A Beijing Normal University professor conducted a study of income distribution in China which reveals how the urbanization process is ripping-off Chinese peasants due to their lack of property rights.
About half of China's GDP "growth" comes from building things, usually on farmland. If farmers had secure ownership rights to their land, they would be benefiting greatly from the rising value of their land. In reality, most benefits from rising land values accrue to developers and government officials who act as brokers in these real estate deals.
In most cases, collectively-owned village land on the fringe of urban areas is leased to a developer who pays rent to a government organization. The villagers, theoretically the collective owners, generally get a fraction of the rent paid by the developer.
The report found that 40 million peasants have "lost" their land, which seems to mean that it has been rented out for urban uses.
The report profiles Bailian village of Hunan's Hengdong County, where 19.3 mu of farmers' land was purchased, and the developer earned 8.5 million yuan from the land. The government collected 6.2 million yuan [from the developer?], but farmers only got 470,000 yuan in compensation.
According to the report, the number of rural migrants rose from 98 million in 2005 to 153 million in 2010. There were over 250 million peasants employed either locally or as migrants last year.
When peasants move to cities, they typically find they are frozen out of urban property ownership and excluded from urban social services.
In the past, migrants typically worked in cities until they saved enough money to go back to their village to build a house, get married, or start a business. However, the report confirms that this pattern is breaking down. The "new generation" of migrants have little interest in returning home and often have no property to return to. Only 8.8% of rural migrants intend to go back to their villages, including 7.7% of "new generation" migrants and only 13% of "old generation" migrants.
The report also found that many young migrants have no property to return to. Of 16-25 year-old migrants, 41% have no contracted farmland and 36% have no land for building a house in their home village. Of migrants 25-30 years old, 35% have no contracted land and 33% have no housing land.
Most migrants intend to live in the city long-term, yet they still lack access to urban social services. The report says 80% of migrants intend to stay in the city long-term but have not been able to become legal residents of the city.
Monday, October 31, 2011
Sunday, October 30, 2011
Feed Industry's Long Transition
Feed warehouse of Mr. Liu's company.
An interview with a feed industry executive titled "Feed Industry Re-shuffle" provides some interesting perspective on the evolution of China's animal feed industry. The interview follows up on a speech given to an aquaculture industry conference by Liu Hanyuan, the chairman of a fish feed company in September. (Actually, the website of Liu's company says it is a conglomerate composed of feed, fish, food, pharmaceutical, chemical and solar energy companies.)
The interview begins by discussing the growing role of state-owned companies in the feed industry. Mr. Liu provides some historical background. He traces the feed industry's mostly-private character back to the 1980s when Deng Xiaoping proclaimed that the feed industry would be open to everyone. After 30 years, the industry has transitioned from state-owned to companies with private or mixed ownership, "highly marketized and responsive." The entry of state-owned companies, Liu says, is related to the general environment of "state-in, private-out" (国进民退）, i.e. the recent trend of state-owned companies regaining a dominant position in many Chinese industries, pushing aside private companies.
Mr. Liu's assessment of the ascendancy of state-owned companies is that it's too early to say whether this is progress or a regression. He observes that the state-owned companies have advantages: "special policies," large scale, ability to "grab large volumes of grain raw materials," and access to "cash, import quota and approvals." These advantages may give them a shortcut to leading position in the industry.
Mr. Liu sees a period of consolidation and shake-out in the industry that will take a long time. He says it's happening slower than anticipated. Companies of each scale "have their own survival skills." He says that consumers naturally tend to gravitate toward larger stable companies with well-known brands accepted by consumers. Small companies are "under pressure," and those with "weak hardware" will be weeded out. Small and medium companies need to recognize their advantages to compensate for limited research, labor, and management resources.
Mr. Liu discusses the challenges feed companies face in changing their mode of operation. Instead of just manufacturing and selling products, companies will need to integrate into management of upstream raw materials and downstream production of fish and livestock products and provision of services to users of feed.
One of the big challenges facing the industry is the scattered layout of livestock and fish production. Providing technical services to producers in this environment is difficult.
Another challenge is the transition from unbranded generic consumer products to branded products. The interviewer observes that he recently found fish carrying Mr. Liu's company brand in a supermarket that were selling for twice the price of generic fish. Mr. Liu replies that consumers are still in the habit of killing their own chickens and fish so it's hard to sell differentiated products at a premium price. This is a major challenge for large companies.
Mr. Liu acknowledges that brand-creation will be a long process. One positive development he cites is the increased scrutiny of foods by grandparents and parents shopping for kids. These shoppers are more likely to spend more to buy branded products. Mr. Liu suggests that companies concentrate on expanding on this base of 10%-20% of consumers. He sees this emerging trend as an opportunity and anticipates that the industry's transformation will take 10, 20, even 30 years.
Thursday, October 27, 2011
Apple Juice Under Pressure
More cracks are appearing in China's rock-bottom-price-export juggernaut. Apple juice, which came out of nowhere to dominate the world market during the last decade, is losing its competitiveness due to a surge in apple prices.
The Consumers Daily reported the story about rising apple costs on October 25. According to the article, the price of apples used for making juice is up to 1400 yuan (US$220) per ton, which translates to a raw material cost of US$1430. (It takes 6.5 tons of apples to make 1 ton of apple juice concentrate for export.) Adding the cost processing, fuel, transportation and steel drums there is no room for profit at the current FOB export price for juice concentrate of US$ 1850 per ton. "Processors would rather stop production than lose money."
One processor said the raw material price went up to 1600 yuan (US$250) per ton in the last couple of days. The break-even price for juice is US$2200 per ton with this level of raw material cost. Chinese juice is losing its competitiveness versus European juice. Poland's cost of apples for juice raw material is US$175 per ton.
An industry spokesperson said juice concentrate manufacturers are facing a short supply of fruit, operating at only 40% of capacity. One processor said his company thought they could operate at full capacity during October but are actually only at 60% due to the short supply of fruit.
Some see a consolidation on the horizon. Small processors are having a hard time staying in business. If large processors can survive, there may be many acquisitions and mergers.
Keep in mind this is not the first time Chinese apple prices have surged. There was a similar crisis in 2007. There was also an apple bubble a year ago which popped by early spring of this year. Still, raw material costs do seem to be on the upswing in the apple juice business over the last few years.
