Saturday, December 31, 2011

Pork That Glows in the Dark

There have been a number of reports in the Chinese news media lately about pork that glows in the dark. The Southern Rural News compiled reports on this mysterious phenomenon.

 According to a story circulating on Chinese news sites, earlier this month a Mr. Li in Beijing recently bought some pork that gave off a blue glow in the dark. After eating half of it, he began to worry that the pork might be harmful. The vendor who sold it assured him that the pork came from a legally licensed slaughterhouse, complete with inspection stamp.
Mr. Li's glow-in-the-dark pork

There have been many instances of this "flourescent pork" since 2004. According to the Southern Rural News, in Beijing it has a blue color, in Liaoning green, and in Zhejiang gold. The Internet reports discoveries of "flourescent pork" all over the country.

In Feburary 2010, a Mr. Ma in Changsha got up during the night and saw a strange blue glow on his way to the toilet. He turned on the light and discovered the glow was coming from a slab of pork he had just bought from the Carrefour supermarket. According to this article, a blue glow emanates from both the muscle and fat of the meat.
Mr. Ma's glow-in-the dark pork in Changsha. 

No government department has been able to explain why pork glows in the dark and no one knows whether it is harmful to eat it. Animal health officials say fluorescent pork could be due to excessive phosphorus in feed, or it could be from a type of fluorescent bacteria. Regarding Mr. Li's pork in Beijing, an animal health inspector in Tongzhou district said it's OK to eat it as long as you cook it well. However, the article describing Mr. Ma's discovery recommended that you not eat pork that glows in the dark.

Opinions compiled by Southern Rural News say this incident demonstrates the shortcomings of China's food safety system. As long as the meat is stamped with the required approvals, inspectors are satisfied. Food safety officials don't bother to investigate problems that are outside their current sphere of responsibility. There is no proactive investigation of potential problems. Nobody worries about problems or investigates their causes until they explode as a major crisis.

Fighting Falsification of Statistics

China Economic and Industry News reports that China's National Bureau of Statistics (NBS) is setting up a new direct reporting system designed to eliminate the chronic problem of padding statistics by local officials. The announced reform is a needed and welcome change, but it shines a light on fundamental problems in the Chinese statistical system and makes one wonder if there is any value in the reams of numbers published by Beijing every year.

NBS is introducing a new direct statistical reporting system designed to cut out the opportunities for intermediary organizations to falsify data in the traditional bottom-up reporting system. In the new system companies will report data directly to a national statistical data center or to a provincial data center accredited by the national statistics bureau.

Most Chinese statistics are based on a bottom-up reporting system. Local statistical departments collect data from companies, compile the data and report them up to higher-level departments. As numbers are passed up from level to level they tend to be inflated (in the case of GDP) or otherwise altered. It is well-known that GDP estimates reported by NBS in Beijing are routinely adjusted downward. It is common for the national GDP growth rate to be lower than all the provincial estimates.

The article explains that local officials have an incentive to pad the statistics since they are judged on the basis of economic measures like GDP growth. Local officials provide support to certain industries and therefore have incentive to manipulate statistics to show that their strategic plans are succeeding. Consequently, officials routinely manipulate data as they are passed from one level to the next. Statisticians in Beijing have long, contentious meetings to decide what to do with the false data sent to them by the provinces. Obviously, the statistics reported by Beijing are not objective data, but rather manufactured numbers that emerge from countless excel file manipulations and discussions around long wooden tables in Beijing.

The article says that people view statistics as tools of government officials to be used to trumpet their successes at meetings. The inaccuracy of statistics makes it difficult to make accurate forecasts and undermines the credibility of statistical departments.

The new direct system relies on direct reporting of data by 600,000 companies. Participating companies will be companies in manufacturing and services industries with output or sales exceeding a certain threshold and construction companies recognized by the government. The big companies are said to create most of the value and the most important effects on the economy. The direct reporting system will not include the millions of small companies, entrepreneurs and vendors. The article doesn't explain how these small operators will be measured and tracked.

According to the Economic and Industry News article, most economic and industry statistics are produced by bottom-up reporting systems. NBS in Beijing only directly estimates data on commodity prices and household income.

There has been a similar shift away from bottom-up reporting in agricultural statistics. The first agricultural census conducted in the 1990s was the first time a national unified count of farmers, land, animals was conducted. The results confirmed that statistics overstated the number of livestock and understated the amount of farmland by a substantial margin. Since then, NBS has been switching to survey-based approaches to estimating crop and livestock output. The current system is a hybrid of surveys and reporting systems. Village- and farm-level surveys of grain yields, changes in land use, and hog inventories and sales in major production areas are combined with a bottom-up reporting from minor production areas, state farms, and companies. National estimates are made by expanding survey estimates based on census data.

However, even the survey sampling may be subject to local influence and lack of expertise. Surveys are carried out by teams of local statisticians and officials. Who watches them to ensure they don't pick the "best" villages and farmers for the sample? Do they take samples from random plots in the fields, or from plots known to give the highest yields? Suppose a plot chosen for the sample is decimated by drought in a given year. Do enumerators record a "0" for the output from that plot or do they substitute another plot that produced a "reasonable" yield?

Ma Jiantang, the current director of the Statistics Bureau, seems intent on improving statistics. (See a report on agricultural statistics from earlier this year.) However, the problems with the Chinese statistical system are fundamental and deeply entrenched. Statistics are still politicized at all levels. At the national statisticians' meeting where the new reforms were announced, the statisticians were ordered to implement the State Council's instructions on statistical work and the spirit of the 3rd, 4th, 5th, and 6th plenums of the 17th Party Congress and economic work meeting. The meeting was attended by leaders of the communist party's Central Discipline Commission, the Party Organization Department, the Supervision Department, the Audit Department and the Liberation Army's Strategic Planning Department.

Statistics have always been manipulated in China. The modern discipline of statistics relies on completely random selection of samples and use of consistent rules for estimates. The interference of either intentional manipulation or well-intentioned judgment calls by enumerators and reporters can undermine the process.

For historical perspective, we post here some comments on Chinese population statistics from A Cycle in Cathay, a book written in 1895 by W.A.P. Martin, an American who lived in China for 60 years in the 1800s. Martin's brief two-page report reveals practices and manipulation of statistics in the 1800s quite similar to those used today.

Martin (p. 460): "Owing to imperfection in their mode of enumeration, strict accuracy is not to be expected. A governor of a province will sometimes add what he supposes to be the probable increment to an old census, instead of taking the trouble to make a new one."

Martin goes on to cite an instance when Chinese authorities reported to western foreign ministers that China's population was 215 million when it was believed to be closer to 400 million. According to a Dr. Dudgeon quoted by Martin, the Chinese officials deliberately reduced the population figures by one-third. The purpose of deflating the figure was to discourage foreign countries from sending missionaries. According to Martin, the following year Chinese authorities, having seen "no abatement of missionary immigration," added the missing one-third back into the population figures they reported.

Wednesday, December 28, 2011

Deflated Money Bags and New Water Pumps

Earlier this month Industry and Economic News Net posted an article signaling that 2012's rural policy emphasis will be on building water infrastructure. The article includes quotes from the head of Renmin University's School of Rural Development, who said the 2012 "Number 1 Document" will focus on construction of water-management infrastructure. The article doesn't specify what kinds of projects this includes, but other sources cite irrigation infrastructure, pumping stations, repair of degraded reservoirs, and rural drinking water projects.

The 2011 "No. 1 Document" also included a focus on water management. However, the article emphasizes that rich cities need to send money down to poor rural counties to facilitate investments in irrigation and water infrastructure. The Renmin University scholar says it would be a terrible thing to leave the water management construction task half-finished.

The article focuses on financing problems, specifically the role of real estate in local government finance. When local governments collect financial windfalls from selling rural land to developers they are supposed to set aside a significant portion of the proceeds to finance agricultural development. However, in May-June of this year a Chinese Academy of Social Sciences team conducted a survey of 11 counties and found that only 10% of the funds from these real estate windfalls was spent on water projects. The team said the water infrastructure campaign's implementation was impeded by this financial bottleneck and a national meeting on water management work was held in July to discuss this problem. According to one of the team members, the policy shift to address this problem was initiated in the second half of this year.

The article says the slowdown in the real estate market "deflates the money bags" of local governments, especially governments of major grain-producing counties and poor counties. The article notes that a communique issued by the national audit office reported that debts of provincial, prefecture and county governments totaled 10.7 trillion yuan at the end of 2010. The lack of funds could leave rural water projects as "orphans of local governments."

