the room for cheating.
Like many countries, China has a value-added tax (VAT) which assesses a tax on the amount of value added at each stage in the industry chain. Each manufacturer calculates the difference between the final value of his products and the value of raw materials, and pays 17% of the difference as tax. The calculation is complicated by the taxation of unprocessed agricultural products at a lower rate of 13%.
Under the "old" method, a dairy product manufacturer's VAT is calculated as:
VAT = 17%x(value of dairy products manufactured) - 13%x(value of raw milk used)
So, 1000 yuan in dairy products produced from milk purchased for 500 yuan would be assessed a tax of 170-65=105 yuan.
This assumes that a 13% VAT (65 yuan) was already paid on the raw milk (more on that later).
The new method will be:
VAT = 17%x(value of dairy products manufactured) - 17%x(value of raw milk used)
So the processor deducts a larger amount for the hypothetical tax already paid on raw milk or other raw materials, reducing his/her tax burden. In the example above, the new VAT would be 170-85=85 yuan, reducing the tax by 20 yuan.
Rearranging the equation for the "old" method with a little algebra:
VAT = 17%x(dairy products - raw milk) + (17%-13%)x(raw milk)
Under the old method, the processor pays 17% of the value he/she adds to the raw milk plus an extra 4% (17%-13%) on the value of the raw milk (50 yuan in the above example). In theory, under the old method the processor pays for the lower VAT rate for agricultural producers. The new method shifts the 4% burden to the government.
The official rhetoric says the main purpose of the new regulation is to reduce this excess tax "burden" on agricultural processors, thus encouraging more processing of agricultural products and making processors more competitive.
An article discussing the implications of the new VAT method for edible oil manufacturers shows that it's much more complicated than this.
First of all, little or no VAT is actually paid on domestic agricultural products. Companies, cooperatives, and farmers who sell agricultural products they produced themselves are exempt from VAT. That encompasses nearly all agricultural products. Agricultural processors get to deduct the "purchase VAT" whether even when no VAT was actually paid. They write out their own receipt and deduct the hypothetical VAT.
The article calls the "purchase VAT" a "virtual" deduction since the value of (domestically-produced) raw materials does not in fact include any VAT payments. One industry analyst interviewed for the article calls the VAT deduction a "hidden subsidy" for agricultural processors.
One of the purported reasons for the new method is to reduce "cost pressure" on agricultural processors. However, several Chinese edible oil processors quoted in the article say the new regulation will have little or no effect on them. The chairman of Longjiang Fuliangyou Co in Heilongjiang Province said, "It will have no effect on our factory, since our production is tax-free."
The new method is actually most beneficial to processors that use imported soybeans. The VAT system as a whole discriminates against imports, and the method mainly benefits companies using imported raw materials since they bear the biggest actual tax burden. One person quoted in the article calls edible oil the most-taxed industry. Imported soybeans are assessed a 13% VAT on their gross value including the 3% tariff (the tariff on imported edible oils is 9%).
A futures trader gave his opinion: "Since the VAT on imported soybeans is relatively large, the new method is directed at importers."
The article suggests that the new method is mainly intended to stop cheating and fraud in VAT payments. The actual computation of the VAT leaves a lot of room for fraud. The regulations list a whole range of exceptions and special accounting methods. Since VAT is usually not paid on agricultural raw materials, processors usually issue their own receipts that they use to document their input VAT deduction. Analysts quoted in the article say the new rules reduce the room for cheating.
Friday, July 29, 2011
China's Era of High Ag Prices
The Securities Times, a newspaper for Chinese investors, interviewed two executives who offered their opinions on why China is entering an era of permanently higher agricultural prices.
The executives are the chairman of the Longping High-Tech Co and two investment fund managers. They argue that agricultural prices are destined to rise, due to increasing scarcity of agricultural resources, cost pressure, and a new policy environment where cities and industries will "feed" agriculture. They say the transition from "traditional" to "modern" agriculture presents many investment opportunities.
The Longping Co. chairman emphasized the transition from a 50-year period of chemical-based production to reliance on "biological agriculture." This is what Americans would call sustainable agriculture. Instead of constantly adding chemical fertilizer, soil fertility is maintained by returning biological material to the soil. Biological pest and weed controls are used instead of chemical pesticides.
One of the financial analysts argues that the fundamental scarcity of land, energy and environmental resources will push the value of agricultural products up. Agricultural production increases relatively slowly, but demand is growing fast, so he sees prices going up.
The analyst also sees 2007 as the beginning of the transition from the former "dual economy" system in which agriculture had low prices that subsidized industry and urban consumers. He says there is a "national consensus" in China that it's now time for industry and urban consumers to "feed" agriculture.
The "feeding" takes the form of higher farm prices. The financial analyst argues that high prices are much more powerful than farm subsidies in stimulating more production, increasing efficiency, inducing adoption of new technology and introduction of new products. He recommends that prices be allowed to go up, and subsidies for farmers should be shifted to food subsidies for poor urban people.
The executives were asked to recommend investment opportunities related to the high-price agriculture trend. One of the financial analysts recommended seafood and aquaculture products which he sees taking a larger share of food consumption. He cites the chaos in agricultural input supply--including the preponderance of fake seeds and chemicals--and suggests that someone who can develop chains of reliable farm supply shops would have a vast market, although margins would be thin. With mechanization proceeding rapidly, he sees agricultural equipment as another bright sector. Again picking up the "biological agriculture" theme, he says non-chemical control of weeds and pests as having opportunities.
The executive from the plant-breeding company is less specific, but emphasizes product innovations, the intangible value of supplying services to farmers, and using innovative commercial methods to gain large share of local markets. The other financial analyst recommends looking for companies that have access to resources, including land and water, plant-breeding, hog-raising, animal husbandry technology, and the importance of being the first in the market to establish a brand.
Before you rush off to invest in Chinese agriculture, do some research about Agritech and other agricultural ventures that have prompted attention from short-sellers recently. Agricultural and natural resource-related companies operate in chaotic industries and have a tendency to claim ownership of assets they don't have.
The executives are the chairman of the Longping High-Tech Co and two investment fund managers. They argue that agricultural prices are destined to rise, due to increasing scarcity of agricultural resources, cost pressure, and a new policy environment where cities and industries will "feed" agriculture. They say the transition from "traditional" to "modern" agriculture presents many investment opportunities.
The Longping Co. chairman emphasized the transition from a 50-year period of chemical-based production to reliance on "biological agriculture." This is what Americans would call sustainable agriculture. Instead of constantly adding chemical fertilizer, soil fertility is maintained by returning biological material to the soil. Biological pest and weed controls are used instead of chemical pesticides.
One of the financial analysts argues that the fundamental scarcity of land, energy and environmental resources will push the value of agricultural products up. Agricultural production increases relatively slowly, but demand is growing fast, so he sees prices going up.
The analyst also sees 2007 as the beginning of the transition from the former "dual economy" system in which agriculture had low prices that subsidized industry and urban consumers. He says there is a "national consensus" in China that it's now time for industry and urban consumers to "feed" agriculture.
The "feeding" takes the form of higher farm prices. The financial analyst argues that high prices are much more powerful than farm subsidies in stimulating more production, increasing efficiency, inducing adoption of new technology and introduction of new products. He recommends that prices be allowed to go up, and subsidies for farmers should be shifted to food subsidies for poor urban people.
The executives were asked to recommend investment opportunities related to the high-price agriculture trend. One of the financial analysts recommended seafood and aquaculture products which he sees taking a larger share of food consumption. He cites the chaos in agricultural input supply--including the preponderance of fake seeds and chemicals--and suggests that someone who can develop chains of reliable farm supply shops would have a vast market, although margins would be thin. With mechanization proceeding rapidly, he sees agricultural equipment as another bright sector. Again picking up the "biological agriculture" theme, he says non-chemical control of weeds and pests as having opportunities.
The executive from the plant-breeding company is less specific, but emphasizes product innovations, the intangible value of supplying services to farmers, and using innovative commercial methods to gain large share of local markets. The other financial analyst recommends looking for companies that have access to resources, including land and water, plant-breeding, hog-raising, animal husbandry technology, and the importance of being the first in the market to establish a brand.
Before you rush off to invest in Chinese agriculture, do some research about Agritech and other agricultural ventures that have prompted attention from short-sellers recently. Agricultural and natural resource-related companies operate in chaotic industries and have a tendency to claim ownership of assets they don't have.
Wednesday, July 27, 2011
Stabilizing the Pork Market: Not!
Using commodity reserves to stabilize prices is bad idea that just doesn't go away. Chinese officials are obsessed with building up larger reserves of every commodity so they can control and adjust the market. Last year, they even began a campaign to build up vegetable reserves.