The Consumers Daily reported the story about rising apple costs on October 25. According to the article, the price of apples used for making juice is up to 1400 yuan (US$220) per ton, which translates to a raw material cost of US$1430. (It takes 6.5 tons of apples to make 1 ton of apple juice concentrate for export.) Adding the cost processing, fuel, transportation and steel drums there is no room for profit at the current FOB export price for juice concentrate of US$ 1850 per ton. "Processors would rather stop production than lose money."
One processor said the raw material price went up to 1600 yuan (US$250) per ton in the last couple of days. The break-even price for juice is US$2200 per ton with this level of raw material cost. Chinese juice is losing its competitiveness versus European juice. Poland's cost of apples for juice raw material is US$175 per ton.
An industry spokesperson said juice concentrate manufacturers are facing a short supply of fruit, operating at only 40% of capacity. One processor said his company thought they could operate at full capacity during October but are actually only at 60% due to the short supply of fruit.
Some see a consolidation on the horizon. Small processors are having a hard time staying in business. If large processors can survive, there may be many acquisitions and mergers.
Keep in mind this is not the first time Chinese apple prices have surged. There was a similar crisis in 2007. There was also an apple bubble a year ago which popped by early spring of this year. Still, raw material costs do seem to be on the upswing in the apple juice business over the last few years.
Tuesday, October 25, 2011
Soybeans and Underground Finance
Piles of soybeans. Source: Jinrong Shijie (Banking World)
China's soybean traders are taking advantage of their ability to get credit to become suppliers of cash to the underground lending market. The story is an interesting merger of several megatrends: the booming demand for imported commodities, hot demand for short-term financing at high interest rates, and financial whiz-kids gaming the strategy of steadily appreciating the Chinese currency.
The Ministry of Commerce's International Commerce News reports the story. The reporter says many ports have mountains of hundreds of thousands of tons of soybeans that have been imported faster than the market can absorb them. Warehouses in many ports are said to be nearly filled with soybeans. One analyst estimates the total soybean inventories held in ports to be 6.6 million metric tons, an historical high.
According to the reporter's explanation, "soybean banking" works as follows. A trading company with rights to import soybeans signs a contract, then applies to the bank for letter of credit, paying a deposit of 20-30%. The company gets funds to pay for the soybeans with 90-180 days to pay it back.
The soybeans are on the boat about a month, and traders sell the soybeans as quickly as possible after the beans arrive at the harbor. Once importers get cash from the sale, they still have 40-50 days before they have to repay their loan. So during this period, they lend out the funds at high interest rates on the underground financial market.
According to an individual from an oil-processing company in Guangdong, the same strategy is used with palm oil imported from Malaysia, only the degree of leverage and the time period is shorter.
According to an analyst, many traders in Shandong, Zhejiang, and Guangdong are engaged in this "soybean banking." In their eagerness to get cash, they sell soybeans below cost. They make the money back by charging interest rates of 25%-30% on the underground lending market. They also make money on the appreciation of the Chinese currency during the period before they pay back the funds.
Analysts worry that the lure of soybean banking has artificially lifted demand for imported soybeans and also inflated their price. According to analysts, domestic vegetable oil processors have been losing money since late last year. The high price of soybeans raises costs, results in losses, and reduces capacity utilization.
The overstock of soybeans and weak demand is said to be a portent of weak prices and falling imports in coming months.
This story has been rumored since early this year, but no one has described the mechanics of the strategy before. The appearance of this story in the Ministry of Commerce's news site suggests the government is not happy about the behavior. The story opens a window on the chaos that ensues when the government tries to control prices (interest rates, exchange rates, and commodity prices). Trying to hold one price rigid creates an arbitrage opportunity that clever financiers will take advantage of, with unintended consequences following quickly.
Monday, October 24, 2011
Soybean Industry's "Enemy Occupation"
There is consensus among analysts that China's soybean production is down substantially this year. The Jilin Province Commerce Department estimates that production is down 30% this year, to 12 million metric tons (mmt). Another estimate from a crop tour organized by a futures exchange group observes that soybean planted area is down 25%-30% in Heilongjiang, but estimates this year's national crop at 14 mmt, down 8%-9%.
An article in the Huaxia Times reports varying estimates of the decline in soybean production. One soybean analyst estimates a 17% decline, but the article adds a caveat: "compared with some other estimates this seems optimistic." The same analyst estimates that production in Heilongjiang Province could be down 26%. Another futures analyst says he found on a crop tour of the northeast that soybean area has been declining since 2008 and is down one-third to one-half in many areas.
The Huaxia Times report uses military rhetoric to sound an alarmist tone on the decline in soybean production. Juxtaposing the soybean analyst's 15.5 mmt estimate of this year's soybean crop against this year's soybean imports of over 50 mmt, the Huaxia article describes the soybean industry as having "fallen to enemy occupation."
The Huaxia article correctly attributes the decline in Chinese soybeans to low profits: rice nets returns double those from soybean-planting and corn profits are also much higher than those from soybeans. The article cites a large grain farmer who said he replaced most of his soybeans with rice and corn. The futures analyst wrote in her crop tour report that she saw few soybeans in the countryside in eastern Heilongjiang, as most fields were planted in corn. Soybeans were planted only on a few hills.
However, the Huaxia article sprinkles in key phrases like "pressure," "imported soybeans," and "genetically-modified" to give the story a more sinister tone and conjure up a foreign bogeyman. According to Huaxia, since foreign companies came into the Chinese soybean industry in 2004, Chinese soybeans "have been in retreat" because they can't compete with low-cost imported soybeans with higher oil content.
2004 is a watershed year in Chinese soybean industry lore. That year, Chinese soybean companies were caught with uncovered positions during an unexpected decline in world soybean prices. A number of Chinese soybean companies went bankrupt. Many in China believe this was an evil plot by multinational companies to take over the Chinese soybean industry.
Now the Huaxia article follows the conspiracy story trail. The article observes that few companies outside of Heilongjiang use Chinese "non-GMO" soybeans in their vegetable oil crushing plants. A quote from a manager of a Heilongjiang company reveals why this may be the case: he says his company loses money selling cooking oil made from non-GMO Chinese soybeans; profits from other products cover the losses.
Next, the article blames "some local governments" for encouraging farmers to plant other "high-yielding grains like corn and rice." It says, "Soybeans have been abandoned."
Finally, the article interviews several oils industry analysts and managers who offer opinions on how China can protect soybeans by giving subsidies or artificially raising the price.
The article ends with another swipe at the foreign company bogeyman. The last quote is from a manager of Jiusan, one of the biggest Chinese vegetable oil processors, who worries about the effects of soybean interventions on downstream processors. He worries that giving "the same subsidies" to domestic and foreign processors doesn't help the Chinese companies compete with big international grain trading companies.