In the current environment, the article says, there can be no question of the government cutting [spending?] across the board. It says there has to be some "tilting" and "focus." The article asserts that rural counties make a great contribution to grain security but they are usually less-developed [i.e. poor] regions. On the other hand, wealthy cities rely on these counties to supply them grain. The current party line is that China needs to set up a mechanism for transferring funds from wealthy regions to agricultural regions to facilitate investment in water management infrastructure.

Last month the dimsums blog reported on the new fiscal federalism strategy of government transfer payments and the new model for agricultural development embodied in a Henan development plan.

Tuesday, December 27, 2011

AQSIQ Preparing Crackdown on Meat Imports?

There has been a fair amount of agitation in the Chinese pork industry about the surge in pork imports this year.   Quite a few industry people blame the recent decline in pork prices on rising imports. (The dimsums blog posted an article on this earlier this month.) When China wants to shut down imports, authorities typically use the pretext of a disease, pest, or food safety problem to reject imports. During most of 2010 China shut down pork imports from North America after a brief H1N1 scare. It took over a year to lift the ban, coincidentally during a period when pork prices in China were depressed.

In view of the agitation against imports, it is perhaps ominous that AQSIQ (China's quarantine and inspection authority) held a meeting on December 26 to discuss strengthening inspection and quarantine measures specifically for imported meat. The vice director of the bureau chaired the meeting held in Tianjin.

The article reveals no specific measures. The vice chairman calls for inspectors to address unspecified "continuing problems."  He tells officials to strive to improve the quarantine supervision system for imported meat products, using the most effective measures for strict supervision to maintain quality.

Alternatively, the AQSIQ meeting could portend a crack-down on meat smuggling. Dimsums previously reported on the widespread smuggling of poultry that surged after China imposed countervailing duties on U.S. poultry (mostly chicken feet) a year ago. Beef smuggling has been going on since China banned North American beef imports after the discovery of a BSE case in 2003.

Ironically, the AQSIQ meeting about the urgency of improving the quality and safety of imported meat came the day after another branch of the bureau revealed that it found salbutamol in products of a well-known meat company based in Tianjin, the same city where the meeting was held.

More Adulterated Pork

China's Inspection and Quarantine Bureau testing of pork products discovered nine samples containing illegal additives. A reporter found results of tests of hams, sausages and other meat products on the bureau's web site (the dimsums blogger could not find it) showing that meat processed in September contained a type of "lean meat powder" and nitrites that exceeded legal limits.

The bureau tested 250 samples from 227 meat companies (about one sample per company?) in Beijing, Tianjin, and Hebei. They were tested for 24 different substances. The article included a table showing the nine samples that failed the tests but the table is so small it's not entirely legible. It shows the name of the company, product, and production date but it is not clear what was detected in each sample.

The article reports two of the illegal substances found. One was a kind of sausage produced by a Beijing company that had excessive levels of nitrites, a chemical that is widely used in making sausage (and it used to be a big concern in the U.S.) Another failed sample was apparently a kind of smoked meat from pig heads that contained salbutamol, a kind of "lean meat powder" less well-known than clenbuterol and ractopamine but also banned in China since 2002.

The product containing salbutamol was a famous brand called Yingbin ("welcome the soldiers") produced by a 58-year-old company in Tianjin that used to be one of the four leading meat companies in China. The manager of the company was interviewed by the reporter over the phone. When asked about the problem, he said it originated at the farm level (implying it's not his responsibility) and agricultural officials are "investigating." He said the smoked pig head meat batch was only 35 kilograms, so not to worry.

Well, the salbutamol would have been in all the meat from the pigs--75-to-100 kg per pig. And it probably would have been used in a whole herd of hundreds, if not thousands, of pigs.

All of the failed samples were produced between August 27 and October 5, yet the results were not publicized until late December. Why did it take more than two months to reveal the results to the public?
Nine meat products that failed tests for banned substances in September-October 2011. 

Monday, December 26, 2011

Heilongjiang: The National Granary

Propaganda from Xinhua News Service describes Heilongjiang Province as "granary under heaven" and provincial champion in grain production. The article refers to the recent "economic work conference" and describes Heilongjiang's production and sale of grain as a bright spot in the economy and a base for economic growth.

Heilongjiang is a sprawling province in the far northeastern corner of China that has a relatively low population density (since it was settled much later than other parts of China) and a rich black soil that makes it an agricultural powerhouse. Heilongjiang has a system of large mechanized state farms -- known as "reclamation areas" in Chinese government-speak -- set up in the 1950s as a buffer against Russian incursions. Two prominent state-owned agribusiness companies emerged from the province's state farm system: Beidahuang--the "great northern wilderness"--and the vegetable oil company "Jiusan" which is short for "management bureau no. 93."

According to Xinhua, Heilongjiang's progress in raising crop yields contributed a substantial share to China's unprecedented string of increases in grain production in recent years. According to the chairman of the Provincial agricultural commission, Heilongjiang's grain output rose from 34.65 million metric tons (mmt) in 2007 to 55 mmt in 2011. A target of 75 mmt is set for 2015.

The article also emphasizes that a high proportion of Heilongjiang grain is sold to the market. The chairman of the provincial agriculture commission claims that 50 mmt of grain was sold into the market this year. This is an unusually high proportion in China where farmers generally retain most of the grain they produce for their own consumption on-farm.

Chinese authorities view Heilongjiang as a source of grain that can meet the demands in other regions of China where demand exceeds the local supply. The vice director of the provincial statistics bureau estimates that Heilongjiang's grain can support 240 million people nationwide. He says Heilongjiang uses one-tenth of China's grain area to produce one-fourth of the commercially-sold grain, supporting one-sixth of the Chinese population's grain consumption.

The Xinhua article describes Heilongjiang as the stabilizer that guarantees food security. It says the province has  supplied 45 mmt of grain to the rest of the country since 2006. According to the article, three days after the 2008 earthquake in Sichuan, Heilongjiang milled 2.4 mmt of rice to supply the earthquake-ravaged region with food.

The article emphasizes the contribution of science and technology to Heilongjiang's increase in grain output, signaling the strategies being pushed by authorities in the current five-year plan.

Mechanization is one of the factors emphasized. Heilongjiang has 558 agricultural machinery cooperatives which purchased large tractors and combines and signed contracts to provide services to farmers. According to Xinhua, the total power of agricultural machinery has increased 45.7% since 2007. According to the article, mechanization breaks the bottleneck of traditional man- and animal-power and allows a "rush" to plough, sow and harvest at the time when temperature and soil conditions are best. A related campaign has been to promote deep-ploughing in the fall which facilitates early planting in the spring.

Irrigation is another emphasis of the article. The reporter describes a large framework of pipes in the fields that deliver water to corn plants at key periods of the growing season. In a model farm district, they claim that irrigation has raised  yields by about 50%. According a provincial official, Heilongjiang has initiated a major water project that includes 38 large pumping stations.

The article claims that improved seed varieties are planted on 98% of Heilongjiang's land. The article also refers to pest control advisors and "precision" cultivation.

Chinese authorities seem to remain in crisis mode over commodity price inflation even though food prices seem to have stabilized or dropped since October. They rushed out a massive grain production statistic (normally the grain production statistic is not announced until January) and the official media have been putting out cheerleading articles like this one to announce their great success in grain production. At the same time, rumors say that a series of large purchases of U.S. corn were made to refill state reserves. Are the grain bins emptier than officials are letting on?

Sunday, December 18, 2011

China Running Out of Farmers?

Several recent stories have discussed remarkably fast demographic change underway in rural China.  A few years ago rural China was characterized by a massive surplus of labor, but now they are talking about labor shortages. People are asking, "Who will do the farming ten years from now?"

A Guangming Daily article by a Beijing University post-doctoral student reports on the disappearance of nearly all peak working-age adults in a series of villages. One Hebei province village has 458 people registered as residents, but only 216 actually live there. All young people have gone out to work and just a few workers under 60 years old are left. The youngest is a 46-year-old lady. In a Shanxi province village there are 234 people registered but only 130 living there permanently, mostly old people and children. A large survey carried out by the Communist Party Central Committee found this pattern of aging populations was common in villages all over rural China.

Old farmers in Shanxi's Zhaojiagou Village. Source: Guangming Daily.

According to the article, "The outmigration improves the economic situation of people but it leaves a shortage of labor in agriculture; 'shortage of farmers' is a permanent problem." Scholars and policymakers in China worry that the shrinking rural workforce will leave land uncultivated.

With fewer workers recently rural land has been left idle, affecting agriculture stability and grain security. The author cites the example of Binhu village in Hubei where in 2008 40% of the land was left idle, and more than half of farmers cut back from planting two rice crops a year to one.

