Dissecting 2011 Income Statistics

The National Bureau of Statistics reported that rural household income rose faster than urban income in percentage terms during 2011. However, rural Chinese people remain poor in absolute and relative terms. Agriculture is now a minor source of income for rural households. "Rural" is no longer synonymous with "agriculture."

The statistics are based on NBS's household surveys: 74,000 rural households and 66,000 urban households who fill out records of income and expenses over the course of the year. The average per capita rural household income was 6977 yuan in 2011, about $1090 per person per year or $3 per day. The average income was up 17.9% in nominal terms and 11.4% in real terms after deducting inflation. The increase was .5 percentage points faster than in 2010.

Average (blue) and median (yellow) household income for rural (left) and urban (right) households in 2011.

Urban household disposable income, meanwhile, averaged 21,810 yuan ($3,400) per person. This is still over 3 times the average rural income. Urban income was up 14% in nominal terms and 8.4% in real terms. Salary income was up 12% (attributed to increases in minimum wages in many places), but business income was up 29%--attributed to a good business environment and a cut in taxes for private businesses. Financial income was up 24.7%, due to rapid increases in rental income.

The rural population is slowly being transformed from "farmers" to "workers." Rural income from salaries and wages averaged 2967 yuan ($464) per person and was up 21.9%. Wages contributed 42.5% of rural income (up 1.4 percentage points from 2010) and accounted for half of the growth in rural income.

Rural net income from agriculture averaged 2520 yuan ($394) per person. This accounted for 36 percent of rural income--less than the 42.5% from wages. Of the agricultural income, 1897 yuan came from crops and 463 yuan came from livestock. Net income from growing crops was up 10%--60% of the increase was due to higher crop prices and 40% was due to increased volume of sales. Livestock income was up, primarily due to higher prices, after two years of declines. The report noted that farmers who grew cotton and potatoes had low income or even losses due to declining prices for their crops.

An interesting comparison is this: the increase in average urban household income (2700 yuan) last year was equivalent to 39% of rural income and was more than rural households earned from farming (2520 yuan).

Rural income from operating manufacturing and service businesses averaged 702 yuan per person. Service business income was up 21.4% but manufacturing income was up a less robust 5.8%.
As the share of income derived from agriculture falls, Chinese officials worry that their peasant class are losing interest in farming. Solution: give them stipends from old-age pensions and land rent and warehouse them in apartment blocks. Turn the fields over to companies and big professional farmers.


Unearned income from transfers and financial revenue is emerging as an important source, but it's still small for rural people. Rural households got 11% of income from transfers and financial payments; the report trumpets the increase in income from the new rural old-age pension scheme. But urban households got 26% of their income from these "unearned" sources. The small share of income from financial sources (3%) reflects China's low interest rates and aversion of companies to paying dividends.

Rural household income sources for 2011: salaries 42.5%; household businesses 46.2%; transfers 8.1%; financial income 3.3%.

Urban household income sources: salaries 64.5%; business 9.2%; transfers 23.8%; financial income 2.7%.

ADBC Props Up Cotton Market

Chinese policy officials purchased huge volumes of cotton for reserves and subsidized loans for private purchases to support cotton prices during 2011.

 A January 16 article explained that the ADBC--the government's policy bank for subsidizing commodity procurement--stepped up its purchases in the face of a decline in private funds for cotton purchase and downward pressure on cotton prices.

As of the end of December 2011, ADBC had issued 66.2 billion yuan (over $10 billion) in loans that supported cotton purchases of 65.39 million dan (3.27 mmt). Both amounts were up more than 75% from the previous year. Subsidized loans from the Agricultural Development Bank of China (ADBC) financed 73% of China's cotton purchases in 2011.

Most of the purchases were made in Xinjiang, the largest cotton-producing region which is about 2000 miles from most of the textile industry in eastern China. Xinjiang's subsidized cotton-purchase loans totaled 48.6 billion yuan, supporting purchase of 47.04 million dan (2.3 mmt). The Xinjiang loans doubled from the year before.