Scary costume idea for your Chinese Halloween party this week: dress up as a multinational grain trading company.
An article in the Huaxia Times reports varying estimates of the decline in soybean production. One soybean analyst estimates a 17% decline, but the article adds a caveat: "compared with some other estimates this seems optimistic." The same analyst estimates that production in Heilongjiang Province could be down 26%. Another futures analyst says he found on a crop tour of the northeast that soybean area has been declining since 2008 and is down one-third to one-half in many areas.
The Huaxia Times report uses military rhetoric to sound an alarmist tone on the decline in soybean production. Juxtaposing the soybean analyst's 15.5 mmt estimate of this year's soybean crop against this year's soybean imports of over 50 mmt, the Huaxia article describes the soybean industry as having "fallen to enemy occupation."
The Huaxia article correctly attributes the decline in Chinese soybeans to low profits: rice nets returns double those from soybean-planting and corn profits are also much higher than those from soybeans. The article cites a large grain farmer who said he replaced most of his soybeans with rice and corn. The futures analyst wrote in her crop tour report that she saw few soybeans in the countryside in eastern Heilongjiang, as most fields were planted in corn. Soybeans were planted only on a few hills.
However, the Huaxia article sprinkles in key phrases like "pressure," "imported soybeans," and "genetically-modified" to give the story a more sinister tone and conjure up a foreign bogeyman. According to Huaxia, since foreign companies came into the Chinese soybean industry in 2004, Chinese soybeans "have been in retreat" because they can't compete with low-cost imported soybeans with higher oil content.
2004 is a watershed year in Chinese soybean industry lore. That year, Chinese soybean companies were caught with uncovered positions during an unexpected decline in world soybean prices. A number of Chinese soybean companies went bankrupt. Many in China believe this was an evil plot by multinational companies to take over the Chinese soybean industry.
Now the Huaxia article follows the conspiracy story trail. The article observes that few companies outside of Heilongjiang use Chinese "non-GMO" soybeans in their vegetable oil crushing plants. A quote from a manager of a Heilongjiang company reveals why this may be the case: he says his company loses money selling cooking oil made from non-GMO Chinese soybeans; profits from other products cover the losses.
Next, the article blames "some local governments" for encouraging farmers to plant other "high-yielding grains like corn and rice." It says, "Soybeans have been abandoned."
Finally, the article interviews several oils industry analysts and managers who offer opinions on how China can protect soybeans by giving subsidies or artificially raising the price.
The article ends with another swipe at the foreign company bogeyman. The last quote is from a manager of Jiusan, one of the biggest Chinese vegetable oil processors, who worries about the effects of soybean interventions on downstream processors. He worries that giving "the same subsidies" to domestic and foreign processors doesn't help the Chinese companies compete with big international grain trading companies.
Scary costume idea for your Chinese Halloween party this week: dress up as a multinational grain trading company.
Tuesday, October 18, 2011
Corn Import Quota: Private vs. State-Owned
As forecasts of Chinese corn imports inflate, it's worth keeping in mind that China has a tariff rate quota (TRQ) system that limits corn imports to 7.2 million metric tons annually. Some of the arcane restrictions associated with the system could limit imports by even more. A closer look shows that the TRQ system is stacked in favor of state-owned companies...er, a state-owned company.
Last month, the National Development and Reform Commission announced the annual application for 2012 corn import quotas. The total quota available is 7.2 mmt, of which 4.32 mmt is reserved for state-owned traders. That leaves 2.88 mmt for private companies. These amounts were set at the time of China's WTO accession in 2001 and have not changed since then. Corn imported within the quota is assessed a tariff of just 1% while over-quota imports are charged a tariff of over 70%.
According the NDRC announcement, applicants for corn quota must register with the state commercial and industrial management departments by October 1, 2011. Applicants must have good accounts, tax records; No violations in records for 2009-11 in customs, industrial-commercial, tax, or import quarantine and inspection; no violations of “agricultural product tariff rate quota management” regulations.
The regulation seems to set up a catch-22. You must have been registered in 2010 in order to apply this year. And, according to the announcement, "generally speaking, quota can only be distributed to companies that have actually imported during the previous three years." That seems to rule out importing this year if you didn't import in the last 3 years. If you didn't import last year, you can't import this year. And if you don't import this year, you won't be able to import next year.
The announcement also notes that quotas are distributed to the various provinces, further diluting the quantity available to any particular company.
In April of this year Mr. Liu Yonghao, chairman of China's largest feed company, protested against the outmoded TRQ system for corn imports. Facing cost pressures from rising domestic corn prices, Mr. Liu's company, New Hope Group, has become interested in importing raw materials. Mr. Liu pointed out that private companies account for 95% of the feed market, yet these companies must compete for 40% of the corn-import quota. Liu says the total private-company quota totaled just 2.4 mmt in 2010. Meanwhile, the state-authorized trader--COFCO--is awarded 60% of the quota, that's 4.3 mmt for a single company. Liu called for an end to the discrimination against private companies in awarding quotas.
Liu said his company's feed sales of 13 mmt in 2010 amounted to 8%-9% of the market. For this amount of production, Liu's company needed 10 mmt of corn, soymeal, wheat and other raw materials. Liu's New Hope Company got an import quota allocation of just 100,000-200,000 mt. Elsewhere in the article Liu reports that New Hope's subsidiary, Liuhe Co., imported 300,000 mt of corn last year and the New Hope Livestock Co. subsidiary imported 30,800 mt.
These purchases exceeded the quota awarded to New Hope, so the company had to buy 280,000 mt of the imported corn from COFCO, the state-trader that was awarded 60% of the quota. This is said to be an embarrassment for New Hope [and a profit-making opportunity for COFCO].
Mr. Liu complains that (the) state-trader is allocated more quota than it can use while the private quota is spread over many companies who don't have enough quota for their needs. He also complains that many private companies didn't import in 2010 and earlier because imported corn was too expensive, and they lost their rights to import quota.
Liu also complains that the quota is divided up among provinces, so that each province could be allocated only 90,000 mt. This practice seems to reflect the past when companies mainly operated in a single province and is not suited to large national conglomerates like New Hope.
The article then turns to the politics of distillers dried grains (DDGS, the by-product of ethanol production) imports. With corn getting more expensive, companies like New Hope have sought out substitutes for corn like DDGS. In 2010, New Hope imported 550,000 mt of U.S. DDGS. China's total imports were over 3 mmt.