In Shanxi Province's Zhaojiagou village there is little idle land, but the future is not optimistic. Most workers there are age 60 or older, planting corn and walnuts. Each one operates 20-30 mu of land using human and animal labor. In 5-10 years these old people won’t be able to do the work. 

The author warns that the idle land phenomenon will spread if the labor shortage is not solved. Given the seasonality of agriculture, he warns that once land is left idle it could become a vicious cycle, affecting grain security and social stability.

Another article on the "Semi-monthly Online Chat" worries that ignoring the idling of farmland could lead to a reliance on imported grain.

Both authors make reference to the so-called "Lewis Turning Point" where a developing country reaches a stage where it transitions from surplus labor to scarce labor. With large numbers of people entering cities, less labor is available to work in agriculture. The "semi-monthly" author develops the implications for agriculture more fully, warning that the "emptying-out" of villages leaves the elderly and frail behind to do the farm work who are incapable of cultivating several mu of land, so the author says. He says that mechanization and improved technology are critical to agricultural development but you can't do farming without labor. 

The authors observe that there has been a sharp decline in children as well, portending even more radical demographic change in the future. The Beijing University author says every administrative village in the Shanxi countryside used to have its own school, but now many have just a few students and other schools have been turned into barns for raising pigs. The schoolmaster in one township says there were 800 students in the 1990s, but the number fell to 200 in 2007 and just 90 in 2009. The junior middle school was turned into a central primary school with just 68 students and 24 staff. There are four villages that still have schools but there are just 21 students, an average of 5 per school. 

There are three reasons given for the shrinking number of students. One is a plunge in the birth rate from about 4 kids per family during the 20th century to one or two children now. Another is that many people with school-age children have left the village to work in cities. Finally, many children now go to school in the county city instead of in the village. The shrinking number of students means financial difficulties for rural governments supporting schools. According to the Beijing University author, "If the number of students keeps falling the government’s spending on buildings and teachers will be wasted." 

Of course, the shrinking number of children also portends a population explosion in reverse--a rural population implosion--and further shrinkage of the farming labor force. Most young people leave the village to work in factories or construction sites as soon as they leave school. They have little experience or interest in farming. The population is transformed from "grain producers" to "grain users."

The "semi-monthly" author says "we have ten years to wait and watch" or "we have ten years to develop technology and reform agriculture." He speaks in vague terms of "technology," "reform," and "land transfer." He identifies several constraints on rural development: low returns in agriculture, imbalances between rural and urban economies created by the household registration system, poor rural education, and favoring industrial over agricultural investment. He calls for improvement of rural social insurance, reducing the gap between the rural and urban economies, reforming the urban-rural household registration system, improving public services in rural areas, and raising the quality of rural workers. 

According to an online survey on "Who will farm in 10 years?" over 70% of respondents thought this is a big concern but only 35% had any interest in actually farming themselves. 

Of course, China's agricultural sector could function quite well with a small fraction of its present farm labor force of around 300 million people. The Shanxi village cited by the Beijing University author has a total of 2500 mu of land, equal to about 400 acres, approximately the size of one U.S. farm. 

Chinese agricultural officials may be secretly pleased to see the country's peasant farmers die off or moved into old-age homes. Then they will be free of the rural protest headache and free to implement their vision of large mechanized "scientific" farms which has been the holy grail of communist agriculture since early in the last century. In fact, it's possible these "Who will farm in 10 years?" articles are part of a propaganda push to lay the groundwork for new land-transfer schemes, professional pest control teams, and other measures intended to take the "modernization" and "scale-ization" of agriculture to the next level. Let's see what's in the "Number 1 Document" next month.

Tuesday, December 13, 2011

Pork Imports "Pressuring" China Market?

China's pork imports are set to reach a record high in 2011. The climb in pork prices through most of this year has reversed over the last two months and prices have been declining. A number of industry people and journalists are putting these two pieces of information together and concluding that imported pork is driving down Chinese pork prices.
"Foreign pork" going to the "China market." Source: China International Commerce News.

A online poll asked respondents to identify the reason for declining pork prices. Of the 152 respondents, nearly half said imports were the main reason for declining pork prices. Less popular reasons were: "producers are selling lots of hogs because of worries about disease," "producers have expanded and market supply has increased due to government policies," "producers are slaughtering as fast as possible because they see prices starting to go down," "the price was very high before and naturally is going down now."

On an online bulletin board where a similar query was posted most respondents said there are multiple reasons and you can't identify a single reason for declining prices. One respondent said the government is allowing pork imports to ensure that "low-priced" "coolies" working on construction sites can afford to buy meat, hence keeping labor costs down and preventing housing costs from rising. Others said it was due to disease and merchants driving hog prices down.

The International Commerce News quoted the chairman of the animal husbandry association who said this year's pork imports will surpass 1 million metric tons, breaking the record set in 2008. According to this article, imports from January to September totaled 870,000 metric tons.

The article says that imported pork is pressuring the domestic market, noting that prices had fallen 8% in November. It asks whether the imports are a filling a gap in the market or an "attack."

Mr. Ma, the chairman of the animal husbandry association, says imports are one reason for the decline. He says declining consumption due to substitution of poultry for pork is another reason. Ma is opposed to pork imports, saying that the domestic pork supply is adequate and imports "are not needed." Imports just pressure the market and drive the price down, leading to turmoil in the hog market.

Ma says imported pork has a “new type of lean meat powder,” called ractopamine, that is hard for testing organizations to detect. Ma should know that ractopamine is not new and is used widely in China.

Ma says importing companies can’t just pursue the interests of their companies. They have to consider the country’s long-term interests. In his view, importing pork to stabilize price is a kind of short term behavior. “In meat, consumers choose the easy way, discouraging farmers.” He says, "Both are meat; this way is completely unneeded." Mr. Ma thinks the government should stabilize the overall pork market rather than rushing to import pork.

Another opinion is offered by Qiao Yufeng, who thinks that importing pork gives consumers more choice. Industry competition promotes development of the domestic meat industry. There is no need to “cry wolf” over foreign pork.

Meanwhile, a journalist in Hefei, Anhui Province, notes that people are talking about the "foreign pork" driving down prices and went out to find out whether foreign pork is on the dining tables in Hefei. The reporter visited supermarkets and a wholesale market and couldn't find any foreign pork anywhere.

One worker at a supermarket meat counter in Hefei said, "We mainly sell pork from Hefei and north of the Huai River, but no imported pork."

A supermarket shopper said, "Foreign pork? Never heard of it." The shopper admitted he never checked the origin of pork he buys.

A worker at a Carrefour supermarket said, "We sell pork from Hefei and Luohe City in Henan. I've heard of foreign pork but we don't sell it."

An elderly shopper expresses disdain for foreign pork. He prefers local pork which has a strong flavor good for roasts and soup. The gentleman says he would never buy foreign pork: "Even if the price is low, it's not as good so how could I eat it?"

The reporter then went to a wholesale market in Hefei and again found no foreign pork. The meat manager said, “The market has no imported pork; selling imported pork is not allowed.”

So where is this imported pork?

The International Commerce News article quotes a pork industry analyst who points out that imports are "a drop in the bucket" for China's pork consumption of 50 million metric tons. A Shanghai meat trader explains that most of the imports are organs, feet, and tails. Only about 10% is muscle meat cuts. He explains that foreigners don't like to eat organ meats so these cuts are cheap and have a price advantage in the Chinese market. The price of muscle meats is higher and these meats are less competitive. The article doesn't explain that much of the imported meat is purchased by processors who use it to make sausages and other processed products.

Still, the article says the pork imports are a "wake up call" for China's pork industry. The writer insists the industry must change its mode of operation to promote larger-scale producers. People are quitting hog-raising, going into cities and eating more meat, leaving fewer people raising pigs. The bottlenecks are lack of land, lack of cash, and pollution problems. The writer says crop production should be integrated with hog production. Using manure as fertilizer for crops supplies more feed and addresses the pollution problem. He says the government should address the cash problem by attracting more investment to the industry through the "demonstration" role of dragon head enterprises.

Sunday, December 11, 2011

Illegal Pork Is Cheaper

A group of news items published December 8 in the New Capital News sheds light on the continuing struggle to stamp out unapproved pork marketing channels. The articles reveal  that the lower costs of illegal marketing channels are the root of the problem. "Safe" food is typically monopolized and more expensive than food that comes to the consumer through widely-dispersed channels.

The news comes from Tongzhou, a suburb of Beijing. The article features an interview with a bloodied Mr. Hou, who has just returned from being treated for a concussion at the local hospital. Mr. Hou operates the local agricultural produce market in Zhangjiawan Town, just outside the East Sixth Ring Road. On December 7, Mr. Hou heard that hogs from unregistered slaughter points were being sold in the market. He sent a subordinate to confront the accused trader. The trader refused to pay a fine and a vigorous confrontation ensued. Mr. Hou went to investigate and was beaten nearly senseless according to his account.