This idea is a reflection of early-twentieth-century hubris when social scientists thought they could apply precise engineering systems to planning economic activity by employing clever bureaucrats equipped with mathematical formulas, reams of statistics, and sharp pencils. Most Chinese leaders were trained as engineers and the current party line is the "scientific outlook on development."
The pork market is an excellent example of misguided stabilization policies. According to an announcement by the government's Agricultural Development Bank of China (ADBC), the bank has been busy making loans to finance pork reserves. In the first half of 2011 the bank made loans totalling 2.34 billion yuan to manage national pork reserves. The loans went to 69 companies who sold a total of 100,000 metric tons of frozen pork into the market in five waves of sales.
Government bureaucrats can almost never time purchases and sales to stabilize prices. When prices are rising, everyone expects prices to rise forever, and they start to panic and hoard commmodities. The government panics and thinks they need even bigger reserves, so they buy up even more of the commodity.
The ADBC report notes that they have been busy this year building up local reserves in addition to the national reserve. They made additional loans totaling 1 billion yuan to build up local reserves of 60,000 mt.
According to the National Bureau of Statistics, meat and poultry output during the first half of the year totaled 37 million metric tons (they did not report a separate number for pork production). Meat production was up a measly 0.2% year-on-year. I calculate that to be an increase in meat and poultry production of 74,000 metric tons, about equal to the volume of the new local pork reserves.
Not mentioned in the article is that pork prices went to their highest level ever. Some localities have been selling pork reserves recently, AFTER pork prices already had peaked.
In a recent article giving a run-down on the "hog cycle" over the past 30 years, two experts said it's hard to stabilize the pork market since no one knows how many pigs are out there. One expert lauded the government's "information and warning mechanism" that was put in place in 2009, but says basic data collection is difficult and sampling has many errors since there are so many production units. He also cites tax collection (evasion?), disease information, and "red letter" policy notices as factors making collection of "truthful, accurate" data difficult (without explaining). He notes that, given the length of the production cycle, farmers need to get information 3 months in advance in order to make good decisions.
Another expert from the Chinese Academy of Agricultural Sciences said that the Ministry of Agriculture's monitoring system needs improvement. The system collects data from 6000 farms in 2000 townships in 200 counties, but "errors are relatively large." He claims the data collected from 100 production counties is relatively accurate, but the sample from 100 minor production counties is very small. He suggests that the system should sample 500 counties in order to reduce the error to 5% or less.
I calculate that a 5% error for an inventory of 450 million hogs (the estimated inventory for April) would be +/- 22 million. That would be a "confidence interval" of 428-to-472 million hogs IF the data were improved. If we suppose the current error is 10%, then the Ministry would estimate that there are somewhere between 405 and 495 million hogs.
The sampling error for Chinese hog statistics is close to the entire U.S. hog industry (inventory is currently estimated at 65 million head).
The Chinese government has been working hard at stabilizing the hog industry since the last round of pork price spikes in 2007. The result is exactly the same kind bullwhip pattern of prices that preceded the subsidies and price interventions.
The magazine article on the hog cycle points out that the length of cycles has actually gotten shorter. The government increases intervention when prices are high and withdraws support when prices are low, a pattern of “more intervention, more confusion.”
Chinese leaders are having to learn all over again that social and economic systems cannot be designed and manipulated like machines and bridges.
This idea is a reflection of early-twentieth-century hubris when social scientists thought they could apply precise engineering systems to planning economic activity by employing clever bureaucrats equipped with mathematical formulas, reams of statistics, and sharp pencils. Most Chinese leaders were trained as engineers and the current party line is the "scientific outlook on development."
The pork market is an excellent example of misguided stabilization policies. According to an announcement by the government's Agricultural Development Bank of China (ADBC), the bank has been busy making loans to finance pork reserves. In the first half of 2011 the bank made loans totalling 2.34 billion yuan to manage national pork reserves. The loans went to 69 companies who sold a total of 100,000 metric tons of frozen pork into the market in five waves of sales.
Government bureaucrats can almost never time purchases and sales to stabilize prices. When prices are rising, everyone expects prices to rise forever, and they start to panic and hoard commmodities. The government panics and thinks they need even bigger reserves, so they buy up even more of the commodity.
The ADBC report notes that they have been busy this year building up local reserves in addition to the national reserve. They made additional loans totaling 1 billion yuan to build up local reserves of 60,000 mt.
According to the National Bureau of Statistics, meat and poultry output during the first half of the year totaled 37 million metric tons (they did not report a separate number for pork production). Meat production was up a measly 0.2% year-on-year. I calculate that to be an increase in meat and poultry production of 74,000 metric tons, about equal to the volume of the new local pork reserves.
Not mentioned in the article is that pork prices went to their highest level ever. Some localities have been selling pork reserves recently, AFTER pork prices already had peaked.
In a recent article giving a run-down on the "hog cycle" over the past 30 years, two experts said it's hard to stabilize the pork market since no one knows how many pigs are out there. One expert lauded the government's "information and warning mechanism" that was put in place in 2009, but says basic data collection is difficult and sampling has many errors since there are so many production units. He also cites tax collection (evasion?), disease information, and "red letter" policy notices as factors making collection of "truthful, accurate" data difficult (without explaining). He notes that, given the length of the production cycle, farmers need to get information 3 months in advance in order to make good decisions.
Another expert from the Chinese Academy of Agricultural Sciences said that the Ministry of Agriculture's monitoring system needs improvement. The system collects data from 6000 farms in 2000 townships in 200 counties, but "errors are relatively large." He claims the data collected from 100 production counties is relatively accurate, but the sample from 100 minor production counties is very small. He suggests that the system should sample 500 counties in order to reduce the error to 5% or less.
I calculate that a 5% error for an inventory of 450 million hogs (the estimated inventory for April) would be +/- 22 million. That would be a "confidence interval" of 428-to-472 million hogs IF the data were improved. If we suppose the current error is 10%, then the Ministry would estimate that there are somewhere between 405 and 495 million hogs.
The sampling error for Chinese hog statistics is close to the entire U.S. hog industry (inventory is currently estimated at 65 million head).
The Chinese government has been working hard at stabilizing the hog industry since the last round of pork price spikes in 2007. The result is exactly the same kind bullwhip pattern of prices that preceded the subsidies and price interventions.
The magazine article on the hog cycle points out that the length of cycles has actually gotten shorter. The government increases intervention when prices are high and withdraws support when prices are low, a pattern of “more intervention, more confusion.”
Chinese leaders are having to learn all over again that social and economic systems cannot be designed and manipulated like machines and bridges.
Saturday, July 23, 2011
Cooking Oil Price Intrigue Continues
There is still uncertainty and speculation about whether the major cooking oil producers will raise retail prices of their products.
According to a July 22 article in the Southern Metropolitan Daily, an edible oil company executive said that the two leading companies have requested permission to raise prices by 5% and have received tacit approval from the National Development and Reform Commission. However, the companies have still not announced anything and discount this news as rumors.
The rumored price increase would be for the two leading edible oil brands, Jinlongyu, sold by Yihai Kerry (Wilmar), and Fulinmen, sold by COFCO. Leading peanut oil producer, Luhua, "tested the waters" by announcing a price increase earlier but retracted it shortly thereafter.
An Yihai Kerry official said, "We haven’t applied for a price increase, and have no plan to increase prices.” A COFCO official said the report of a planned price hike is "false news."
The year-on-year CPI increase for June was 6.4%, above the government's target. So NDRC is apparently hesitant to let companies raise prices. (The CPI for food was up 14%, meat was up 32%, eggs 22%, and fish 13%; clothing was up only 2% despite soaring cotton prices.)
According to a Qilu securities report issued July 10, companies lose 186 yuan on every metric ton of soybeans they process into cooking oil. Many companies are reported to be cutting back production or shutting down. Daily consumption of imported soybeans is said to be about 25% lower than last November. With cut-backs in consumption, soybeans are piling up at ports.
At a Carrefour supermarket in Guangzhou, no promotions are being offered for rapeseed oil, soy oil and salad oil (usually companies offer some extra doo-dads taped on to the oil bottles as promotional gimmicks). Only high-end oils sunflower, canola, and olive oil were offering promotions.
There was not much peanut oil on the shelves and Luhua brand peanut oil was completely sold out. The supermarket manager explained that deliveries have stopped. When asked whether prices will be raised, the Carrefour manager said, “No notice received yet.”
Apparently, the big companies have received instructions from the government to keep selling their product. The Yihai Kerry official emphasized that the company had maintained its nationwide supply since the informal price controls were imposed despite increases in raw material prices. The company faces a lot of pressure, but it is adhering to its "social responsibility" by maintaining supply.