However, last December a group of companies petitioned the Ministry of Commerce to conduct an antidumping investigation against U.S. DDGS. It turns out that most of these companies calling for antidumping are state-owned, including two ethanol companies controlled by COFCO, Jilin Grain Group, and Petrochina the state-owned petroleum company. These Chinese alcohol producers also sell distillers' grains that face competition from imported DDGS.
Liu is annoyed that the price of imported DDGS has risen since the antidumping investigation began and is now above the price of domestic distillers' grains.
Last month, the National Development and Reform Commission announced the annual application for 2012 corn import quotas. The total quota available is 7.2 mmt, of which 4.32 mmt is reserved for state-owned traders. That leaves 2.88 mmt for private companies. These amounts were set at the time of China's WTO accession in 2001 and have not changed since then. Corn imported within the quota is assessed a tariff of just 1% while over-quota imports are charged a tariff of over 70%.
According the NDRC announcement, applicants for corn quota must register with the state commercial and industrial management departments by October 1, 2011. Applicants must have good accounts, tax records; No violations in records for 2009-11 in customs, industrial-commercial, tax, or import quarantine and inspection; no violations of “agricultural product tariff rate quota management” regulations.
The regulation seems to set up a catch-22. You must have been registered in 2010 in order to apply this year. And, according to the announcement, "generally speaking, quota can only be distributed to companies that have actually imported during the previous three years." That seems to rule out importing this year if you didn't import in the last 3 years. If you didn't import last year, you can't import this year. And if you don't import this year, you won't be able to import next year.
The announcement also notes that quotas are distributed to the various provinces, further diluting the quantity available to any particular company.
In April of this year Mr. Liu Yonghao, chairman of China's largest feed company, protested against the outmoded TRQ system for corn imports. Facing cost pressures from rising domestic corn prices, Mr. Liu's company, New Hope Group, has become interested in importing raw materials. Mr. Liu pointed out that private companies account for 95% of the feed market, yet these companies must compete for 40% of the corn-import quota. Liu says the total private-company quota totaled just 2.4 mmt in 2010. Meanwhile, the state-authorized trader--COFCO--is awarded 60% of the quota, that's 4.3 mmt for a single company. Liu called for an end to the discrimination against private companies in awarding quotas.
Liu said his company's feed sales of 13 mmt in 2010 amounted to 8%-9% of the market. For this amount of production, Liu's company needed 10 mmt of corn, soymeal, wheat and other raw materials. Liu's New Hope Company got an import quota allocation of just 100,000-200,000 mt. Elsewhere in the article Liu reports that New Hope's subsidiary, Liuhe Co., imported 300,000 mt of corn last year and the New Hope Livestock Co. subsidiary imported 30,800 mt.
These purchases exceeded the quota awarded to New Hope, so the company had to buy 280,000 mt of the imported corn from COFCO, the state-trader that was awarded 60% of the quota. This is said to be an embarrassment for New Hope [and a profit-making opportunity for COFCO].
Mr. Liu complains that (the) state-trader is allocated more quota than it can use while the private quota is spread over many companies who don't have enough quota for their needs. He also complains that many private companies didn't import in 2010 and earlier because imported corn was too expensive, and they lost their rights to import quota.
Liu also complains that the quota is divided up among provinces, so that each province could be allocated only 90,000 mt. This practice seems to reflect the past when companies mainly operated in a single province and is not suited to large national conglomerates like New Hope.
The article then turns to the politics of distillers dried grains (DDGS, the by-product of ethanol production) imports. With corn getting more expensive, companies like New Hope have sought out substitutes for corn like DDGS. In 2010, New Hope imported 550,000 mt of U.S. DDGS. China's total imports were over 3 mmt.
However, last December a group of companies petitioned the Ministry of Commerce to conduct an antidumping investigation against U.S. DDGS. It turns out that most of these companies calling for antidumping are state-owned, including two ethanol companies controlled by COFCO, Jilin Grain Group, and Petrochina the state-owned petroleum company. These Chinese alcohol producers also sell distillers' grains that face competition from imported DDGS.
Liu is annoyed that the price of imported DDGS has risen since the antidumping investigation began and is now above the price of domestic distillers' grains.
Sunday, October 16, 2011
More Grain, but Higher Prices?
The eight straight increases in grain harvest since 2003 continues to get a strong propaganda push in China. But an inquisitive Chinese citizen might ask, "If we're producing so much grain, why do grain prices keep going up?" An essay by an Academy of Social Sciences Researcher posted on many Chinese web sites this week takes on this issue.
The author begins with some startling statistics. From 2004 to 2010, China's grain production rose by a cumulative total of 120 million metric tons (mmt), a remarkable increase of 26.9% in six years. Yet grain prices went up about 80% over that period. The author notes that it looks like grain output will be up again this year, yet this year's grain price is up 10% from 2010.
The author, Li Guoxiang, credits agricultural policy for the steady increase in grain production. He emphasizes the role of the minimum price policy. While the minimum price has generally been less than the market price in most years, the built-in expectations of rising prices encourages farmers to keep planting grain because they will be protected from downside risk in price. Li points to 2008-09 as an example of a period when the government prevented grain prices from falling to preserve farmers' incentives. He observes that China has insulated its grain market from wild swings in world grain prices in recent years.
With a steadily-increasing grain supply, why are prices rising?
The first factor he emphasizes is the rise in production costs. The prices of all inputs and factors of production have risen sharply as industrialization and urbanization increase opportunity costs.
Based on data from the national agricultural product cost and profit survey, Li reports these increases in prices of agricultural inputs during 2003-09:
Seeds: increased from 2.6 to 5.1 yuan/kg, up 95%
Fertilizer: increased from 2.9 to 5.4 yuan/kg, up 88.5%
Wages: increased from 18.8 to 53.7 yuan/day, up 185.6%
Land rent: increased fro 791 to 1719 yuan/hectare, up 117.4%.
During 2010-11, the increase in the fertilizer price slowed, but it didn't stop grain prices from increasing. In surveys, Li Guoxiang found that the wage surpassed 100 yuan, and 200 yuan in some places during the peak labor season. In 2010, land rent of 600 yuan per mu was common, and it went up to 800 yuan in 2011. In some places land rent was more than 1000 yuan.
By comparison, the sale price of grains (rice, wheat and corn average) went up from 1.1 to 1.8 yuan/kg during 2003-09, an increase of 61.9%. Thus, grain prices have not kept up with increasing costs.