When Mr. Hou acquired the contract to operate the market two years earlier, he found the incidence of illegal pork-selling was "serious." Since then there has been a crackdown and the number of traders in the market has declined from 37 to 18. However, still only two-thirds of the pork sold in the market comes from legally-designated slaughter points. The other one-third comes from farms that slaughter pigs themselves or numerous unregistered slaughterhouses.

Pork sales records from the Zhangjiawan market. Source: New Capital News.

The record of sales for December 7 that accompanied the article listed each trader and the number of hogs sold. There were 20.5 hogs from registered slaughterhouses, 10 from other sources, and 4 in an unlabeled column.

The root of the problem is the higher costs of legal slaughterhouses. Mr. Hou said that the suppliers using legal marketing channels complained about the prevalence of illegal pork when he took over. Mr. Hou explains that the price of hogs bought from legal slaughterhouses is 8-to-10 yuan per 500g while hogs from illegal channels cost only 6-to-7 yuan. The sale price is 11-to-12 yuan, so there is much higher profit from selling cheaper illegal hogs. The designated slaughterhouses charge a fee to transport hogs and slaughter them. There is also a fee for inspection. Illegal marketing channels avoid these costs.

Mr. Hou says the illegal marketing is the "Achilles heel" of the food safety system. Traders go door to door purchasing hogs from backyard farmers. They often use family connections to identify suppliers. The hogs are not inspected and lack legal certificates. The hogs can't be traced to their source. The illegal marketing channels may be associated with other illegal behavior such as pumping water into carcasses.

Mr. Hou says regulation of these small local markets lags behind that of larger wholesale markets and supermarkets. He says inspectors have only checked the market twice during the two years he has operated the market.

However, there were no complaints about the illegally-sold hogs in the Zhangjiawan market. Mr. Hou noted that the merchants selling hogs from legal channels complained vigorously about the prevalence of illegal hogs when he took over the market.

Friday, December 9, 2011

China's 10 Years in WTO: Success and Challenges

Ahead of the tenth anniversary of China's accession to the World Trade Organization on December 11 Chinese officials are putting out a propaganda blast proclaiming the successes and continuing challenges from WTO membership.

At least two interviews with agricultural officials have been published: an Economic Times interview with Cheng Guoqiang, an economist with the State Council's Development Research Center who has been researching agricultural trade and support since the 1990s, and a Farmers Daily interview with Vice Minister of Agriculture Niu Zhi. Both officials emphasize that joining WTO was a strategic decision with historic significance that integrated China with the global economy and kept up the momentum on the country's market-oriented reforms. The officials emphasize that carefully designed policies allowed imports to relieve stress on China's domestic resources while shielding farmers from import competition. The officials are upbeat about China's experience during the first ten years but they also note remaining problems.

Both officials bring up the "two markets" and "two resources" strategy. China must import some commodities to relieve pressure on domestic natural resources while at the same time protecting domestic suppliers and "security" for domestic industries. At the same time there is an effort to boost exports of labor-intensive commodities and reduce barriers to those exports in foreign countries.

Cheng explained how the "comparative advantage" concept guided trade strategy. Trade barriers were lowered to allow more imports of land-intensive commodities, utilizing a combination of domestic and international markets to supply China's demands. Cheng points out the large imports of soybeans and edible oils as an example of the benefits of trade. If these imported products were to be produced in China,  the oils would take up 68% of China's grain area. Within China there is a strategy to concentrate production of particular commodities in the regions where they have a comparative advantage.

At the time of WTO accession there were gloomy predictions about the negative impacts on small-scale uncompetitive Chinese farmers. Both officials emphasize the importance of policies implemented to support and protect farmers after WTO accession. Niu said China designed new support policies that reflect Chinese conditions and conform to WTO rules. "We take our commitments seriously," said Niu. The policies include subsidies to farmers, subsidies for improved crop varieties, price supports for commodities, spending on infrastructure, science and technology, marketing infrastructure, and support for agricultural industries.

The authors note that China has opened its market much wider to imports with an average agricultural tariff to 15%. However, they complain about China's domestic industries being under pressure from imports. Niu says Chinese exports are still constrained by many unfair trade barriers in other countries. Cheng complains that China has no power to influence prices, leaving Chinese businesses and farmers vulnerable to big swings in commodity prices.

The officials worry that foreign companies are dominating some industries. Cheng reports that some multinational edible-oil processing evaded restrictions on entry into particular industries. He said some investment projects approved for cotton seed and palm oil processing were subsequently extended to crushing soybeans and rapeseed or edible oil refining activities that had not been approved. In other cases, local officials motivated by "GDP worship" allowed foreign companies to start projects that were not approved by the State Council. According to Cheng, "Some foreign grain merchants use their global supply chain advantage" to undercut prices of medium and small Chinese grain enterprises to grab market share.

Niu said that China intends to open its market a little more. He said China needs to make even better use of "two markets" while avoiding the disadvantages of open markets. Commodities in short supply like soybeans, edible oils, and cotton can be imported--utilizing the resources of foreign countries--with "guidance" and "controls."  Imports of grains which are considered more strategic will be kept small in order to remain mostly self-sufficient. Niu called for China to "fully utilize tariffs and TRQ management,  stronger import management of bulk agricultural commodity imports and building a stronger trade remedy system to reduce pressure on domestic markets from foreign commodities."

Niu calls for absorption of advanced technology, structural adjustment, and improved science and technology dissemination. Niu said farmers will receive more support and protection. The first focus is on infrastructure investments. The amount of subsidies will be increased and the scope widened and subsidy methods will be improved. Niu emphasizes use of loan guarantees, interest subsidies, and "guidance"of private investments in agriculture.

Cheng cited the important role of policies in protecting farmers from adverse impacts of WTO accession, but he worries that the relative profitability of crop production is falling. When asked to identify continuing problems, he emphasized organizational weakness among Chinese officials. He said there is not a coordinated means of responding to international challenges. Responsibilities are officials are not well-defined and there are frequent conflicts among interests of central and local officials. 

Both officials voice a commitment to free trade and progress on the troubled Doha round, but they also complain about the continued prevalence of high subsidies in agriculture among WTO members and hope for a global trade environment that puts developing countries on equal footing with developed countries.

Tuesday, December 6, 2011

Office Palace in "Poverty" County

Economic Times posted a report that Wangjiang, designated as a "poverty county" in southwest Anhui Province, is constructing a palatial office building that reportedly "is bigger than eight American White Houses." An investigation team from the local prefecture, Anding City, said that the building's size does not exceed the standards.  However, the team said the approval is not entirely complete and hinted that problems could be found with the interior decorations or other issues.

These are the kind of shenanigans the central government is trying to crack down on. For example, regulations on cash "awards" for grain-producing counties explicitly forbid spending funds on automobiles, "training centers," and "image-building projects."

Monday, December 5, 2011

Huge Grain Crop

China's National Bureau of Statistics has announced preliminary estimates of this year's huge grain crop. The Bureau says this year's grain production set a new record of 571.2 million metric tons (mmt). The grain output increased by 24.7 mmt, or 4.5%. The Ministry of Agriculture's chief economist brags that this is the eighth consecutive increase in grain production. This hasn't happened in at least 50 years.

The three major cereal grains totaled 510 mmt:

Rice 200.78 mmt, up 5.03 mmt, 2.6%
Wheat production was 117.92 mmt, up 2.74 mmt, 2.4%
Corn 191.75 mmt, up 14.5 mmt, 8.2%. 

There was no mention of soybean production which plummeted this year as farmers shifted to corn and rice.

Grain production is becoming more regionally concentrated. The 13 major grain-producing provinces account for three-fourths of output, but they accounted for 90% of the increase in production this year. Two provinces produced more than 50 mmt: Heilongjiang (55.71 mmt) and Henan (55.43 mmt).
The increases in the northeast were: 
Heilongjiang increased 5.58 mmt or 11.1%, 
Jilin 3.29 mmt, 11.6%, 
Liaoning 2.7 mmt, 15.3%, 
Inner Mongolia 2.29 mmt, 10.6%

Due to weather effects, Guizhou's output fell 2.35 mmt (-21.2%), and Chongqing's fell 2.9 mmt (-2.5%). Summer grain (winter wheat) decreased in Gansu, Ningxia, Xinjiang; early rice fell in Anhui, Hubei, Guangxi; fall-season grain production fell in Guizhou by 2.79 mmt (-29.3%), and in Chongqing by 300,000 mt (-3%), and Shanghai's production decreased.