ADBC also made loans of 28.5 billion yuan (about $4.45 billion) to support purchases of 2.17 mmt of cotton for government reserves, "promoting cotton market price stability."

Another article reported that reserve purchases of cotton totaled 918,000 mt during November and 1.133 mmt during December. Most of the December reserve purchases (685,000) were made in Xinjiang. This article says Xinjiang accounted for 1.4 mmt of the 2.17 mmt purchases for reserves during 2011.

Another article on the cotton market explains that domestic cotton is being sucked into reserves and is replaced by imported cotton. Imported cotton totaled 790,000 mt in December (a high for that year). The cotton purchased for reserves is relatively high in quality, leaving only poor quality domestic cotton available for purchasers. Imported cotton has a price and quality advantage, so enterprises are eager to buy imported cotton, especially those that need high quality cotton. 

The article explains that textile export growth was slowed by economic troubles in Europe and America in the second half of 2011. Textile exports grew only 22% during 2011, and apparel exports grew only 19%. How long can you plan on your exports growing 25-30% per year?

Barriers to Investment in Agriculture

An article posted on a feed industry web site discusses barriers to capital moving into agricultural production in China. The article notes that China needs better control over the source of raw materials for the food supply chain--milk without melamine, pork without toxic additives, and rice without heavy metals. To gain more assurance of the quality and safety of foods, modernization, commercial-scale production, and traceability are needed, and these need capital investment.

There is lots of money sloshing around in China looking for a place to invest, but relatively little is going into agricultural production. In particular, the article notes the barriers constraining "upstream" investments of feed companies in raising pigs and other animals.

The article says that banks are hesitant to lend for projects involving "assets that wear fur": livestock and poultry production. While farms are said to be potential "gold mines," they are also fraught with risk. Companies could have their investments wiped out or be stuck with legal liabilities as a result of weather disasters, disease epidemics or food safety incidents. These risks constrain company investment in agriculture.

Wan Long, the chairman of Shuanghui--one of China's largest meat companies--gives several reasons for lack of upstream investment.

One barrier to investment is the lack of land. Livestock farms need a lot of land which is very hard to come by. Second, companies fear being held responsible for disease outbreaks.

Third is the high cost of pollution control. Wan says small farmers scattered over the landscape can dispose of their pig manure randomly and no one notice, but a big company farm has to invest in treatment facilities. Shuanghui built a massive 200,000-head hog farm in Henan's Ye County which entailed a 50-million-yuan investment in manure treatment. This adds 10 million yuan to the cost of raising 10,000 head of hogs, a cost few companies can bear.

A fourth reason cited by Wan is the fierce competition. There are millions of small and medium farms and the  fierce competition drives profit margins down. Outsiders are hesitant to invest in an industry with thin margins and insiders (farmers) don't have money to invest, so investment stays low.

Wan's fifth problem is lack of policy support. He says it's hard to get financing and subsidies are hard to implement. He observes that authorities in Hong Kong are giving compensation of 20-30 yuan per bird to cull poultry in order to control avian influenza. In China, he says, compensation is low or not distributed, so farmers don't cull sick animals and it's hard to control the spread of disease.

The article says Wan's company, Shuanghui, pledged to build a 500,000-head farm for each new 2-million-head slaughter/processing facility [this followed the company's implication in use of toxic feed additives last March]. However, the article acknowledges the impossibility of building enough farms to supply a company of this size--annual sales of 50 billion yuan. Supplying all of its own hogs would be "too much to eat."

Even Wen's Group, the "big brother" of the pork industry, can't build its own farms. Wen's Group claims to slaughter 6.8 million hogs, but those hogs are actually raised by farmers who supply the company. The article calculates that an investment of 6.8 billion yuan (over $1 billion) in manure treatment facilities would be needed for Wen's hogs, based on Shuanghui's reported expenditure in Ye County above.

Thus, the pattern for the forseeable future is for big companies to rely on individual farmers to make their own investments in farms. Wen's group has a contracting model in which the company supplies piglets, feed and veterinary drugs and advice to farmers who supply the company.