Against this rising cost structure, the government has to keep raising grain prices to ensure that farmers can earn a reasonably good profit to prop up their incentives. Professor Li quotes the 2006 no. 1 document: “Adhere to and improve the minimum purchase price policy for key grains; maintain grain prices at a reasonable level.”
Li points out that Chinese citizens have rising living standards. He estimates that grain consumption will increase 30 mmt by 2020 to reach 630 mmt. [These numbers imply a current consumption of 600 mmt, about 50 mmt more than production. The 50 mmt deficit roughly matches soybean imports. Soybeans are considered a "grain."] People are changing their lifestyles "from planting grain to eating it" and "from raising hogs to consuming pork." Along with economic development there will be a change in structure of grains demanded and a demand for greater quality and safety.
Li explains that agricultural price policy involves a delicate balancing act. Prices must rise as consumers bear part of the cost of rising input prices. But agriculture must also increase productivity to mitigate the increased "burden" of food costs born by consumers. Rising agricultural prices should be accompanied by steady increases in agricultural subsidies to give farmers reasonable profits. Finally, agricultural productivity must be increased by promoting "modern agriculture."
Yet two other factors behind price increases cited by Li are the unintended consequences of government policies. One factor Li doesn't dwell on is monetary policy. He observes that the M1 money supply grew 34% in 2009. Excess liquidity in the economy contributes to speculation. Li observes that, with agricultural prices guaranteed to rise, there is a tendency for farmers, processors and traders to hold their commodities in storage instead of selling them. When there is a shortfall of supply in a certain area, speculators rush in to buy up commodities, "artificially exaggerating the tension between market demand and supply," adding upward pressure on grain prices.
Li also fails to mention that the increase in grain prices is magnified in livestock industries. Corn prices are up over 20% from last year, putting upward pressure on pork costs. That means pork prices have to go up too.
In the end, Li complains that slow growth in agricultural productivity is the main culprit. Li sums up by saying that the "sacred mission of agriculture" is to fulfill the peoples' rising demands for quality agricultural products by speeding up agricultural modernization, practicing modern agriculture and raising productivity.
The author begins with some startling statistics. From 2004 to 2010, China's grain production rose by a cumulative total of 120 million metric tons (mmt), a remarkable increase of 26.9% in six years. Yet grain prices went up about 80% over that period. The author notes that it looks like grain output will be up again this year, yet this year's grain price is up 10% from 2010.
The author, Li Guoxiang, credits agricultural policy for the steady increase in grain production. He emphasizes the role of the minimum price policy. While the minimum price has generally been less than the market price in most years, the built-in expectations of rising prices encourages farmers to keep planting grain because they will be protected from downside risk in price. Li points to 2008-09 as an example of a period when the government prevented grain prices from falling to preserve farmers' incentives. He observes that China has insulated its grain market from wild swings in world grain prices in recent years.
With a steadily-increasing grain supply, why are prices rising?
The first factor he emphasizes is the rise in production costs. The prices of all inputs and factors of production have risen sharply as industrialization and urbanization increase opportunity costs.
Based on data from the national agricultural product cost and profit survey, Li reports these increases in prices of agricultural inputs during 2003-09:
Seeds: increased from 2.6 to 5.1 yuan/kg, up 95%
Fertilizer: increased from 2.9 to 5.4 yuan/kg, up 88.5%
Wages: increased from 18.8 to 53.7 yuan/day, up 185.6%
Land rent: increased fro 791 to 1719 yuan/hectare, up 117.4%.
During 2010-11, the increase in the fertilizer price slowed, but it didn't stop grain prices from increasing. In surveys, Li Guoxiang found that the wage surpassed 100 yuan, and 200 yuan in some places during the peak labor season. In 2010, land rent of 600 yuan per mu was common, and it went up to 800 yuan in 2011. In some places land rent was more than 1000 yuan.
By comparison, the sale price of grains (rice, wheat and corn average) went up from 1.1 to 1.8 yuan/kg during 2003-09, an increase of 61.9%. Thus, grain prices have not kept up with increasing costs.
Against this rising cost structure, the government has to keep raising grain prices to ensure that farmers can earn a reasonably good profit to prop up their incentives. Professor Li quotes the 2006 no. 1 document: “Adhere to and improve the minimum purchase price policy for key grains; maintain grain prices at a reasonable level.”
Li points out that Chinese citizens have rising living standards. He estimates that grain consumption will increase 30 mmt by 2020 to reach 630 mmt. [These numbers imply a current consumption of 600 mmt, about 50 mmt more than production. The 50 mmt deficit roughly matches soybean imports. Soybeans are considered a "grain."] People are changing their lifestyles "from planting grain to eating it" and "from raising hogs to consuming pork." Along with economic development there will be a change in structure of grains demanded and a demand for greater quality and safety.
Li explains that agricultural price policy involves a delicate balancing act. Prices must rise as consumers bear part of the cost of rising input prices. But agriculture must also increase productivity to mitigate the increased "burden" of food costs born by consumers. Rising agricultural prices should be accompanied by steady increases in agricultural subsidies to give farmers reasonable profits. Finally, agricultural productivity must be increased by promoting "modern agriculture."
Yet two other factors behind price increases cited by Li are the unintended consequences of government policies. One factor Li doesn't dwell on is monetary policy. He observes that the M1 money supply grew 34% in 2009. Excess liquidity in the economy contributes to speculation. Li observes that, with agricultural prices guaranteed to rise, there is a tendency for farmers, processors and traders to hold their commodities in storage instead of selling them. When there is a shortfall of supply in a certain area, speculators rush in to buy up commodities, "artificially exaggerating the tension between market demand and supply," adding upward pressure on grain prices.
Li also fails to mention that the increase in grain prices is magnified in livestock industries. Corn prices are up over 20% from last year, putting upward pressure on pork costs. That means pork prices have to go up too.
In the end, Li complains that slow growth in agricultural productivity is the main culprit. Li sums up by saying that the "sacred mission of agriculture" is to fulfill the peoples' rising demands for quality agricultural products by speeding up agricultural modernization, practicing modern agriculture and raising productivity.
Thursday, October 13, 2011
Foreign Supermarket Resentment
A Wal-Mart in Nanchang, shortly after its opening in 2005
Is there a war against foreign supermarkets in China? The Chongqing arrest of Wal-Mart employees for repeatedly passing off conventional pork as premium "green food" pork has received huge publicity and Wal-Mart has closed all its outlets in Chongqing. In January of this year, Carrefour and Wal-Mart outlets were singled out for fraudulent pricing behavior.