But maybe the companies are telling NDRC they can't keep this up any longer. A July 21 article in Daily Business News reports that Beijing supermarkets have stopped receiving shipments of Jinlongyu and Fulinmen oils over the past two weeks. Their inventories are dropping. This article reports that Yihai Kerry and COFCO demanded that the NDRC let them have a price increase similar to what Luhua requested.
Beijing supermarket managers have been given verbal confirmation that prices will be increased, but the oil producers still deny any plans to raise prices.
According to a July 22 article in the Southern Metropolitan Daily, an edible oil company executive said that the two leading companies have requested permission to raise prices by 5% and have received tacit approval from the National Development and Reform Commission. However, the companies have still not announced anything and discount this news as rumors.
The rumored price increase would be for the two leading edible oil brands, Jinlongyu, sold by Yihai Kerry (Wilmar), and Fulinmen, sold by COFCO. Leading peanut oil producer, Luhua, "tested the waters" by announcing a price increase earlier but retracted it shortly thereafter.
An Yihai Kerry official said, "We haven’t applied for a price increase, and have no plan to increase prices.” A COFCO official said the report of a planned price hike is "false news."
The year-on-year CPI increase for June was 6.4%, above the government's target. So NDRC is apparently hesitant to let companies raise prices. (The CPI for food was up 14%, meat was up 32%, eggs 22%, and fish 13%; clothing was up only 2% despite soaring cotton prices.)
According to a Qilu securities report issued July 10, companies lose 186 yuan on every metric ton of soybeans they process into cooking oil. Many companies are reported to be cutting back production or shutting down. Daily consumption of imported soybeans is said to be about 25% lower than last November. With cut-backs in consumption, soybeans are piling up at ports.
At a Carrefour supermarket in Guangzhou, no promotions are being offered for rapeseed oil, soy oil and salad oil (usually companies offer some extra doo-dads taped on to the oil bottles as promotional gimmicks). Only high-end oils sunflower, canola, and olive oil were offering promotions.
There was not much peanut oil on the shelves and Luhua brand peanut oil was completely sold out. The supermarket manager explained that deliveries have stopped. When asked whether prices will be raised, the Carrefour manager said, “No notice received yet.”
Apparently, the big companies have received instructions from the government to keep selling their product. The Yihai Kerry official emphasized that the company had maintained its nationwide supply since the informal price controls were imposed despite increases in raw material prices. The company faces a lot of pressure, but it is adhering to its "social responsibility" by maintaining supply.
But maybe the companies are telling NDRC they can't keep this up any longer. A July 21 article in Daily Business News reports that Beijing supermarkets have stopped receiving shipments of Jinlongyu and Fulinmen oils over the past two weeks. Their inventories are dropping. This article reports that Yihai Kerry and COFCO demanded that the NDRC let them have a price increase similar to what Luhua requested.
Beijing supermarket managers have been given verbal confirmation that prices will be increased, but the oil producers still deny any plans to raise prices.
Wednesday, July 20, 2011
Wheat Substituted for Corn
A farmer quoted in an article about high pork prices recently observed that food for pigs costs more than food for humans.
As corn prices rise above wheat prices, feed mills are substituting wheat for corn in animal feed. Normally, the wheat price is about 10% higher than the corn price, but declining corn stocks and robust demand have pushed corn prices above wheat prices since April. Wheat is now about 150-yuan more per metric ton than corn.
In Gaotang County of Shandong Province, corn is now about 1.1 yuan/500g and wheat is 1.04 yuan/500g.
As pig prices soar, feed mills are turning to wheat. One livestock company in Henan has been buying mainly wheat--about 200 metric tons daily--since the wheat harvest came in last month.
Since 1998 there have only been two previous periods when the wheat-corn price relationship was inverted. One was during 2001 when wheat stocks were extremely high and wheat prices were depressed. A second was a 14-month period during 2007-08 when a big expansion of corn processing capacity in Henan and Jilin boosted the demand for corn.
Analysts say the government’s attempts to control the demand for corn by industrial processors since last October have not been very effective. Profits from industrial processing are said to have risen to 300 yuan per metric ton. The demand for corn remains strong, putting upward pressure on price. Some imported corn has arrived at Chinese ports, but has not entered the market. It’s not clear whether the imports will affect the price.
As corn prices rise above wheat prices, feed mills are substituting wheat for corn in animal feed. Normally, the wheat price is about 10% higher than the corn price, but declining corn stocks and robust demand have pushed corn prices above wheat prices since April. Wheat is now about 150-yuan more per metric ton than corn.
In Gaotang County of Shandong Province, corn is now about 1.1 yuan/500g and wheat is 1.04 yuan/500g.
As pig prices soar, feed mills are turning to wheat. One livestock company in Henan has been buying mainly wheat--about 200 metric tons daily--since the wheat harvest came in last month.
Since 1998 there have only been two previous periods when the wheat-corn price relationship was inverted. One was during 2001 when wheat stocks were extremely high and wheat prices were depressed. A second was a 14-month period during 2007-08 when a big expansion of corn processing capacity in Henan and Jilin boosted the demand for corn.
Analysts say the government’s attempts to control the demand for corn by industrial processors since last October have not been very effective. Profits from industrial processing are said to have risen to 300 yuan per metric ton. The demand for corn remains strong, putting upward pressure on price. Some imported corn has arrived at Chinese ports, but has not entered the market. It’s not clear whether the imports will affect the price.
Most Consumers Accept GMOs
A new survey conducted by the Chinese Center for Agricultural Policy at the Chinese Academy of Sciences has found that slightly over half of consumers surveyed were either strongly or moderately receptive to genetically modified foods. Only 16% were strongly opposed and 27% were neutral.
The survey covered 400 families in six cities of Guangdong and Jiangsu Provinces.
Professor Huang Jikun, leader of the study, said that the results show that Chinese consumers still have a higher degree of acceptance of GMOs than consumers in other countries.
However, the degree of acceptance appears to be on a downward trend. In 2002 and 2003 the Center conducted similar surveys that showed 61% were receptive to GMOs and only 8% were strongly opposed. About the same proportion were neutral.
Huang attributes the declining acceptance to negative publicity about GMOs disseminated on the Internet in recent years.
The only major food in China containing significant genetically-modified material at present is cooking oil. Most kinds of vegetable oil contain oil from genetically-modified soybeans from the U.S. and South America (and possiby domestic GMO cottonseed). Genetically-modified soybeans are not planted in China (at least not legally), so some oils made from domestic beans are labeled as "GMO-free."
Companies that sell vegetable oil are paying attention to the change in consumer attitudes. Companies are placing "non-GMO" logos in more prominent places on labels.
Huang asserts that consumers give little consideration to GMO content in actual purchasing decisions. In research conducted in Nanjing supermarkets, Bai Junfei, another researcher from the Center, found that consumers typically spend no more than 30 seconds deciding what cooking oil to purchase. They often take the recommendations of sales persons. The main consideration for 70% of people is price, followed by brand and color of the oil. No more than 15% said they were concerned about GMO content.
A China Academy of Agricultural Sciences researcher, Huang Dafang, says that it's only natural that people have little understanding of GMOs since it's a new thing. As society and technology develop he thinks more people will understand GMOs. He seems to imply that this means greater acceptance.
The survey covered 400 families in six cities of Guangdong and Jiangsu Provinces.
Professor Huang Jikun, leader of the study, said that the results show that Chinese consumers still have a higher degree of acceptance of GMOs than consumers in other countries.
However, the degree of acceptance appears to be on a downward trend. In 2002 and 2003 the Center conducted similar surveys that showed 61% were receptive to GMOs and only 8% were strongly opposed. About the same proportion were neutral.
Huang attributes the declining acceptance to negative publicity about GMOs disseminated on the Internet in recent years.
The only major food in China containing significant genetically-modified material at present is cooking oil. Most kinds of vegetable oil contain oil from genetically-modified soybeans from the U.S. and South America (and possiby domestic GMO cottonseed). Genetically-modified soybeans are not planted in China (at least not legally), so some oils made from domestic beans are labeled as "GMO-free."
Companies that sell vegetable oil are paying attention to the change in consumer attitudes. Companies are placing "non-GMO" logos in more prominent places on labels.
Huang asserts that consumers give little consideration to GMO content in actual purchasing decisions. In research conducted in Nanjing supermarkets, Bai Junfei, another researcher from the Center, found that consumers typically spend no more than 30 seconds deciding what cooking oil to purchase. They often take the recommendations of sales persons. The main consideration for 70% of people is price, followed by brand and color of the oil. No more than 15% said they were concerned about GMO content.