A County's Big Plans for Pigs

A county in Heilongjiang Province recently published a lengthy description of its economic development plan based on pigs which opens a window on the quiet--but big--transformation of China's pork industry. It also reveals some of the organizational strategies common in China: a merger of communist party officials, big companies, farmer cooperatives, and dreams of organic riches from "green" food.

Bayan pigs

Bayan County is one of the leading grain-producing counties in China. But officials there are looking to change its status as a county of "farmers rich, financially-poor" by developing the pork industry in a big way. With its abundant grain supplies, officials want to turn the county into a "hog-grain capital" that produces a nationally-known brand of pork. The county's hog production grew from 400,000 head annually in 2002 to 3.2 million in 2011.

The county's strategy involves elaborate coordination by officials that involves rural credit cooperatives (to provide loans), a county insurance company (for hog insurance), village disease prevention teams, breeding farms, farmer cooperative unions, processing companies, research institutes and colleges.

The article describes several women who run pig farms. (Many articles feature ladies raising pigs; it seems to reflect a national strategy to encourage women to get into the pig business.) One lady graduated from Northeast Agricultural University and returned to her village to raise pigs instead of going to the city. Another lady, daughter of a prominent hog farmer, got 27,000 yuan in gifts at her wedding which she invested it building a pig barn; she now raises about 200 pigs while her husband works in town managing the highway.

Officials recognized that farmers needed an outlet for their pigs, so in 2005 they made pilgrimages to Shandong,  Sichuan and other places to try to lure a meat company to Bayan County. After seeing their "beneficial policies, sincere feelings and solemn commitment," several companies have set up shop in Bayan. Jinluo and Yurun, two of the largest meat companies, have made commitments to build processing plants. Jinluo's plant has a capacity of 1.5 million head and one of the six projects planned by Yurun has a capacity of 1.8 million. These two combined have a capacity that exceeds the county's current hog output.

Pork processing in Bayan

New company-operated breeding farms are being set up and a new feed mill is scheduled to open in March.

Bayan's hog industry includes a combination of big industrial operations and small farmers united in cooperatives. Bayan County has nine farms raising 10,000 or more hogs and many others raising thousands of hogs annually but it also has 32,000 farmers raising 50 or fewer hogs.

Cooperatives are another emphasis of the Bayan strategy. Traditionally, each farmer operated independently, using his/her own breeds, management, feed, etc. and when they sold pigs they were at the mercy of brokers and slaughterhouses who set the price. The cooperative strategy aims to unite farmers so they can jointly purchase the same breeds of piglets, feed, and veterinary drugs and get training and services. They are supposed to use their negotiating power to get better selling prices for their finished hogs from the slaughterhouse.

A farmer named Zeng says that he struck a deal to supply pork to a market in Harbin City in 2006, but he couldn't produce enough hogs to meet his commitment. He ended up getting 75 farmers together to start a cooperative connected with a breeding farm. An official says there were only two hog-raising cooperatives in 2006, but they now have 34 cooperatives with 100 members or more.

These cooperatives are still relatively small. Another strategy is to link up small cooperatives in cooperative unions that are big enough to set up their own brands of pork. This reflects another strategy (apparently borrowed from the Europeans) of brands based on geographic location. The county is trying to establish a trademarked "Bayan pork" brand to sell nationwide.

Another facet of the strategy is to produce "green" pork in order to earn a higher profit. "Green" pork standards call for raising pigs without antibiotics, hormones, "lean meat powders", dyes or other additives, and using "green" feed (not explained, but probably limited pesticide use and soil and water free of toxins like heavy metals). Farmers use a bed with a wooden frame (in contrast to the usual concrete pens) that keeps pigs dry and keeps them from developing sores. Their housing is kept at a constant temperature. In the summer the windows are covered with a curtain and fans are run to keep the barn ventilated.

In a pilot program last year two cooperatives produced 60,000 pigs under the "green" standard. They plan to produce 1 million this year, 3.8 million by 2015 and 5 million by 2020.