Why are Carrefour and Wal-Mart being singled out? Are these fortune-500 companies more shifty and dishonest than other retailers in China? Surely not.
These crackdowns are likely to some degree a reflection of growing resentment in China against foreign supermarket chains that is starting to pop up in the Chinese press.
The release of the 2010 list of top-100 retailers highlighted the growing influence of foreign chains in the Chinese supermarket sector, noting that five foreign chains opened 140 new stores, a faster growth rate than domestic supermarkets.
An article that appeared in January this year about the same time as the price-cheating accusations provided a megaphone to a Zhejiang supermarket executive and Peoples Congress representative to complain about unfair competition from foreign supermarkets. He called for local governments to give domestic supermarkets a helping hand, perhaps a clue to a behind-the-scenes campaign against foreign supermarkets launched this year.
The official claimed that 90% of large supermarkets in large cities like Shanghai and Hangzhou are foreign companies with little space for domestic supermarket chains to survive. The official claimed that foreign supermarkets had come into China like a flood after WTO accession. Chinese supermarkets are like small shoots in a rice field that are washed away.
According to the Zhejiang supermarket official, domestic supermarket chains have to keep moving to more remote markets as foreign supermarkets extend their reach. First, foreign supermarkets enter big cities, pushing domestics to small cities. Then foreign companies enter small cities, pushing the domestics to towns, etc. "We go where the foreigners don't want to go," said the official. Domestic supermarkets are pushed "up the mountain and down to the countryside."
The official complained that cities entice foreign supermarkets into their city as an "image project," offering them free land and tax advantages. Domestic chains pay more in taxes and are obliged to hire workers. He claims that domestic chains have a larger "social responsibility" that the foreign chains evade.
Unable to compete with foreign chains on an equal footing, the Zhejiang executive urges local government officials to hold the business of domestic supermarkets together. Otherwise, the domestic chains will be forced to keep moving to more remote places that foreign companies are not interested in or be absorbed by the foreign companies.
Another criticism was posted on a public forum in April by a person who returned to his hometown in Shandong and was shocked at the low prices foreign supermarkets pay farmers for their vegetables. "Foreign supermarkets buy at low prices, exploiting China’s producers; foreign supermarkets [sell at] high prices, exploiting Chinese consumers!"
Another posting, apparently in response to the price-cheating allegations, points out the folly of singling out foreign supermarkets for cheating on prices. This poster points out that the supermarket stores are run day-to-day by Chinese people; the foreigners only show up for big events or major decisions. He calls the foreigners fools for blindly turning over their stores to Chinese people. "Only people with an IQ below 50 can think that [cheating people on prices] is a foreigner’s trick. What a joke! Carrefour is a fortune 500 company. Cheating people on prices like this would destroy their reputation--how many years will it take to repair [the damage]? This kind of price cheating can only happen in China."
Wednesday, October 12, 2011
Too Much Heavy Metal
On October 10, a scholar from the Chinese Academy of Engineering said 12 mmt of grain are contaminated by heavy metals each year.
At a meeting in Guangzhou, Professor Luo Xiwen said, “Soil contamination is extremely serious in our country. Investigations show that heavy metal contamination is above limits on 300 million mu, one-sixth of the cultivated land."
According to Luo, environmental pollution, soil pollution already have become a worldwide issue. He said the United States has over 217,000 farms polluted with heavy metals. According to Professor Luo, many countries put a high priority on treating soil pollution issues and air and water pollution issues. [so China should too?]
A bottle that contained a sample of pig feed that was tested for lead, moisture, protein, manganese, melamine and clenbuterol in the laboratory of the center for animal disease control in Chongqing.
The government's testing results report virtually no problems. In the first half of the year, Guangzhou's testing center detected no “lean meat powder” or illegal additives, and 97% of samples passed overall. The main substances detected were arsenic, manganese, copper, zinc and vitamin A.
At a meeting in Guangzhou, Professor Luo Xiwen said, “Soil contamination is extremely serious in our country. Investigations show that heavy metal contamination is above limits on 300 million mu, one-sixth of the cultivated land."
According to Luo, environmental pollution, soil pollution already have become a worldwide issue. He said the United States has over 217,000 farms polluted with heavy metals. According to Professor Luo, many countries put a high priority on treating soil pollution issues and air and water pollution issues. [so China should too?]
As an engineer, Luo naturally recommends technological solutions. To really address the food safety issue, said Luo, producers, managers, merchants and consumers must be linked up and farm products need to be checked at each stage from breeding, production and sale to table. For example, a sensor can be used to monitor soil and water; a system can be set up to track the source of animal germplasm and feed resources and monitor disease.
Luo frets that the system relies on companies to check themselves. He thinks the government should engage in lots of testing.
In fact, there's already a lot of testing going on, but it's expensive and it's virtually impossible to test everything in a way that guarantees no toxins or illegal substances are present in food.
A bottle that contained a sample of pig feed that was tested for lead, moisture, protein, manganese, melamine and clenbuterol in the laboratory of the center for animal disease control in Chongqing.
The government's testing results report virtually no problems. In the first half of the year, Guangzhou's testing center detected no “lean meat powder” or illegal additives, and 97% of samples passed overall. The main substances detected were arsenic, manganese, copper, zinc and vitamin A.
The Guangzhou testers say there are four main factors causing feed products to fail tests. First is that toxins are easily introduced in rainy weather, long-distance transport and storage feed raw materials. Some feed companies treat materials to remove mold but not all the toxins are eliminated. Second, due to negligent management some producers set new product standards, but continue to use the old label. Third, due to unregulated labeling, some companies use organic arsenic preparations but they are not listed on the label. Fourth, mistakes by workers result in cross-contamination.
Tuesday, October 11, 2011
Another Meat Crackdown
China's Commerce Ministry has announced that it will be one of six departments launching a nine-month crackdown on underground slaughterhouses and butchers. The stated purpose is to improve food safety by addressing "lean meat powder," pumping water into meat, and butchering sick pigs. The campaign plans to outlaw all underground slaughter activity and regulate the meat industry. By the end of June 2012, all meat in cities at the prefecture-level and higher should come only from "designated slaughterhouses." The notice stressed that all localities are to conduct unified crackdowns as directed by the State Council's order.
This follows a Ministry of Commerce order in July that required each locality to increase rectification efforts on the hog slaughter industry, cracking down on underground slaughter. The National Development and Reform Commission issued a notice at the end of September reducing inspection fees for hogs, cattle, sheep, dogs, chickens, and ducks.
zzzz...