A China Academy of Agricultural Sciences researcher, Huang Dafang, says that it's only natural that people have little understanding of GMOs since it's a new thing. As society and technology develop he thinks more people will understand GMOs. He seems to imply that this means greater acceptance.
Monday, July 18, 2011
Vaccine Crackdown
On July 14, China's Ministry of Agriculture issued a notice requiring each agricultural officials at the national, provincial and local levels to strengthen supervision of vaccines for large animals, ensure their quality and effectiveness, and put a strong barrier in place against the spread of disease.
This seems to confirm the faulty vaccine problems described in yesterday's dimsums posting. The notice addressed the problems of sub-standard vaccines, poor storage facilities, and the black market in vaccines.
The order to "earnestly do a good job on supervising production, distribution, storage, and use of vaccines" included five parts:
1. Supervision of production and distribution of vaccines. Implement strict testing to make sure vaccines conform to standards and regulations, prohibit fake products and guard against advertising that contains exaggerated claims or is misleading to the user.
2. Strengthen management of the vaccine bidding procurement system, set up a complete vaccine supply record system, standardize transportation of vaccines and supervision of storage.
3. Give farmers guidance to make sure vaccines are used properly. Set up a vaccine management system to understand the animal and poultry health situation. Do a good job on disinfection and avoiding cross-contamination.
4. Regulate large scale farms’ use of vaccines. Farms must have veterinary technicians and good transport and storage facilities. They must set up truthful and complete vaccine use records. Farms cannot re-sell vaccines to others.
5. Increase vaccine sampling and supervision. Crack down on production and sale of fake or watered-down vaccines and illegal black market sale of vaccines.
The notice tries to cure the symptoms, but does not address the fundamental problem. When has a government entity ever done a good job of marketing a product?
This seems to confirm the faulty vaccine problems described in yesterday's dimsums posting. The notice addressed the problems of sub-standard vaccines, poor storage facilities, and the black market in vaccines.
The order to "earnestly do a good job on supervising production, distribution, storage, and use of vaccines" included five parts:
1. Supervision of production and distribution of vaccines. Implement strict testing to make sure vaccines conform to standards and regulations, prohibit fake products and guard against advertising that contains exaggerated claims or is misleading to the user.
2. Strengthen management of the vaccine bidding procurement system, set up a complete vaccine supply record system, standardize transportation of vaccines and supervision of storage.
3. Give farmers guidance to make sure vaccines are used properly. Set up a vaccine management system to understand the animal and poultry health situation. Do a good job on disinfection and avoiding cross-contamination.
4. Regulate large scale farms’ use of vaccines. Farms must have veterinary technicians and good transport and storage facilities. They must set up truthful and complete vaccine use records. Farms cannot re-sell vaccines to others.
5. Increase vaccine sampling and supervision. Crack down on production and sale of fake or watered-down vaccines and illegal black market sale of vaccines.
The notice tries to cure the symptoms, but does not address the fundamental problem. When has a government entity ever done a good job of marketing a product?
Sunday, July 17, 2011
Why Peanuts Are Expensive
China's rising commodity prices are both a microeconomic and a macroeconomic phenomenon. A recent article on the soaring peanut market opens a window on the factors driving the price of a little-noticed commodity skyward.
According to the article, the price of raw peanuts has doubled in the past year and is at a record-high level. The price increased 44% from March to June. The increase in raw peanut cost has far outstripped the increase in final products. The peanut oil price is up 40% and the peanut meal price is up 16% over the past year. Thus, the rise in raw material cost has put peanut oil processors in serious loss-making territory. The article estimates that crushers lose 2200 to 2900 yuan for each ton of peanuts they process.
The article poses several reasons for the rise in peanut prices.
The first reason is microeconomic--the constant battle to determine what crops will be planted on a limited supply of cropland. There is a campaign to expand planting of peanuts to new areas in Henan and Liaoning Provinces, but plantings decreased in traditional peanut-growing areas last year as soaring prices of chili peppers and other vegetables lured farmers to switch some land to these crops. The article estimates that actual peanut production was flat or slightly down at the end of 2010.
The second reason is mainly macroeconomic. When last year's peanuts came on the market, traders were flush with cash due to easy lending standards. They anticipated prices would go up, so they bought up peanuts with borrowed money and stockpiled them in warehouses. The limited supply of peanuts on the market helped drive prices up.
The third reason is a rapid expansion of peanut processing capacity, another reflection of easy money and a government policy to build up the domestic peanut and rapeseed oil processing industry as a counterweight to the soy and palm oil industry. The large number of processors trying to utilize their capacity are chasing peanuts, putting more upward pressure on peanut prices.
The article suggests that prices may flatten or come down somewhat later in the year. Peanut prices were soaring at planting time this year, so many farmers returned their acreage to peanuts. Consequently, this year's harvest is likely to be a big one if weather is OK. Moreover, peanut oil prices are already high relative to soybean oil prices and it will be hard for peanut oil to remain competitive if prices go even higher.
According to the article, the price of raw peanuts has doubled in the past year and is at a record-high level. The price increased 44% from March to June. The increase in raw peanut cost has far outstripped the increase in final products. The peanut oil price is up 40% and the peanut meal price is up 16% over the past year. Thus, the rise in raw material cost has put peanut oil processors in serious loss-making territory. The article estimates that crushers lose 2200 to 2900 yuan for each ton of peanuts they process.
The article poses several reasons for the rise in peanut prices.
The first reason is microeconomic--the constant battle to determine what crops will be planted on a limited supply of cropland. There is a campaign to expand planting of peanuts to new areas in Henan and Liaoning Provinces, but plantings decreased in traditional peanut-growing areas last year as soaring prices of chili peppers and other vegetables lured farmers to switch some land to these crops. The article estimates that actual peanut production was flat or slightly down at the end of 2010.
The second reason is mainly macroeconomic. When last year's peanuts came on the market, traders were flush with cash due to easy lending standards. They anticipated prices would go up, so they bought up peanuts with borrowed money and stockpiled them in warehouses. The limited supply of peanuts on the market helped drive prices up.
The third reason is a rapid expansion of peanut processing capacity, another reflection of easy money and a government policy to build up the domestic peanut and rapeseed oil processing industry as a counterweight to the soy and palm oil industry. The large number of processors trying to utilize their capacity are chasing peanuts, putting more upward pressure on peanut prices.
The article suggests that prices may flatten or come down somewhat later in the year. Peanut prices were soaring at planting time this year, so many farmers returned their acreage to peanuts. Consequently, this year's harvest is likely to be a big one if weather is OK. Moreover, peanut oil prices are already high relative to soybean oil prices and it will be hard for peanut oil to remain competitive if prices go even higher.
Pig Vaccines: Free and Worthless
Seemingly enlightened policies like distributing free hog vaccines have unintended consequences that can be deadly.
A May article in Economic Information reported that many Chinese hog farmers throw away free vaccines distributed by the government because the medicines often don't work and have bad side effects. Instead, farmers who want to protect their hogs from disease buy vaccines from the black market.
The boss of a hog farm in Henan told the reporter about an industry meeting last year where one farmer loudly complained that his hogs were always sick and dying; he asked in exasperation whether there are any effective vaccines.
Foot and mouth is one of the most feared diseases on hog farms because it can easily spread to the entire farm with devastating losses. Farmers told the reporter that some large and medium-scale hog farms buy smuggled foreign vaccines that cost 10 times more.
The boss of one large hog farm in Beijing said he spent 1 million yuan on black market vaccines last year. He explained his predicament: "What could I do? The free foot and mouth vaccines are not effective and they have many side effects. Farmers would like to use free vaccines, but they buy black market vaccines to avoid the heavy losses from a disease outbreak."
Another farmer in Guizhou said he was initially afraid of buying black market vaccines that could be fake, but he was so worried about the cost of a disease outbreak that he spent over 100,000 yuan to buy black market vaccine from Guangxi Province which was clearly much more effective than the free vaccine. He later went back to the agent to buy more.
In Guizhou, a farmer said that agents selling black market vaccine call up farmers. When farmers hear that a particular vaccine is effective it spreads rapidly and farmers pay a premium to get it. Some can't get it even at a high price.
Some hog farmers think the black market in vaccine is running rampant. Foreign vaccine comes into China through three routes: Hong Kong-Guangdong, Vietnam-Guangxi, and Taiwan-Zhuhai.
In a Southern Rural News article earlier this month a reporter interviewed the vice chairman of a company that sells two types of vaccine for the Myanmar 98 strain of foot and mouth disease. One type is sold to the government, but another type sold directly to large hog farms has a higher concentration of the active ingredient and more advanced technology.