The National Bureau of Statistics credits three factors for the increase: policy support, improved science and technology, and a shift in planting to high-yielding crops like corn and rice. The four subsidies for farmers totaled 140 billion yuan (up17%) and "awards" to grain and oilseed producing counties totaled 22.5 billion yuan (up 21.6%). Minimum prices for rice and wheat were raised. These measures mobilized the "enthusiasm" of local governments to implement policies, build infrastructure and disseminate technologies.

Most of the increase in production was due to increased yields. Grain yield increased 3.9%, contributing 21.27 mmt,or 85.8%, of the increase. Science and technology played a important role. Key technology measures: improved varieties, soil fertility testing, water-saving irrigation, pest control, corn plastic mulch, new techniques, mechanization. Improved varieties were planted on 95% of area, contributing 35% of increase in grain. According to MOA statistics, the 2011 wheat campaign was carried out on 13.3 million ha; corn plastic mulching on 6 mil ha, up 400,000 ha; specialized pest control on 44 mil ha, up 9.6 mil ha. Drip irrigation for corn increased.

Grain area sown increased to 110.57 mil ha, up 0.6%. Of that summer grain area 27.56 mil ha, up 116,000 ha, early rice down 45,000 ha, fall grain increased 625,000 ha. Increased area accounted for 3.46 mil ha of increase. Some area switched from low-yielding crops like soybeans to high-yielding crops like corn and rice. Corn was planted on 33.43 mil ha, an increase of 930,000 ha (up 2.9%); rice area reached 30 mil ha, up 123,000 ha (up .4%); wheat area was 24.19 mil ha (down .3%), of that winter wheat area was 22.6 mil ha (up 78,000 ha). Structural adjustment contributed 4 mmt or more.

The report says weather was generally favorable. Droughts came at a time when crops were not especially vulnerable. Each locality took measures to avert serious effects of droughts and flooding.

Tuesday, November 29, 2011

Soybean Support Price

Chinese authorities have announced a "provisional" minimum price for purchasing soybeans for government reserves. The price is 2 yuan per jin, or 4000 yuan per metric ton and applies to 3rd-grade domestic soybeans harvested in 2011 and purchased in Inner Mongolia and the three northeastern provinces (Heilongjiang, Jilin and Liaoning).

The China Oils Net explains that the provisional price has been raised each of the last three years. The price set in late 2008 was 3700 yuan per metric ton. According to the China oils net, this price didn't give farmers enough profit so they were not enthusiastic about selling. However, the dim sums blog recalls that the problem in 2008 was that no one wanted to buy Chinese soybeans at support prices since imported soybeans were cheaper.

The provisional support price was raised to 1.87 yuan/jin or 3740 yuan per metric ton beginning November 23, 2009. In 2010 the price was raised to 3800 yuan, but farmers didn't want to sell at that price. The market price was in the 3900-4000 yuan/mt range at that time.

The volume of domestic soybeans coming on the market is down this year since production has fallen. According to reports, the quality of soybeans is down this year. The oil content is only 14% in some areas.

With a limited supply the market price is up, so the support price may not have much effect. Private purchasers are setting prices of 1.98-2.00 yuan/jin, close to the support price.

The China Oils Net thinks the outlook for domestic soybean production next year is not favorable. Profits from soybeans are still not as good as those from competing crops. Moreover, at the current market price, soybeans from Heilongjiang Province do not have a price advantage versus imported soybeans by the time they are transported to coastal regions. Although policies have tried to raise yields and expand plantings on non-GMO soybeans, the China Oils Net writer thinks the market is still tilted in favor of imported soybeans due to their price advantage.

Vegetable Oil Prices Plunge

Commodity prices in China are still subject to the law of gravity. During the first eight months of this year Chinese officials worried about inflation ordered the biggest vegetable oil companies to keep a lid on prices despite strong upward pressure on prices. When the unofficial price controls were lifted in August, prices rose.

Now, just a few months later, vegetable oil prices are falling. The Shandong Commerce News reports that cooking oil prices in supermarkets are falling, some as much as 20 percent.

Mr. Zhao, a shopper in a Jinan supermarket, noticed that cooking oil brands that were rising in price during August and September are now a lot cheaper. Various brands, including Jinlongyu, Hujihua, Longda, and Xiyan, all were running special promotions. The price on a four-liter bottle of Longda peanut oil was cut from 96.8 yuan to 79.9 yuan, a 17% discount.

The reporter found that soybean and corn oils had the biggest price cuts. With the Jan. 1 New Year and the Spring Festival holidays coming up, shoppers were eager to stock up on cheaper oil. Some shoppers were stocking up because they worried that prices might go up again after the holiday period. The display area for soybean oil was mostly cleaned out, with only a few bottles left. A worker in the store said sales were about 30 percent more than before the promotion.

The decline in prices is not just a promotional phenomenon. A wholesaler interviewed by the reporter said falling retail prices reflect a recent decline in wholesale prices. Soybean oil and mixed salad oil have had the biggest declines. The reporter said the declining prices, in turn, reflect declining prices on the international market since about 70% of China's vegetable oil is imported.

Monday, November 28, 2011

Patriotic Cabbage Campaign

The Ministry of Agriculture has issued an emergency notice on addressing the problem of unsellable napa cabbages. The program launches a "patriotic cabbage campaign" that involves twisting arms to make sure surplus cabbages get sold.

This follows the successful "patriotic potato campaign" held in mid-October. Around the time of the National Day holiday (Oct. 1) there was a large volume of potatoes with no buyers in Inner Mongolia, Gansu, and Shaanxi Province. In order to reduce farmers' losses, the Ministries of Agriculture and Commerce called on city people in Beijing, Tianjin, Guangzhou, Nanjing and other big cities to buy potatoes from Inner Mongolia. "Some people began calling this the 'patriotic potato campaign.'"

Following this great success, on November 24 the Ministry of Agriculture issued the new notice calling for measures to help farmers in Shandong and Hebei Provinces sell their unsold cabbages.

The notice calls for each province's agriculture, commerce, development and reform and finance departments to designate potatoes and cabbage as commodities to be held in government reserves and to establish a winter-spring vegetable reserve as soon as possible. Officials are also to encourage "dragon head enterprises" to buy up cabbages, participate in the farmer-direct supermarket purchase program, give government aid for stores selling cabbage at low prices, reduce entry fees, stall rents and warehouse rents in wholesale markets for vendors who sell cabbages, and encourage trading companies to buy up cabbages in producing areas.

According to the Ministry of Agriculture, wholesale markets in northern China are expected to sell 32 million jin of cabbages during the second half of November, up 90% from the first half of the month. This is as a result of the patriotic cabbage campaign.

Sunday, November 27, 2011

Weak Corn Prices

According to Futures Daily, Chinese corn prices have been falling due to pressure from the new harvest, weak demand and worries about the fallout from the European debt crisis. The futures price fell below 2200 yuan per metric ton (about $14.75  $8.75/bu) and is threatening to break through 2100.

This year's record-breaking harvest, estimated at 184.5 million metric tons, has been coming on the market, putting seasonal downward pressure on prices. In northern China good weather encouraged farmers to sell, and the price fell 200-300 yuan/mt to 2160-2380 yuan. In the northeast the corn price is in the 2000-2050 yuan range. As prices start to fall, farmers become more eager to sell. Farmers tend to sell a lot of corn at the end of the year to raise money for the coming holidays.

The market is worried about the effects of the European debt crisis, and whether the crisis will spread outside Europe to the United States.

Demand has been weakened by the government's recent actions to rein in the industrial corn-processing sector. A new VAT regulation was issued for the fuel ethanol industry--instead of exempting fuel ethanol companies from VAT they must pay it first and then get a refund. Stricter environmental controls were announced for starch, sweetener and ethyl alcohol processors, raising their operating costs.

Livestock demand is not particularly robust either. The peak season for pork consumption in southern provinces has not arrived yet. The one bright spot is the poultry industry where prices and profits are still high and producers are stocking up on birds in anticipation of the January 1-Chinese New Year holiday season.

A big  uncertainty is the level of state corn reserves. The article says it is "an indisputable fact" that reserves are low. Restocking of government reserves could add to demand and support prices, but the article says state-owned grain companies are buying "only 500,000 metric tons" compared with 29 million metric tons in 2010.

Saturday, November 26, 2011

Subsidies for Rural Governments

According to a preliminary announcement from China's Ministry of Finance, government spending on rural affairs will exceed 1 trillion yuan ($156 billion) for the first time next year.

Only 140 billion yuan ($22 billion) of the total is for subsidies to farmers. The article says grain subsidies are now 100 yuan per mu (about $38.50 per acre) and it is estimated that costs of inputs (fertilizer, pesticide, plastic sheeting, fuel, etc.) are about 300 yuan. So, the article says, the government pays about one-third of the production cost. (This doesn't include the cost of labor and land.)