Shall we point out that the Ministry launched other crackdowns last year that apparently fizzled out? A similar crackdown on slaughter houses was announced in May 2010. The central communist party web site announced last November that the Ministry launched a clenbuterol crackdown (but only six departments were involved in that one), several months before China Central Television revealed that use of "lean meat powders" was an open secret in the pork industry.
Perhaps they really mean it this time.
Thursday, October 6, 2011
The Hog Industry Crisis
A speech by Qiao Yufeng, the head of China's Animal Husbandry Association, at the Fifth International Corn Industry Forum held in Changchun in September offers a frank assessment of China's hog industry.
Qiao begins by asking, "Who uses the 180 million metric tons of corn? All of it is used by livestock." [not quite, only about 60% of it.] He then takes pigs as representative of livestock in China and launches into a discussion of high hog prices, cyclical patterns, and problems facing the industry.
Qiao observes that China's July CPI was up 6.5% and recalls that the CPI increased by the same amount in 2007, when pork prices were up over 80%. He says the CPI has become a "hog indicator."
He notes the transformation of the hog industry from small-scale to large-scale farms and the importance of environmental protection. He asks rhetorically, with the ratio of hog to grain prices now at a high level of 8:1, where is the crisis? He then goes on to identify three crises:
1. A land utilization crisis. The policy is now t0 encourage large-scale hog farms instead of scattered backyard hog-raising. But these big farms need land. With cities expanding, where will these farms be built? He observes there are no hogs within Beijing's sixth ring road and Changchun--formerly a relatively small city--is now sprawling and pushing farms further out. Big cities have to bring pork in from distant locations.
2. Disease crisis. Qiao recalls that diseases led to a shortage of hogs in 2006 and prices fell to low levels. In 2009, disease appeared again with the world wide H1N1 outbreak and other diseases showed up. He says there are many new diseases and strains appearing. There used to be just one kind of foot and mouth disease; now there are many kinds.
3. A high cost crisis. Qiao says high feed costs have been a matter of discussion for some time, but now this is a real problem.
Qiao says he hears of many people talking about raising pigs. But last year prices were low and small farmers quit in large numbers. "Who will come to raise pigs?" He asks.
He says there is a supply problem. When prices were low, he says the inventory of sows was reduced by 2 million. If you consider that each sow produces as many as 13 piglets, that represents a lot of pigs.
Qiao says the cyclical repetition of ups and downs in prices is a problem that has to be solved. He calls for industry chains in accord with Chinese characteristics like the attempts by COFCO to form complete chains. He praises Wan Long, the founder of the Shuanghui Group. Qiao complains that farms have no fixed relations with slaughterhouses--they rely on traders and seldom participate in cooperatives.
He complains that it's hard for hog farms to get loans. Hogs can't be used as collateral and the farms don't own their land--they must rent it. So it's crucial for companies to go out on the market to raise capital so they can operate.
Qiao points to the regional imbalance between pork production and consumption. Cities like Shanghai, Beijing, and Guangzhou can only produce a small fraction of the pork they consume. City officials want nothing to do with hog farms. The farms are exempt from tax, so they produce no revenue and they require environmental clean-up. The 12th five-year plan calls for concentrating hog production on small farms in western provinces and large farms in coastal areas.
Qiao points to this year's "lean meat powder" incident as a big systemic problem for the industry. He then comments on the general problem of additives in pig feed, including excessive antibiotics. He says the average Chinese person consumes the equivalent of 183 grams of antibiotics in meat--like taking 8 bottles of pills a year.
He asks why China has been importing so much meat and soybeans. He cites rising grain prices worldwide. "Why do we have to import?" He asks. "Is there enough corn?"
"Will hog prices go down next year?" Qiao doesn't think so. He seems to think prices are permanently higher. He wonders whether the high prices will stimulate investment in the industry.
Regarding the government's propaganda about 8 straight increases in grain production, Qiao wonders whether there will be enough corn. Qiao says he speaks for the biggest users of grain--hog farms.
Qiao is not the most incisive analyst--his thoughts seem scattered and his facts are often incorrect. But in contrast to most government officials in China who have canned speeches, Qiao speaks his mind openly and asks lots of questions...a refreshing speech in this respect.
Policy Produces Grain
Graphics promoting the government's subsidies and 350,000 technicians from the Farmers Daily web site
The Ministry of Agriculture is pouring on the propaganda about an 8th-straight increase in grain harvest expected this year despite droughts, floods, short supplies of water and land, and the European debt crisis. The Farmers Daily web site has an entire page of articles and a video announcing the magic number of 1.1 billion jin (550 million metric tons) expected for this year. It gives credit to the increase in the government's subsidies and 350,000 technicians in the fields giving guidance to farmers.
A Farmers Daily reporter interviewed Mr. Zhang Hongyu, the head of the Ministry of Agriculture's Legal Office, to find out how China could pull off this remarkable string of increases in grain production for eight years in a row.
Zhang obligingly explains that the government's policy support is the main factor responsible for increasing grain production. He points to the government's big increase in spending on rural issues, especially subsidies and price supports which mobilize farmers and local officials in the task of grain production. A second factor is the government's efforts to overcome drought and floods. The third factor is better implementation of policies. After issuing dozens of subsidy policies since 2004, this year the government finally decided to organize a survey team to go out and find out whether policies were being actually implemented and what the actual problems are with grain production.
Among the implementation activities Zhang identifies are a big propaganda campaign this year to make sure farmers know how much the government is doing to help them. We presume this interview is part of the propaganda campaign.
Next Zhang turns to the all-important issue of maintaining grain security in the face of rising demand and an anticipated exodus of labor out of farming in coming decades. Zhang emphasizes that Chinese people must depend on themselves for this task. Zhang says this means China must remain self-sufficient in corn, wheat and rice. Zhang says China can rely on imports to fill gaps between supply and demand for other commodities, but must depend on domestic production for its supply of grains. He mentions corn first, perhaps quashing the oft-repeated predictions that China is about to relax its self-sufficiency policy for corn and become a big importer.
In order to maintain self-sufficiency, Zhang says that China will keep increasing subsidies, keep raising grain prices and control imports and exports. They will keep spending on infrastructure, provide extension services, support farmer cooperatives, give farmers loans, and support new programs like pest control teams and drought mitigation efforts.