The government's vaccine program operates like the old central-planning system. The government designates 7 companies to produce foot and mouth vaccine. The entire production and sales process is planned. Companies report up to each level of government the volume produced, and products are then passed down level by level to veterinary stations.
The central government subsidizes 80% of the cost for western provinces, 60% for central provinces, and 30% for coastal provinces. The rest of the cost is picked up by the province or local government. Vaccines and subsidies are distributed based on the number of hogs reported by local authorities.
Regions where the central government pays most of the vaccine cost naturally tend to over-report the number of hogs to get more subsidies. In places where local governments pay most of the vaccine cost (like the area surrounding Guangzhou), the number of hogs reported is understated.
One city official in Guangdong said, "We all generally take last year's statistics and reduce them by one-third."
The result is that free vaccines are under-supplied to regions where local governments pay most of the vaccine cost, and there isn't enough vaccine to go around. In regions where the central government pays most of the cost, there is more vaccine than farms can use.
In Guangdong, where local government pays most of the cost, industry people estimate that the government-procured vaccines meet about 40% of the province's need for foot and mouth vaccinations.
According to one veterinary station, they distribute free vaccines mainly to small-scale farmers. Many of the large farms receive the vaccines as a "political task," then throw them away.
A May article in Economic Information reported that many Chinese hog farmers throw away free vaccines distributed by the government because the medicines often don't work and have bad side effects. Instead, farmers who want to protect their hogs from disease buy vaccines from the black market.
A technician working on a hog farm told the reporter, “Free distribution of foot and mouth vaccines to hog farms is a very good thing for us. However, the free vaccines are either never received or thrown away."
The technician explained that the quality of the vaccines is poor. They don’t protect the pigs and they have bad side effects, inducing abortions by sows and sometimes even spreading blue ear disease.
The Chinese government requires farmers to vaccinate their pigs against foot and mouth disease, blue ear disease and swine fever. The government procures these vaccines from companies that bid to become suppliers to the program. The vaccines are distributed free of charge to farmers, passing through a multi-level distribution system: from province to county to township to village to farms.
There are at least three reasons for the poor quality of the vaccines. One is that companies who win the bidding contest earn low profits, so they reduce the amount of active ingredient in the vaccines or use shoddy ingredients to cut costs. A second reason is that vaccines can deteriorate in the long distribution chain from factory to farm. It takes a long time for vaccines to reach the farmers and there are no proper refrigerated storage facilities at some steps of the distribution chain. A third reason is that companies producing the free vaccine follow government standards. These are often outdated and not effective against new strains of virus that are appearing.
The boss of a hog farm in Henan told the reporter about an industry meeting last year where one farmer loudly complained that his hogs were always sick and dying; he asked in exasperation whether there are any effective vaccines.
Foot and mouth is one of the most feared diseases on hog farms because it can easily spread to the entire farm with devastating losses. Farmers told the reporter that some large and medium-scale hog farms buy smuggled foreign vaccines that cost 10 times more.
The boss of one large hog farm in Beijing said he spent 1 million yuan on black market vaccines last year. He explained his predicament: "What could I do? The free foot and mouth vaccines are not effective and they have many side effects. Farmers would like to use free vaccines, but they buy black market vaccines to avoid the heavy losses from a disease outbreak."
Another farmer in Guizhou said he was initially afraid of buying black market vaccines that could be fake, but he was so worried about the cost of a disease outbreak that he spent over 100,000 yuan to buy black market vaccine from Guangxi Province which was clearly much more effective than the free vaccine. He later went back to the agent to buy more.
In Guizhou, a farmer said that agents selling black market vaccine call up farmers. When farmers hear that a particular vaccine is effective it spreads rapidly and farmers pay a premium to get it. Some can't get it even at a high price.
Some hog farmers think the black market in vaccine is running rampant. Foreign vaccine comes into China through three routes: Hong Kong-Guangdong, Vietnam-Guangxi, and Taiwan-Zhuhai.
In a Southern Rural News article earlier this month a reporter interviewed the vice chairman of a company that sells two types of vaccine for the Myanmar 98 strain of foot and mouth disease. One type is sold to the government, but another type sold directly to large hog farms has a higher concentration of the active ingredient and more advanced technology.
The government's vaccine program operates like the old central-planning system. The government designates 7 companies to produce foot and mouth vaccine. The entire production and sales process is planned. Companies report up to each level of government the volume produced, and products are then passed down level by level to veterinary stations.
The central government subsidizes 80% of the cost for western provinces, 60% for central provinces, and 30% for coastal provinces. The rest of the cost is picked up by the province or local government. Vaccines and subsidies are distributed based on the number of hogs reported by local authorities.
Regions where the central government pays most of the vaccine cost naturally tend to over-report the number of hogs to get more subsidies. In places where local governments pay most of the vaccine cost (like the area surrounding Guangzhou), the number of hogs reported is understated.
One city official in Guangdong said, "We all generally take last year's statistics and reduce them by one-third."
The result is that free vaccines are under-supplied to regions where local governments pay most of the vaccine cost, and there isn't enough vaccine to go around. In regions where the central government pays most of the cost, there is more vaccine than farms can use.
In Guangdong, where local government pays most of the cost, industry people estimate that the government-procured vaccines meet about 40% of the province's need for foot and mouth vaccinations.
According to one veterinary station, they distribute free vaccines mainly to small-scale farmers. Many of the large farms receive the vaccines as a "political task," then throw them away.
Saturday, July 16, 2011
Edible Oil Prices Revisited
On July 15, the National Development and Reform Commission held a press conference where officials announced that edible oil prices will remain stable in the second half of the year. The increase in retail vegetable oil prices will not as large as people think. The main reason NDRC gave was that China is largely dependent on imported soybeans and vegetable oil. International output has increased, thus stabilizing prices.
What's missing from this debate is the recognition that market conditions differ for different types of oilseeds. Soybean prices have been relatively stable, but peanut prices have been climbing since April (see chart below). Luhua produces peanut oil; that's why they are eager to raise prices. Rapeseed prices are also starting to rise.
Data source: National Grain and Oils Information Center price monitoring data. Peanuts in Shandong, Rapeseed in Anhui, Soybeans at Dalian.
An article from China Fats and Oils network sums up the edible oils market as "oil weak, meal strong." It says companies are inclined to raise prices to cover rising costs, but they hesitate to do since final demand for their products is not that strong. Meanwhile, soy meal demand is strengthening as high prices for pork stimulate a build-up of hog inventories and demand for feed rises.
The article reports that Luhua Company backed off its plan to raise prices. Media reports last week reported that Luhua, mainly a peanut oil producer, was planning to be the pioneer in increasing the price of edible oil products. Other companies were expected to follow. There are now some reports that the plan to raise prices has been canceled and the article says, "We still don't know whether or not Luhua is raising its price."
Perhaps Luhua company's communist party secretary got a call from the NDRC telling him it would be a good idea to cancel the price increase. Just a thought...
A Q&A posted on the sohu web site expresses skepticism about the NDRC's optimistic outlook. The NDRC spokesman emphasized the anticipated record corn and rice crops expected in northeast China, but the skeptics note that the big increase in corn and rice area also means a big decrease in soybean area. Falling domestic soybean output could mean higher soybean and oil prices later in the year.
An official addressed this question by referring again to the stable prices and high inventories in international markets reflected in USDA's July report. He pointed out the price fluctuations are not like those in earlier years when old ladies went on a panic-buying binge, prices shot up and then fell just as rapidly. The official said that the government is watching the situation closely and will take necessary measures if needed.
What's missing from this debate is the recognition that market conditions differ for different types of oilseeds. Soybean prices have been relatively stable, but peanut prices have been climbing since April (see chart below). Luhua produces peanut oil; that's why they are eager to raise prices. Rapeseed prices are also starting to rise.
Data source: National Grain and Oils Information Center price monitoring data. Peanuts in Shandong, Rapeseed in Anhui, Soybeans at Dalian.
Friday, July 15, 2011
Winter Wheat Up 2.12 MMT
The National Bureau of Statistics reports that this year's winter wheat harvest was 110.79 million metric tons, up 2.12 mmt from last year. The average yield was 4902 kg/ha, up 77 kg or 1.6% from last year. Planted area increased 79,000 hectares, or about 0.3% (they don't report harvested area).
The increase in production is surprising given the panic-filled reports on the worst drought in 50 years last winter in wheat-producing areas. Production increased in the main winter wheat-growing areas of Hebei, Shandong, Henan, Anhui, and Jiangsu by 1.53 mmt. The increase in wheat output is consistent with reports from the field during last month's harvest period.