This year the rhetoric has shifted from subsidies to farmers to subsidies to local governments and water projects.  Chinese authorities have recognized that local officials also need incentives to implement central government policies. The operative term appearing in the Chinese literature this year is "dual incentives" (两个积极性)for local government officials and for farmers.

This year, nearly all official speeches and articles about grain subsidies include a phrase about subsidies "mobilizing the enthusiasm of local government and farmers" (in that order). This year, "awards" to major grain- and oilseed-producing counties (transfer payments) are to be increased to 22.5 billion yuan ($3.5 billion). On top of this, the central government will take over the province's contribution to "grain risk funds" that finance grain subsidies and policy purchases of grain. The new grain risk fund contribution totals 24.9 billion yuan ($3.9 billion) of central government funds.

An article, "Problems and Countermeasures for Raising Grain ProductionCapacity in Production Areas," published in the Chinese journal Macroeconomics published earlier this year seems to be part of a big propaganda campaign to push the new federalism strategy (causing one to question the value of academic journals in China, but that's another story). The article explains that local governments in rural areas are not inclined to make investments in agriculture since the returns are small and long-term in nature. Instead, they prefer to put money into high-profile factories or urban development projects, which leaves agricultural infrastructure neglected and deteriorating. A more fundamental problem is that rural governments are broke. They have a thin tax base to start with and the elimination of the "agricultural tax" narrowed the tax base even further.

One of the big concerns is that reservoirs and irrigation networks built in the 1950s and '60s have deteriorated and are no longer functional or are even dangerous. This reduces the ability to avert or cope with floods and droughts. Another big problem is the lack of safe drinking water in many rural communities.

The "grain risk fund" is said to be a burden on local governments. Rural governments complain that they are expected to sink funds into money-losing grain-procurement enterprises. In some cases local governments don't have enough funds to pay grain subsidies (half of "grain risk funds" must be used for subsidies to farmers).

The new federalism aims to take funds from rich coastal and urban regions and transfer them to poor rural regions. Presumably, tax funds collected from industrialized regions finance the central government "awards" and grain risk fund contributions.

The new federalism is included as a component of the big Henan development scheme. Perhaps not coincidentally, the author of the article explaining the concept is from a teachers' university in Nanyang, a small city in Henan.

Also as part of the big campaign, the local statistical bureau in Zhoukou, another agricultural region in Henan, also released a report on the topic this month reciting virtually all the same points as the article above but decorated with statistics from Zhoukou. (This article demonstrates that China's statistical system still exists to validate government policies, not to provide objective information). The Zhoukou report complained that cost of production surveys show that farmers still make little profit from planting grain despite subsidies of 80 yuan per mu. It cites weak infrastructure and lack of insurance that led to big losses from natural disasters in recent years. Elimination of the agricultural tax has tightened finances in Zhoukou. In 2003, Zhoukou got 48% of its tax revenue from the agricultural tax (compared with 0.21% in Guangzhou). Zhoukou's grain output is 13% of the province's total, but its financial revenue is only 2% of the provincial total. Its budget is half of the average for prefectures in Henan and only 2% of the average nationwide. The report helpfully recites a list of ideas for funneling more money into regions like Zhoukou.

China's new federalism reflects another interesting and difficult modernization for China. We tend to think of China as a single nation but it is going through a transition similar to that of 19th century Europe. The lack of integration has resulted in huge gaps in wealth and development. China's leaders are trying to mold a vast collection of more or less autonomous city-states into an integrated nation-state. Part of that way is struggling to find ways to funnel the riches from coastal provinces into the poor, broke hinterland.

Interesting that this is happening at the same time Europe is struggling to keep its continent-wide agglomeration together.

A Grand Plan for Henan

In October, the State Council announced a grand scheme for Henan Province that is described as representing China's new model of economic and social development for the whole country.

The Council's "ideas on support for speeding up construction of a central economic region in Henan Province" is an all-encompassing plan for coordinating the development of agriculture, industry, urbanization and even culture. The plan encompasses nearly every aspect of the economy and society, but the plan has a central theme of raising grain production by upgrading irrigation and other rural infrastructure, upgrading technology, agriculture-industry links and breaking down the barriers between the rural and urban economies.

The plan emphasizes Henan Province's role as a major grain-producing region and its importance to national grain security. The plan aims to upgrade grain production capacity and mentions a goal of promoting the region's livestock production and processing industry (but there aren't a lot of details on meat in the plan). The plan includes all the standard buzz words of promoting "scale" production, mechanization, improved crop varieties, organization of farmers into cooperatives, high yields, efficiency, quality, safety, and ecological production. The plan puts a major emphasis on integrating agriculture with other sectors and viewing the Henan plan as radiating out to neighboring regions to boost the entire central China region. The plan includes development of logistics and construction of north-south transportation routes.

The plan does not mention the massive south-north water diversion project, but it may be related. The water diversion project begins south of Henan (in northern Hubei) and runs through Henan to north China. The plan's emphasis on water projects, north-south transportation networks, and reference to an economic region centered on the Yangtze River makes one wonder whether this plan is related to the water diversion project.

The plan is part of the broader national grain security plan for maintaining grain production capacity through 2020. The plan emphasizes "fall grain" (as opposed to wheat--the region's major crop which grows over the winter and is harvested in the summer). By 2020 Henan's grain production capacity is targeted at 65 mmt. Planting of wheat and corn for special uses, quality soybeans and rice will be promoted. The plan aims to add more grain fields that produce 1000 kg. Funds will be budgeted for water projects, to manage low-lying lands subject to flooding and water-logging, repairing dangerous reservoirs, construction of large-medium water irrigation projects, expanding large-scale pumping stations, and increasing ability to withstand droughts and floods.

Another paragraph calls for promoting other types of agriculture: livestock, horticultural crops, fruit and flowers. Four prefectures in Henan are designated as national-level model modern agriculture districts, and two others are to be "scientific agriculture areas."

Following this year's standard rhetoric the plan calls for increased spending on subsidies both for farmers and for local governments. It promises to arrange deals for purchasing grain between consuming and producing regions, improve agricultural insurance and set up pilot projects for improving rural financial services.
The plan also has a nationalist element. It emphasizes the historical culture of the Henan region (the capital of ancient dynasties were based there) and makes an appeal to Chinese nationalism. The plan describes Henan as a new region for Chinese history and culture that utilizes the resources and strengthens the cohesion of the Chinese people worldwide by creating an innovative cultural development district.

The plan invokes a new slogan of "three huas" (三化) that is even harder to translate than the "san nong" or "three rurals" or "three agricultures" that became an official slogan a decade ago (and is also invoked in the plan). ("Hua" refers to the Chinese practice of adding the suffix "hua" (化) to a word to make into a new word that denotes a process. One klunky approach would be to translate "three huas" as "three -zations": industrialization (gongye-hua), urbanization (chengzhen-hua), and agricultural modernization (nongye xiandai-hua). The basic idea is to "coordinate" these three related processes that are at the heart of the transformation of the Chinese economy and society in the current era. The 12th five-year plan that begins this year seems to be viewed as a the entrance into this new era. The "three huas" entail "flexible" policy measures, the orderly resettlement of rural population, tight control over land conversion, more efficient and intensive use of land, and reform of administrative management.

This plan raises the question of the role of government in resource allocation. Nearly everything in China can be bought and sold freely, but the key factors of production--land and capital--are are still allocated by the state. Land is owned by the state or by collectives and can't be bought or sold without officials acting as brokers or middlemen. Interest rates are fixed and bank executives receive lending orders from the communist party. While labor is allocated by market forces, the household registration system constrains rural-urban migration. Thus, the government still has a major say in allocation of the major factors of production and views itself as filling a vital role as coordinator and facilitator.

Tuesday, November 22, 2011

Chinese Feed Mogul on Benefits of WTO

Liu Yonghao, the chairman of New Hope Group--China's largest feed company--was interviewed by 21st Century about how his company has benefited from China's WTO accession 10 years ago. Liu said New Hope was one of the biggest beneficiaries, citing WTO for providing his company with a stable channel for importing raw materials.

New Hope's home base in Sichuan, the largest hog-producing province. Liu says the biggest challenge in producing feed is sourcing raw materials. In the early days, feed mills had to set up importing channels in Shenzhen to procure amino acids and vitamins that were not available domestically. When the government monopolized grain they had to collect ration tickets and devise other arrangements with farmers to get grain they could process into feed. 