Next Zhang turns to the all-important issue of maintaining grain security in the face of rising demand and an anticipated exodus of labor out of farming in coming decades. Zhang emphasizes that Chinese people must depend on themselves for this task. Zhang says this means China must remain self-sufficient in corn, wheat and rice. Zhang says China can rely on imports to fill gaps between supply and demand for other commodities, but must depend on domestic production for its supply of grains. He mentions corn first, perhaps quashing the oft-repeated predictions that China is about to relax its self-sufficiency policy for corn and become a big importer.
In order to maintain self-sufficiency, Zhang says that China will keep increasing subsidies, keep raising grain prices and control imports and exports. They will keep spending on infrastructure, provide extension services, support farmer cooperatives, give farmers loans, and support new programs like pest control teams and drought mitigation efforts.
Sunday, October 2, 2011
Heilongjiang Tour: Vanishing Soybeans
"Buy soybeans" (source: Futures Daily News)
The fall crop tour organized by the Dalian Commodity Exchange also sent teams to investigate the soybean-corn-rice situation in Heilongjiang Province. The main finding was that soybean acreage plunged by 30 to 50 percent--less in some areas and more in other areas.
On the giant "Friendship Farm" (a state farm built by the Russians in the 1950s when they were "friends") soybean plantings declined 60% from 315,000 mu last year to 125,000 mu this year. The farm increased corn plantings by 50,000 mu (9%) and increased rice plantings by 120,000 mu (18%).
The crop tour reports that some areas were affected by storm damage and drought, but the impacts were not widespread. Yields are estimated to be down from last year but still good.
Low earnings from soybeans have discouraged farmers from planting soybeans. Corn is said to have net profits per hectare 3 times higher than soybean profits. Returns from rice are about double those from soybeans. The prices of the main competing crops -- corn and japonica rice -- have been high this year. One of the phrases thrown around this year in Heilongjiang is "dry land switched to paddy," a reference to soybean fields converted to irrigated rice fields.
The decline in soybean area might have been even greater if not for some natural limits. One of the limits on the loss of soybean area is lack of water to irrigate rice. Some farmers wanted to plant corn, but had to plant soybeans because wet fields last spring delayed planting. Some poor quality land is only suited for soybeans. Some farmers who lack labor plant less labor-intensive soybeans. There is a saying in Heilongjiang, "Those who want exercise plant corn; the old, weak and sick people plant soybeans."
The Heilongjiang Statistics Bureau estimated 2010 provincial soybean area at 67.177 million mu and the ITG Futures crop tour report estimates that this year's area could be down to about 47 million mu.
One crop tour report observes that soybean area is not likely to rebound in the next 3-to-5 years since it takes 3 years to get a harvest after soybean fields are converted to rice paddy (apparently because pesticide residues prevent good rice yields). The ITG Futures report observes that the government's emphasis on hitting a numeric target for grain production is unfavorable to soybean production. Since soybeans have a lower yield than corn or rice, the target can be reached more easily by encouraging planting of higher-yield crops.
Like Chinese grain prices, soybean prices are rising, but the rate of increase is limited by competition from imported soybeans. During 2008-09 the government tried to support domestic soybean prices but no one would buy them at the support price since imported beans were available at a lower price. This may be why the crop tour observes that the government has been raising its "protection price" for soybeans by only a few cents (fen) each year. This year's price for government warehouse purchases is expected to be around 2 yuan per 500g, up from 1.9 yuan last year. Private traders are trying to stockpile soybeans at an initial price of about 1.95 yuan. The report from ITG Futures conjectures that the government give up trying to control the price of soybeans and imports are likely to keep increasing their prevalence in the Chinese market.
Saturday, October 1, 2011
Jilin Corn Tour: Lust, Caution
Corn tour participants interview a farmer (source: Futures Daily http://www.qhdb.com.cn/)
The Dalian Commodity Exchange sponsored a series of crop tours in northeastern China this month. There are dozens of reports posted online. The report on the corn tour of Jilin Province (pt. 1, pt. 2) predicts that Jilin will have another good corn harvest, but warns corn market participants to exercise caution over the coming months.
The corn tour made a big circle around Jilin Province to assess this year's corn harvest and learn about market conditions. The tour found widely varying crop conditions. Photos of sample corn cobs from various regions illustrate the wide range of conditions. In some places there was moderate to severe damage from storms, drought, and pests, but they report that damage to the corn crop was either confined to small areas or offset by improved weather later in the growing season. The tour's assessment is that the Jilin corn crop will be good this year.
More telling is the tour's report on market conditions and farmers' intentions to sell corn. Corn prices are on a steady upward trajectory that farmers expect to continue. One of the factors supporting higher prices is the rising cost of production. Farmers told corn tour participants that production costs rose 15-to-20 percent this year. Another factor is the government's policy of guaranteeing that grain prices will rise steadily. This builds in expectations that there is no chance that prices will decline; so the best strategy is to hold your corn as long as you can.
The conventional wisdom around the world is that China's corn market is a one-way bet, that more demand and limited supply will drive prices ever-skyward. Consequently, investors world-wide have lusted after any investment that can expose them to the sure bet of China's corn market.
Jilin farmers are on the bandwagon. Unlike past years when prices tended to fall after harvest, they expect a higher purchase price for corn of 1950-to-2100 yuan/mt (about $7.70 to $8.30 per bushel) and further increases in the future. Most Jilin farmers say they intend to delay selling their corn. More than half of farmers interviewed on the tour say they will sell only half of their corn before spring festival (February), holding the rest to sell between February and May. A few farmers plan to hold most of their corn to sell after the spring festival. Farmers generally have more cash available these days and don't need to sell their grain in a hurry (a result of cash from off-farm work and improved credit availability).
Jilin corn purchasers told the tour that they expect to pay more for corn this year too, but purchasers see some potential downside risk on the horizon. The Chinese corn supply looks like it will be abundant this year, and demand may weaken in coming months. The build-up of the swine herd will likely come to a halt by spring festival. The Chinese government is trying to control credit, dampen inflation, and rein in industrial use of corn. There are signs of a weakening Chinese economy. Today's Wall Street Journal announces that investors are starting to dump Chinese stocks, the Chinese yuan has bumped against the daily trading limit which suggests flight of money out of China. We saw in late 2008 that demand for commodities in China can collapse in a heartbeat when the economy tanks--are we facing a similar situation now?
The lust for Chinese corn can be a dangerous game. Farmers' intentions to hold their corn off the market until next year combined with a scenario of a demand slow-down could add up to a collapse of Chinese corn prices during 2012. Hence, the Dalian corn tour report's assessment is that this year's corn market trend will be especially "complex" and advises caution.
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