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.


Unknown said...

Another great post. Thanks, Fred. Anyone know if there are similar quotas for wheat imports?

dimsums said...

Yes, there are tariff rate quotas for wheat, corn, rice, cotton and wool. The state-owned traders get 90% of the wheat quota. http://www.ers.usda.gov/Briefing/China/tradepolicy.htm