He recalls traveling all over the country during the 1980s trying to convince grain warehouses and oil-crushing mills to sell him corn and soymeal. As a Sichuan native, he spent much of his time in the northeastern provinces buying grain. During Chinese New Year holiday, the hotels closed down but he was still trying to find grain to buy. At that time it was hard to get grain, the prices fluctuated and were not in line with international prices.

Before WTO accession, plant-based protein was imported but was scarce. After WTO accession, imports of soybeans boomed. Last year, China's soybean imports were over 50 mmt. Liu says his company uses 3-to-4 million metric tons (mmt) of soybeans to make 15 mmt of feed. Imported soybeans are crushed to make vegetable oil and soy meal for feed--most of the value of those beans is for feed.

Turning to the topic of foreign investment, Liu recalls that multinational companies like CP, Willmar, and Purina were dominant in the China market during the early years after "reform and opening." Now New Hope is one of the leading feed companies, selling 15 mmt annually.

Liu observes that China is the world's largest meat, egg, and dairy country. Since entering WTO, the manufacturing sector has grown rapidly, urbanization has increased, many small-scale "back yard" farmers have quit farming to work elsewhere, and consumption of meat, eggs, and milk rose. Liu said his company became a world-class company by the fourth year after WTO accession.

Liu says his company is growing by integrating from feed milling into the entire industry chain: breeding, livestock production, slaughter and processing. New Hope has set up a livestock technical services company, a loan guarantee company, and farmer cooperatives. The company sees itself as an intermediary with the "government above," "farmers below," a domestic "dragon head" company and a multinational company overseas.

The 21st Century interviewer asked Liu about his company's earlier plan to import feed and export meat products after WTO accession. Liu responded that China doesn't have enough meat products and does export any. Instead New Hope company is investing overseas. Liu asks rhetorically, "Foreign companies have invested in China, so why can't we invest overseas?"

New Hope looked into investing in mature markets like the U.S., Europe, Japan and South Korea, but felt they didn't have any advantage there since big multinationals dominate these markets. New Hope is now focusing on Southeast Asian countries like Vietnam, Cambodia and the Philippines. CP, the Thai company, is the leading feed miller in these countries, but New Hope has experience going up against them in China. New Hope operates a dozen mills in Southeast Asia: five in Vietnam, four in the Philippines, one in Cambodia, two in Indonesia.

The company's main overseas market is Vietnam. CP and Willmar have mills there, but Liu describes the feed industry in Vietnam as very weak.

In Vietnam, Liu says, they have to offer steep discounts to get livestock producers to buy their feed. The Vietnamese tell them all other Chinese products like motorcycles and apparel are sold at a fraction of the price of Japanese, American or European products, so they New Hope has to sell its feed at half-price in Vietnam.

Liu says Chinese exports and the quality of exported goods has improved since WTO accession. In Vietnam, the discount on Chinese goods is narrowing. It used to be 50%, but Chinese goods now sell for 70%-80% of the price of other goods.

The company hopes that after using their feed several years customers will gain confidence in their quality. Liu says New Hope is now one of the top three feed products in Vietnam. He says their after-tax earnings in Vietnam were 100 million yuan last year.

New Hope has plans to expand in Sri Lanka, Egypt and South Africa. They have ten plants under construction overseas. New Hope recently set up an overseas investment company in Singapore and plans to double foreign investment every year.

Monday, November 21, 2011

Resettling Dairy Cows

Chinese officials in a far-flung outpost of Inner Mongolia have initiated a plan to entice cow-herders to move their cattle into new dairy-farming communities. This seems to be another expression of Chinese officialdom's vision of creating a "modern" agriculture that adapts the industrialized concentrated western model to a crowded Chinese countryside.

This year officials in Inner Mongolia’s Hulunber Banner, Old Barag Town plan are planning a dairy cattle resettlement project. The plan for building demonstration "dairy communities" (奶牛养殖示范小区) was formulated in 2010 with planned investment of 76.6 million yuan (about $12 million). An initial set of five barns with related equipment with capacity to hold 500 cattle were constructed in June. Eleven barns, each holding 100 cows, are scheduled to be completed by the end of November.

Herders who move their cattle into the communities this year will be given free housing, free water and electricity and cattle bedding as inducements and a worker will be available to feed the cattle and maintain the equipment. The milk price will be kept slightly higher than the market price.

Sunday, November 13, 2011

China's Nongrain Ethanol Push

China's "Renewable Energy Plan" for the 12th five-year plan period aims to increase ethanol production by 1.2 million metric tons (mmt) to reach 3 mmt by 2015. The propaganda coming out now indicates a push to meet that goal by stepping up non-grain ethanol production.

An article from the "industry research net" posted on several websites several days ago pronounces that it's already clear that China must "take the nongrain ethanol road." The article cited remarks by Premier Wen Jiabao at last month's China-Southeast Asia exposition which attributed recent rises in corn and wheat prices to international market influences but nevertheless called for control of corn-based processing. That presumably includes ethanol. The article then cites a foreign scientist who extols the advantages of non-grain biofuels and lists vague "breakthroughs" made recently in the four grain-based ethanol plants authorized in 2004. The Jilin Ethanol Co. has launched an ethanol project using sweet sorghum stalks which has apparently yielded promising results from experimental trials. The ethanol companies in Anhui and Henan are also said to be making progress in making ethanol from crop stalks.

Not mentioned are the joint venture sweet sorghum project that collapsed several years ago, nor the regular reports from Henan that farmers persist in illegally burning wheat and corn stalks in the fields because it is too troublesome and time-consuming to collect them.

Another news reports says the Ministry of Environmental Protection is completing the environmental assessment of a new fuel ethanol plant that will be built by PetroChina at Danshan, an island in Zhejiang Province. This project was approved by the State Council in July, and is part of a massive industrial and logistics project planned for the islands off the coast of Zhejiang Province.

The Danshan ethanol plant will cost over 3.2 billion yuan (about $500 million). It will produce 300,000 mt of ethanol--one-fourth of the planned increase in ethanol production--from imported cassava chips. By my calculation this would take nearly 1 mmt of cassava imports. Currently imports exceed 3 mmt. About 80% of China's cassava imports come from Thailand and other sources are Vietnam and Indonesia. According to the Chinese Academy of Agricultural Sciences experts consulted by the reporter, cassava is the most economic raw material for producing ethanol.

Grain-based ethanol projects came in for criticism in recent years as grain prices increased. In an interview last year Cheng Guoqiang, a policy advisor from the State Council's Development Research Center, argued that "cars eating grain" is not in accord with China's national conditions.

Ethanol production requires large subsidies. In the 2010 interview, Cheng said the subsidy was 1375 yuan per ton of ethanol and a total of 1.35 billion yuan in subsidies are paid to four ethanol producers. Ethanol producers are also exempt from taxes.

Another article from 2010 reported that the subsidy was originally set at 1880 yuan/mt in 2004. The Anhui plant's subsidy had been cut 20% from 2055 yuan/mt in 2009 to 1659 yuan/mt last year and was expected to be cut again this year. This article estimated that the corn used to produce one ton of ethanol cost 6275 yuan and the total cost of production was 8000-9000 yuan. The writer pointed out that this amount of money could buy two tons of oil. He estimated that the Anhui plant received 163 million yuan in subsidies to produce 410,000 mt of ethanol.

The article noted that the State Council had announced in 2007 that no more grain-based ethanol project would be approved. However, many are eager to build such projects given the high subsidies available.

Chinese corn prices have risen about 20% since last year, so the cost has continued to escalate, making grain-based ethanol even less cost-efficient. This may explain the urgency attached to non-grain ethanol.

Thursday, November 10, 2011

Hog Prices Declining: Why?

Chinese pork prices have been at record-high levels this year, but now they've started to fall. The Ministry of Commerce price-monitoring system reported that retail pork prices fell seven weeks in a row beginning in mid-September. By the first week of November, the average pork price had fallen 5.4%.

A reporter for Southern Rural News investigated the reasons for falling pork prices by interviewing farmers, feed producers and others in the hog industry. There is no clear reason for the decline, and, as usual, it's a complicated story.

The reporter said there is lots of talk of disease problems, but he found that mortality rates are not higher than normal and disease outbreaks are too limited to cause a national decline in prices. At best, he says, disease is the catalyst setting off price declines, not the fundamental cause.

The supply of piglets was exceedingly tight earlier in the year. The main reason was an outbreak of diarrhea that affected piglets. It began last December and continued through March, spreading from north China to the south. The barns on some farms had nearly 100% mortality, with new-born piglets affected the most. Many sows aborted or had stillborn piglets.

According to the reporter's assessment, once the diarrhea threat was over, pork prices were exceedingly high and farmers were eager to expand production. Large number of sows farrowed at the same time. Then, last summer disease problems were unusually rare and survival of the big crop of pigs born in the spring was unusually high. Consequently, large numbers of pigs came on the market in September. This large supply drove prices down.