Estimated spring wheat production in three northwestern provinces (Gansu, Ningxia, and Xinjiang) was down 750,000 mt due to decreases in both yield and area planted. Spring wheat estimates are preliminary since the spring wheat crop matures later.
Summer grain production rebounded in southwestern provinces (mainly Yunnan, Guizhou) which had been stricken by serious drought last year.
Total production of summer-harvested grains (chiefly wheat but also some other minor grains) is estimated at 126.27 mmt, up 3.12 mmt, or 2.5% from last year. Sixty percent of the increase in production occurred in the southwestern provinces.
These estimates are based on sample surveys in 17 provinces that account for 97% of summer grain output. Local survey teams conduct sample surveys of 200,000 farms in 4000 sample villages to estimate planted area. Yield is estimated by taking crop samples from 40,000 sample plots in 3000 villages. Estimates for the 8 other provinces are based on administrative reporting.
Thursday, July 14, 2011
Pork Policy Deja Vu
Last month, the Ministry of Agriculture announced a set of pork industry policies that the dim sums blog observed were much more restrained than the aggressive policies announced in 2007, a time of similar soaring pork prices. We thought perhaps the government learned from their mistakes last time around when 2007 hog stimulus policies ended up driving the industry into severe losses by 2009. Dimsums was wrong.
Politicians--whether Democrats, Republicans, or Communists--have to "do something" about every problem. So, on July 12, Premier Wen Jiabao chaired a state council meeting where another set of hog stimulus policies were announced. I count 13 policy measures. The policies are quite similar to those announced in 2007. In fact, most are already in place. The subsidy for sows has been revived. There is a preoccupation with disease problems and protecting students from rising prices.
The policies include:
1. Subsidies for building commercial-scale hog farms totaling 2.5 billion yuan that may be increased in the future as needed. This is an expansion of an existing subsidy.
2. A 100-yuan per head subsidy to farmers for breedable sows. This subsidy was introduced in 2006 at 50 yuan, expanded to 100 yuan and seemed to disappear in the last couple of years.
3. Continuing the subsidy for sow insurance. This has been in place since 2007.
4. Support breeding farm construction, increasing the capability of supplying frozen semen. This policy has been around for a number of years and artificial insemination has been promoted heavily over the last couple of years.
5. The number of counties receiving financial "award" grants as pork-supplying counties will be increased from 421 to 500. This policy was introduced in 2007 and the number of counties has grown each year.
6. Implement the animal immunization policy (free vaccinations for foot and mouth, blue ear disease, and swine fever). This has been around at least since 2007.
7. Give aid of 80 yuan per head for safe disposal of pigs that die of disease. This is an existing policy; 80 yuan is not enough to convince farmers to bury dead pigs instead of selling them illegally to butchers.
8. Slaughterhouses will get subsidies of 500 to 600 yuan per head as compensation for disease losses. This is new and may be enough to induce slaughterhouses to reduce the number of sick pigs they butcher.
9. The subsidy for grassroots animal disease prevention personnel is raised from 1000 to 1200 yuan [per month?]. Presumably, this is supposed to induce inspectors/veterinarians to actually do their jobs or stop taking bribes, but looks like still a feeble amount.
10. Increase credit support for commercial-size hog farms and give them loan guarantees. Investigate setting up joint loan guarantees for hog farm enterprises.
11. Strengthen statistics on "vegetable basket" commodity production, distribution and consumption, conduct monitoring and analysis to assess the production situation and changes in the market.
The rest of the policies are subsidies to help poor families bear the rising cost of food.
12. Each locality is to set up a mechanism for linking price subsidies to rising commodity prices.
13. Implement aid policies for students from poor families, strengthen the management of dining halls, ensure that students' standard of living in the fall semester is not affected by rising commodity prices.
Of course, these policies are not going to increase the supply of pork any time soon. It takes about a year to get a new litter of pigs and raise them to market weight. Farmers were already trying desperately to expand their herds. Piglet prices rose far faster than pork prices in recent months, an indicator that farmers are trying to expand but the supply of sows and piglets is limited.
The policies actually could increase pork prices in the short term.
First, the policies push the industry from small-scale to medium- and large-scale farms which have a higher cost structure. Feed rations are shifting from locally-abundant food scraps, crop stalks, vines, brans, etc used by small farmers to grain-based rations used by commercial producers. This is a factor increasing the demand for corn beyond its domestic availability, pushing corn prices up and boosting the cost of feed. That puts a higher floor under pork prices. Large farms have high overhead costs too.
Second, if compensation for disposing of dead pigs works, dead pigs will actually be buried instead of butchered. Long-time readers of this blog will be familiar with the widespread slaughter and sale of diseased hogs. If diseased pork is actually removed from the market, the supply of pork will be restricted and prices will go up.
Another factor not mentioned is stricter enforcement of pharmaceutical use following the "lean meat powder" episode in March. Surely this is restricting the supply of pork. There are some anecdotes about tainted hogs being slaughtered.
The slew of policies introduced in 2007 led to a big surge of investment in the hog industry which in turn led to a big expansion of supply and plummeting prices in 2008 and 2009. It's hard to imagine the policies doing this again. We can look for declining pork prices next year, but the rising cost structure means pork prices can't go down that far before farms start losing money.
That means Chinese people can plan on permanently higher pork prices...unless barriers to imported pork are lowered.
Wednesday, July 13, 2011
Veg Oil Price Controls: Industry Shakeout?
In November 2010, the National Development and Reform Commission ordered the top four vegetable oil companies to freeze their prices as a temporary inflation control measure. According to the Economic Information news site, companies have been losing money and are quietly beginning to raise prices. The large companies claim they have no plan to raise prices, but small and medium prices are feeling the pressure from rising costs. Will the cash-rich large companies be able to wait out the price controls while small and medium companies on the fringe are forced out?
The NDRC's "price decree" only applied to the four largest companies--COFCO, Yihai Kerry, Sinotex and Jiusan--but they have a large share of the market. Small and medium companies reportedly did not dare raise prices since they would then face declining sales.
The price controls were initially set to continue through March and were then extended for another two months. There has been no announcement but people in the industry say that the order to keep prices stable has been extended to August 15. The chairman of corn oil producer Xiwang Food said his company has no plan to increase prices since the government is strictly controlling edible oil prices.
The big companies say they still have no plans to raise prices. COFCO claims that it has remained profitable by cutting costs and raising efficiency. No mention of whether their line of credit with state-run banks and government-sponsored overseas IPOs gives them the cash flow to sustain the losses for a while. I count 34 divisions and companies listed on COFCO's web site, including multiple real estate and property development companies. They can afford to take a loss for the team on vegetable oil...probably offset by building a couple of shopping malls somewhere.
Medium and smaller companies are losing money as costs rise and they don't have the same easy access to cash. International soybean prices are at a high level. Companies are relying on government auctions of low-price domestic soybeans to keep raw material prices down, but domestic soybean prices will probably surge later this year due to a large decline in Chinese soybean production anticipated this fall. One industry analyst estimates that companies lose 100 to 200 yuan on every metric ton of oilseeds they process. A company in Shandong claims to lose 400 to 500 yuan.
Over the last couple of months companies have been starting to quietly raise prices. Luhua peanut oil company has ventured forth with a price increase. Its products are relatively high in quality, so its customers may be more accepting of price increases than those of low-price brands made by COFCO and Yihai kerry.
Given their losses, small and medium companies are under great pressure to raise prices and waiting for someone like Luhua to break the ice on price increases. There is disagreement among industry people as to whether Luhua's price increase will be the first domino in a series of price increases. Industry people say that small and medium-size companies are facing the prospect of shutting down if they don't get relief from cost pressure.
The NDRC's "price decree" only applied to the four largest companies--COFCO, Yihai Kerry, Sinotex and Jiusan--but they have a large share of the market. Small and medium companies reportedly did not dare raise prices since they would then face declining sales.
The price controls were initially set to continue through March and were then extended for another two months. There has been no announcement but people in the industry say that the order to keep prices stable has been extended to August 15. The chairman of corn oil producer Xiwang Food said his company has no plan to increase prices since the government is strictly controlling edible oil prices.
The big companies say they still have no plans to raise prices. COFCO claims that it has remained profitable by cutting costs and raising efficiency. No mention of whether their line of credit with state-run banks and government-sponsored overseas IPOs gives them the cash flow to sustain the losses for a while. I count 34 divisions and companies listed on COFCO's web site, including multiple real estate and property development companies. They can afford to take a loss for the team on vegetable oil...probably offset by building a couple of shopping malls somewhere.