However, the reporter said people in the feed industry disagreed with his assessment. The feed people said their sales of hog feed had been slow in recent months, contradicting the theory of swelling hog inventories.

The reporter then warns that a "panic selling" explanation cannot be discounted. As hog producers see prices start to fall, they sell hogs as fast as possible to avoid getting caught by further decreases in prices in future weeks and months.

The Ministry of Commerce data shows that most food prices have stopped rising and some others are falling. Vegetable prices fell 11.3% over four weeks. Eggs, fish, flour, and soy oil are down, while rice and peanut oil and rapeseed oil prices are steady.

Whatever the cause, the reporter observes that risk for hog producers has increased.

Sunday, November 6, 2011

China as Pork Importer: The New Normal?

China's imports of pork have surged during the last few months, prompted by high domestic prices. China’s imports of pork and related products during January-September reached 870,000 mt, an increase of 44.6% from last year. Is China at a tipping point where it becomes a permanent pork importer?

An article last week in the Southern Daily reported the views of some industry analysts who are grappling with fundamental changes in China's pork industry. Some say imports of "foreign pork" could be a normal occurrence in coming years.

The consensus among analysts is that high prices reflect a shortage of pork in China, and "that shortage is very big," according to one prominent pork analyst, Feng Yuhui.

Analysts have observed that China's pork imports tend to surge during periods of high domestic prices. Imports spiked during 2008, the last time prices were at record-high levels, and fell off during 2010 when Chinese prices were low.

Analysts say this cycle may be different from the last one. This time, large numbers of small-scale "backyard" farmers have chosen to quit the industry in large numbers. There are multiple reasons cited. Although pork prices are high, feed costs are escalating, cutting into profits. Farmers are scared off by the risk posed by disease outbreaks. Moreover, the analysts cite the large number of other opportunities--farmers can find other jobs or business opportunities, so they are quitting hog production.

Meanwhile, large-scale hog production is increasing, but not fast enough to offset the loss of "backyard" producers. This time around Chinese hog producers are "more rational" and are not expanding as vigorously as they did in 2008. Feng Yuhui--the analyst--says that the still-short supply of sows is reflected in very high prices of young feeder pigs.

Wang reports that world pork trade now totals about 6 mmt. However, it would not be hard, he says, to expand trade to 8 mmt since farms in the U.S. and other countries have capacity to expand output.

Feng observes that U.S. hog producers have a cost advantage because the Chinese farms have to import expensive corn and soybeans. He estimates the U.S. cost advantage to be 1.5 yuan per jin (about 21 U.S. cents/lb).

China's pork imports come predominantly from the United States, but the article reports that a parade of merchants are coming to China looking for pork business. A Southern Rural News article reports that a Mexican delegation recently came to Beijing to meet with government groups on pork trade cooperation and China recently approved Mexican pork for import. Another delegation from Finland recently signed a protocol on pork quarantine and veterinary health.

Another analyst, Wang Xiaoyue, notes that large companies like COFCO and New Hope Group are entering the hog-production sector in a big way, but it will take some time for their new capacity to come on-line. In the meantime, he thinks China will have a pork supply deficit of 1-to-2 million metric tons annually until 2015 and imports of "foreign pork" to fill the deficit will be normal. However, these imports are not that big in the context of China's 50-million-metric-tons of annual pork consumption.
And he implies that after 2015 expansion by big Chinese companies will return the market to self-sufficiency.

An Academy of Social Sciences researcher, Li Guoyang, quoted in the Southern Rural News article notes the interchangeability of feed and meat imports. He thinks pork production could push China to import 10-to-20 mmt of corn, an eventuality that would threaten China's "grain security." Why not instead import that grain in the form of pork? He observes that importing pork would be less "sensitive" than importing large amounts of grain. With peoples' incomes and living standards rising, elasticity of demand decreasing, and pressure from rising costs and disease, he suggests that importing pork is important.

Friday, November 4, 2011

Officials Infected with Brucellosis

According to the China Youth Daily, as many as 100 animal quarantine personnel in a county of Inner Mongolia were infected with brucellosis, a serious disease that can be transmitted from animals to humans.

The incident occurred about six months ago during a campaign to test sheep for the disease. Animal quarantine personnel were drawing blood from hundreds of sheep all day long, using only rudimentary tools and no protective clothing. The workers said they were issued one pair of gloves and mask per day and they had to keep using the same ones if the gloves broke while drawing blood.

In April, quite a few of the personnel began experiencing pain in their backs and legs and joint discomfort, dizziness and other symptoms. The county animal husbandry bureau confirmed through testing that several persons were infected with brucellosis.

The China Youth Daily asked the head of the local animal husbandry bureau whether the multiple cases of brucellosis among workers were related to the testing work carried out in the spring.

The director replied, "I don't know and I don't know whether any other people know."

The reporter pressed on, "Is there any other spokesman on the disease prevention activities?"

The director, "Well, there's only me and I can't talk to you about it. This is confidential (机密)."

The reporter: "So did blood testing on sheep take place this spring?"

The director: "Whether it did not not doesn't matter. The point is it's confidential."

The reporter then went to the county center for disease control and asked, "In April and May were there a number of people infected with brucellosis? Were they animal quarantine workers?"

The disease control worker replied without reservation, "Ai-ya! Quite a few, a hundred in all."

The brucellosis-testing campaign is in response to a spike in cases of the disease centered in Inner Mongolia. According to the Minister of Health, Inner Mongolia reported 16,551 cases of brucellosis in 2009, 46% of all cases nationwide.

According to a center for disease control expert, "During the 1950s and '60s, there were serious outbreaks of human infections with brucellosis, but it was mostly wiped out in the 1980s and 90s. However, since the 1990s it has returned and is now one of the fastest-growing reported infectious diseases among humans."

In 2006, an investigation by the Ministries of Health and Agriculture carried out in parts of Liaoning, Jilin, Heilongjiang, and Inner Mongolia found that the disease is found in a widening area that covers northeastern, northwestern, and north China, with the number of infections increasing.

One of the workers involved in the sheep testing said brucellosis is a new concern in the last couple of years. He said, "In the past we just watched for foot and mouth disease. Just in the past few years we started giving injections to sheep and this year is the first time we've drawn blood to test for brucellosis. This time disease prevention work has become a lot more risky."

There were 219 reported cases of brucellosis in 1992 and the reporter found 33,772 were reported in 2010. During June, two workers testing animals in a slaughterhouse in Ningbo, Zhejiang Province--far from Inner Mongolia--were also infected with brucellosis. The Beijing Youth Daily reported in September that students and faculty at Northeastern Agricultural University were infected with brucellosis.

In April 2009, the disease control center in Shijiazhuang City warned people that they should avoid eating roast mutton at small street stalls during the summer months due to the risk of brucellosis or other infections.

A professor Wu at China Agriculture University describes the brucellosis situation as "serious." In some cases it has been caught by drinking unboiled water, pasteurized milk, and sheep meat.

Low Sow Productivity: Don't Skimp on Vaccines

A speech given at a veterinary conference in August zeroes in on a key constraint to productivity in China's hog industry: Chinese sows don't produce enough piglets.

According to the speaker U.S. sows produce an average of 24.35 pigs per year, far higher than the average of about 15 for Chinese sows. In Denmark the average is over 27. The key to improving productivity and reducing costs is to increase the number of pigs per sow.

The speaker observes that U.S. farms have high costs of facilities and labor that they have to spread over larger numbers of pigs to bring down unit costs. The breakeven number of pigs per sow for U.S. farms, he says, is 19. He reports that two big American companies increased the number of finished hogs produced while cutting back on the number of sows.

According to the speaker, the breeds and feeds (corn-soy meal) are similar in the U.S. and China, so why should Chinese sows be less productive? He says the big problem is weaker disease control and prevention in China. Diseases have the most effect on sows and young pigs. He says most Chinese sows produce no more than 15 pigs a year since their reproduction is affected by blue ear disease, circovirus, pseudorabies, classical swine fever, sow’s reproduction. Sows can be in production less than 4 years, and culling rates are relatively high, raising the cost of producing meat animals. Loss of gilts makes it hard to re-stock sow inventories.

He says that most U.S. farms reduced their mortality rates by 40% or more by using a new circovirus vaccine. However, he says few Chinese farmers vaccinate against circovirus because they don't want to pay for the vaccine. He points out that the vaccine is cost-effective: the extra income from reducing mortality by 3 pigs per litter would more than offset the expense of vaccine and the extra income would be substantial spread over a 1000-sow operation, each producing 2 litters per year.