Medium and smaller companies are losing money as costs rise and they don't have the same easy access to cash. International soybean prices are at a high level. Companies are relying on government auctions of low-price domestic soybeans to keep raw material prices down, but domestic soybean prices will probably surge later this year due to a large decline in Chinese soybean production anticipated this fall. One industry analyst estimates that companies lose 100 to 200 yuan on every metric ton of oilseeds they process. A company in Shandong claims to lose 400 to 500 yuan.
Over the last couple of months companies have been starting to quietly raise prices. Luhua peanut oil company has ventured forth with a price increase. Its products are relatively high in quality, so its customers may be more accepting of price increases than those of low-price brands made by COFCO and Yihai kerry.
Given their losses, small and medium companies are under great pressure to raise prices and waiting for someone like Luhua to break the ice on price increases. There is disagreement among industry people as to whether Luhua's price increase will be the first domino in a series of price increases. Industry people say that small and medium-size companies are facing the prospect of shutting down if they don't get relief from cost pressure.
Tuesday, July 12, 2011
Five-Year Plan Boosts Illegal Land Use
China's new 5-year plan has set off a development frenzy and rural land is being gobbled up at an accelerated record pace. On July 12, the Ministry of Land Resources held a press conference which conveyed the impression that the Ministry is helpless against a swelling tide of land grabs for city expansion, road-building, and mining.
A Ministry of Land Resources official said the Ministry's enforcement is in a generally good direction, but the demand for land is intensifying and there is a resurgence of pressure to violate land laws and regulations. There have been 30,000 incidents of illegal land use covering 278,000 mu of land in the first half of 2011. The number of incidents is up 8% this year and the amount of land is up 15%. [And these are presumably just the ones they have caught.]
Here are the observations of the Ministry regarding land pressure:
1. There has been a clear rebound in illegal land use, especially in the western provinces where illegal land use is up 50% this year.
2. Illegal land use has been boosted as cities have attracted large amounts of commercial investment.
3. Construction of road, rail, airport, and water projects has been increasing.
4. As cities and the countryside are integrated, illegal rentals and expropriations of rural collective land for illegal real estate projects, golf courses, houses and industrial parks are becoming common. People feel "planting crops can't compare with planting houses" on rural land.
5. Illegal mining projects are scattered all over.
The Ministry of Land Resources official said that implementation of this year's announcement of the 12th five-year plan has set off a chase for land. Many cities are building new urban districts and infrastructure. It's not easy for the Ministry to enforce land regulations and laws.
The Ministry promises to persist in strict regulation, preserving the "reasonable" use of land, enacting a new enforcement system and having "courage to tackle tough problems." They now rely on satellite photos to control illegal mining.
The roots of this mess lie in the 19th century when socialists decided that collective or state ownership of land is much nicer and fairer than private ownership and voluntary exchange of land. China's collective ownership was OK when land was not worth anything. But now that land is valuable and it's not clear who owns it, there is a chaotic land grab. Those with the most power get the land and the profits. Local governments' strategy of building something on a parcel of land, then asking permission later works pretty well. The National Ministry--far from the land--has little power of enforcement over local land deals.
Collective land ownership is supposed to protect farmers from the pre-"liberation" domination of landlords over tenants, but that was largely a fiction. John Lossing Buck's extensive Chinese land surveys in the 1930s (Land Utilization in China) found that, in most places, farmers owned their land. A 1945 book, A Chinese Village (Taitou, Shantung Province), by Martin C. Yang, emphasized that land-holdings of families were constantly in flux, rising and falling in multi-generational cycles.
A Ministry of Land Resources official said the Ministry's enforcement is in a generally good direction, but the demand for land is intensifying and there is a resurgence of pressure to violate land laws and regulations. There have been 30,000 incidents of illegal land use covering 278,000 mu of land in the first half of 2011. The number of incidents is up 8% this year and the amount of land is up 15%. [And these are presumably just the ones they have caught.]
Here are the observations of the Ministry regarding land pressure:
1. There has been a clear rebound in illegal land use, especially in the western provinces where illegal land use is up 50% this year.
2. Illegal land use has been boosted as cities have attracted large amounts of commercial investment.
3. Construction of road, rail, airport, and water projects has been increasing.
4. As cities and the countryside are integrated, illegal rentals and expropriations of rural collective land for illegal real estate projects, golf courses, houses and industrial parks are becoming common. People feel "planting crops can't compare with planting houses" on rural land.
5. Illegal mining projects are scattered all over.
The Ministry of Land Resources official said that implementation of this year's announcement of the 12th five-year plan has set off a chase for land. Many cities are building new urban districts and infrastructure. It's not easy for the Ministry to enforce land regulations and laws.
The Ministry promises to persist in strict regulation, preserving the "reasonable" use of land, enacting a new enforcement system and having "courage to tackle tough problems." They now rely on satellite photos to control illegal mining.
The roots of this mess lie in the 19th century when socialists decided that collective or state ownership of land is much nicer and fairer than private ownership and voluntary exchange of land. China's collective ownership was OK when land was not worth anything. But now that land is valuable and it's not clear who owns it, there is a chaotic land grab. Those with the most power get the land and the profits. Local governments' strategy of building something on a parcel of land, then asking permission later works pretty well. The National Ministry--far from the land--has little power of enforcement over local land deals.
Collective land ownership is supposed to protect farmers from the pre-"liberation" domination of landlords over tenants, but that was largely a fiction. John Lossing Buck's extensive Chinese land surveys in the 1930s (Land Utilization in China) found that, in most places, farmers owned their land. A 1945 book, A Chinese Village (Taitou, Shantung Province), by Martin C. Yang, emphasized that land-holdings of families were constantly in flux, rising and falling in multi-generational cycles.
Today's collective land ownership system has locked most Chinese farmers into small land-holdings that could disappear at any time with compensation only a fraction of the market value.
Thursday, July 7, 2011
Yak Semen Subsidies
China first began experimenting with direct subsidies to farmers in 2002. Since then they have spread to every nook and cranny of rural China. It's sometimes surprising to see what gets subsidized. A mundane article about a meeting to discuss implementation of this year's fine breed subsidies reveals that Yak semen is one of the unusual items receiving subsidies.
The fine breed subsidy for livestock is a payment to breeding farms to buy or breed quality breeds of bulls or boars and pay for artificial insemination of farmers' animals at breeding stations using semen from these beasts. This typically means importing animals from north America or Europe like Holstein dairy cattle or landrace, yorkshire or duroc hogs to upgrade the breeding stock. At the meeting, officials claimed that the program has increased dairy cow productivity by 500 kg and shortened the time for hogs to reach a market weight by 5-10 days. They claim the artificial insemination rate for hogs has been increased to 60%.
The program began an experimental phase with dairy cattle in 2005. Coverage has since spread to hogs, beef cattle, sheep, goats and yaks. It has expanded from 15 pilot counties to 600 counties. Funding began with just 15 million yuan and increased to 990 million yuan in 2010 and 1.19 billion yuan this year. The newly increased funds will be used in Inner Mongolia, Sichuan, Yunnan, Tibet, Gansu, Qinghai, Ningxia, and Xinjiang for beef cattle, sheep, goats and yaks.
There has been a yak breeding subsidy since at least 2008. A document from that year listed 15 yak bulls at a breeding farm in Qinghai Province that were covered by the subsidy. A Tibetan county document from 2010 gave instructions for applying for the yak breeding subsidy. The coverage of yaks seems to reflect the leadership's imperative to show it is spreading benefits to minorities like Tibetans to keep them happy.
Another example of subsidies targeted at Tibetans is subsidized insurance for yaks and sheep. In January, Gansu Province announced that its livestock insurance subsidy spending would be doubled by extending coverage to 600,000 yaks and 1 million Tibetan sheep. Owners have to pay 12 yuan to insure a yak for 2000 yuan, and 1.8 yuan for 300-yuan of coverage for a sheep lost to disease or disaster.
Qinghai also had subsidized insurance for yaks and Tibetan sheep last year. It covered 6 counties with special mention given to Yushu county which was hit by an earthquake.
The yak subsidy looks more generous than the dairy cattle subsidy. Gansu's subsidized insurance premium for dairy cattle was cut from 96 yuan to 36 yuan for 3000-yuan of coverage.
The fine breed subsidy for livestock is a payment to breeding farms to buy or breed quality breeds of bulls or boars and pay for artificial insemination of farmers' animals at breeding stations using semen from these beasts. This typically means importing animals from north America or Europe like Holstein dairy cattle or landrace, yorkshire or duroc hogs to upgrade the breeding stock. At the meeting, officials claimed that the program has increased dairy cow productivity by 500 kg and shortened the time for hogs to reach a market weight by 5-10 days. They claim the artificial insemination rate for hogs has been increased to 60%.
The program began an experimental phase with dairy cattle in 2005. Coverage has since spread to hogs, beef cattle, sheep, goats and yaks. It has expanded from 15 pilot counties to 600 counties. Funding began with just 15 million yuan and increased to 990 million yuan in 2010 and 1.19 billion yuan this year. The newly increased funds will be used in Inner Mongolia, Sichuan, Yunnan, Tibet, Gansu, Qinghai, Ningxia, and Xinjiang for beef cattle, sheep, goats and yaks.
There has been a yak breeding subsidy since at least 2008. A document from that year listed 15 yak bulls at a breeding farm in Qinghai Province that were covered by the subsidy. A Tibetan county document from 2010 gave instructions for applying for the yak breeding subsidy. The coverage of yaks seems to reflect the leadership's imperative to show it is spreading benefits to minorities like Tibetans to keep them happy.
Another example of subsidies targeted at Tibetans is subsidized insurance for yaks and sheep. In January, Gansu Province announced that its livestock insurance subsidy spending would be doubled by extending coverage to 600,000 yaks and 1 million Tibetan sheep. Owners have to pay 12 yuan to insure a yak for 2000 yuan, and 1.8 yuan for 300-yuan of coverage for a sheep lost to disease or disaster.
Qinghai also had subsidized insurance for yaks and Tibetan sheep last year. It covered 6 counties with special mention given to Yushu county which was hit by an earthquake.
The yak subsidy looks more generous than the dairy cattle subsidy. Gansu's subsidized insurance premium for dairy cattle was cut from 96 yuan to 36 yuan for 3000-yuan of coverage.
Wednesday, July 6, 2011
Leaky GMO Seed Trials
China's Ministry of Agriculture is taking some heat for allowing unapproved genetically modified (GMO) varieties of corn and rice leak into the market.
On June 30 the Ministry of Agriculture held a meeting to discuss management of GMOs. According an article posted on many web sites this week, the Ministry of Agriculture's oversight of GMOs was described as "relatively chaotic."
At the meeting MOA officials repeatedly said, “No imported genetically modified grain seeds have ever been approved and no permits have been given for planting any GMO grains in the country.” However, the article says Chinese fields already have large areas planted in GMO’s, including corn “not approved for commercialization” and GMO rice.
In 2010 testing began on three kinds of GMO corn seed: Denghai 3686 (named after a scientist Li Denghai), Zhongnongda 386 and Zhongnongda 4 (apparently named after Central China Agricultural University). In December 2010 the Ministry of Agriculture issued a notice banning sale of these seeds for a year. However, the article says companies took advantage of the publicity and offered rebates, discounts, and promotions to distribute the seeds more widely. The article says these "illegal GMO corn seeds" are planted on thousands of acres in Sichuan, Hunan, Guizhou, Liaoning, Jilin. A spokesman at the meeting sighed, “This year there may be several million mu of fields 'contaminated!'"
Central China Agricultural University in Wuhan is conducting trials on GMO rice seeds, but there is consternation that rice from these trials is being sold into markets all over southern China and mixed with conventional rice. The Ministry of Agriculture spokesman was said to have described the mixing of GMO seeds as "very serious." An expert speaking "bluntly" at the meeting said that it is very hard to keep trials closed. If someone sees things in the field that are successful they will want to try them out. There is “no way to control farmers from harvesting rice and selling it.” These remarks "caused a public outcry."
In his speech at the meeting, the MOA spokesman clearly stated that MOA must publicly criticize the organizations in charge of regulating GMOs and punish negligent MOA staff.
A photo of a sign posted on an online forum in response to the GMO article. It was accompanied by a call for China to expel foreign seed companies that are a "threat" to Chinese seed companies and Chinese people.
On June 30 the Ministry of Agriculture held a meeting to discuss management of GMOs. According an article posted on many web sites this week, the Ministry of Agriculture's oversight of GMOs was described as "relatively chaotic."
At the meeting MOA officials repeatedly said, “No imported genetically modified grain seeds have ever been approved and no permits have been given for planting any GMO grains in the country.” However, the article says Chinese fields already have large areas planted in GMO’s, including corn “not approved for commercialization” and GMO rice.
In 2010 testing began on three kinds of GMO corn seed: Denghai 3686 (named after a scientist Li Denghai), Zhongnongda 386 and Zhongnongda 4 (apparently named after Central China Agricultural University). In December 2010 the Ministry of Agriculture issued a notice banning sale of these seeds for a year. However, the article says companies took advantage of the publicity and offered rebates, discounts, and promotions to distribute the seeds more widely. The article says these "illegal GMO corn seeds" are planted on thousands of acres in Sichuan, Hunan, Guizhou, Liaoning, Jilin. A spokesman at the meeting sighed, “This year there may be several million mu of fields 'contaminated!'"
Central China Agricultural University in Wuhan is conducting trials on GMO rice seeds, but there is consternation that rice from these trials is being sold into markets all over southern China and mixed with conventional rice. The Ministry of Agriculture spokesman was said to have described the mixing of GMO seeds as "very serious." An expert speaking "bluntly" at the meeting said that it is very hard to keep trials closed. If someone sees things in the field that are successful they will want to try them out. There is “no way to control farmers from harvesting rice and selling it.” These remarks "caused a public outcry."
In his speech at the meeting, the MOA spokesman clearly stated that MOA must publicly criticize the organizations in charge of regulating GMOs and punish negligent MOA staff.
A photo of a sign posted on an online forum in response to the GMO article. It was accompanied by a call for China to expel foreign seed companies that are a "threat" to Chinese seed companies and Chinese people.
Tuesday, July 5, 2011
Vietnam Buys Chinese Pigs
Vietnam animal health authorities held a meeting where it was reported that foot and mouth disease outbreaks have occurred in 39 provinces [Vietnam has that many?] with 45,000 animals dead. According to the report, disease has been a big problem for Vietnam's livestock industry this year. Livestock producers have lost confidence due to the disease problems and the rising prices of fuel, electricity and other items.
According an analyst, Vietnam has a shortage of meat due to blue ear disease and foot and mouth disease. According to Chinese news media reports, many Vietnamese traders have been coming across the border to Guangxi Province in China to buy pigs.
Chinese Ministry of Agriculture officials have issued warnings about serious disease problems in neighboring countries...apparently this is an example.
According an analyst, Vietnam has a shortage of meat due to blue ear disease and foot and mouth disease. According to Chinese news media reports, many Vietnamese traders have been coming across the border to Guangxi Province in China to buy pigs.
Chinese Ministry of Agriculture officials have issued warnings about serious disease problems in neighboring countries...apparently this is an example.
Melamine for Pigs in Chongqing
Cartoon that appeared with a news report. The bottle reads "melamine milk powder"
Law enforcement officials in the Nan'an District of Chongqing announced that a 38-year-old feed trader named Tang has been arrested for allegedly selling milk powder that contained melamine that far exceeded the legal limit.
According to the report in the Chongqing Evening News, for the last 2 years Mr. Tang had been engaged in procuring milk powder from various places such as Guangdong and Zhejiang to sell to feed mills in Chongqing and Chengdu.
The report says the business started in August 2009, when Tang went to a county near Shijiazhuang in Hebei Province to purchase milk powder. He spent 14,000 yuan buying up 6.75 metric tons of milk powder on that first deal, planning to sell most of it in Chongqing and some in Chengdu.
Tang allegedly struck up a business relaionship with a counterpart named Zhang in Chongqing in 2009, doing 5 or 6 deals over the last two years. Zhang would receive the milk powder, store it in a warehouse in Chongqing's Nan'an District, pack it into smaller bags and sell it to local pig farms.
The last shipment of 5 metric tons received from Tang was so cheap, Zhang suspected it might have a problem. He had it tested and results showed melamine content was far over legal limits. After alerting police, the local veterinary testing center tested three samples and found concentrations of 1288 mg/kg, 992 mg/kg, and 623 mg/kg, hundreds of times above the allowable limit of 2.5 mg/kg.
Zhang had sold about 5 metric tons of the milk powder to five local pig farms. A farm boss confirmed this. He said piglets had developed diarrhea after consuming the milk powder. They suspected the milk powder was the cause, and the pigs returned to normal after they stopped giving them the milk powder.
[I thought melamine caused kidney problems.]
A Chongqing agriculture commission official said farms mix milk powder into feed when sows are not giving enough milk to nourish piglets.
Meanwhile, officials are still trying to purge the milk supply of melamine. Last month, a court in Xushui County of Hebei Province sentenced four individuals associated with a dairy company that sold melamine-adulterated milk powder until last year.
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