Officials emphasize that farmers can earn big profits selling premium-priced "green" pigs. What they may not have counted on is that the premiums may shrink and disappear as they flood the market with "green" pigs. Moreover, the usual pattern is that a successful premium-priced product draws imitators out of the woodwork. Their fakes then undermine consumer confidence in anything labeled "green Bayan pork" and the price premium disappears.

Good luck, Bayan. Maybe you'll succeed where dozens of other counties have failed with similar plans.

Cheap pork for new year

A number of localities in China have been publicizing government sales of pork from reserves ahead of the Chinese new year celebration. However, in Guangxi Province price controls have limited the supply.

Hebei Province says they have sold 1,370,000 kg of subsidized pork. Shijiazhuang, the capital city, said they were selling 200,000 kg, Hengshui 150,000 kg, and other cities 100,000 kg.

"benefit the people subsidized sale point" in a Shijiazhuang supermarket

The sales in Shijiazhuang were scheduled to take place from January 13 to 17, 40,000 kg per day. The subsidized pork was sold at a 1-yuan per kg less than other pork. Sales took place at four outlets of the Beiguo  supermarket chain and six Carrefour stores in Shijiazhuang.

In Xi'an City, authorities claim to have 3 million kg of pork reserves stored up, as well as 1 million kg of sugar, and 15 million kg of winter and spring vegetables (and 92,000 metric tons of petroleum products) in city reserves.

Why can't the private sector manage supplies to meet the peak demand that happens every year at this time?

An article from Nanning, the capital of Guangxi Province, indicates that price controls instituted last year may have discouraged suppliers from offering enough pork to meet demand in that province. A Mr. Yan went to the market at 10 am to stock up on pork belly meat ahead of the spring festival and found nearly all the 100+ vendors said they were out of pork. When he found several vendors with pork, they all said it had already been ordered by someone else.

A reporter went to the Guangxi market in the morning to investigate and saw none of the vendors had pork for sale at 10:30. But when he went back at 11:10 all the vendors had pork for sale. The reporter learned that the government set a maximum price for pork in the market, and during the peak demand period before the Chinese new year holiday supplies fall short of demand. When asked why pork suddenly appeared on the counters after 11:00, a vendor explained that the government inspectors left by 11:00. After 11, the vendors bring out their pork and sell it at about 20% above the government's published price. When the reporter asked in the market's administrative office, an official said, "The price matter is a government thing; our responsibility is to make sure the market is orderly."

Maximum prices for pork set in a Nanning market. The maximum price for pork belly is set at 11 yuan but vendors sold at 14-15 yuan after government inspectors left the market.

Another article from Nanning explains that Guangxi instituted price control measures on pork last August. Each resident is entitled to buy 1 kg of pork daily at a ceiling price set by the government. Vendors can get a subsidy of 2 yuan per kg sold, up to 150 kg per day (about 2 pigs). Sales above the 150-kg quota are supposed to also be made at the government-set price but with no subsidy. Inspectors are supposed to visit markets one a week at varying times to check receipts. They have caught some vendors selling above the price, mostly to restaurants and food stalls. Three vendors have had their licenses revoked.

Price inspectors at a market in Nanning

The manager of one slaughterhouse in Nanning said he slaughters 800-900 hogs daily around the new year period, about 20% more than usual. Another slaughterhouse manager said the price normally goes up quite a bit before the new year holiday and there's no problem. However, this year is different, he says, because of the city's price controls--the price is fixed at 21.6 yuan per kg. He said the ex-factory price went down from 27 yuan per kg to 21 yuan when the price controls were put in place last August. Their slaughterhouse took a day off at the beginning of the month but they're back to normal operations now.

Mycotoxins: Feed Hazard

Mycotoxins--toxic substances secreted by mold--are the latest food safety concern hitting the news this month in China. Last month, aflatoxin was discovered in milk products manufactured (but not sold) by one of China's largest dairy companies. Earlier this month aflatoxin was found in peanut oil recalled by authorities in Guangdong Province. These incidents are just the tip of the iceberg of a much broader problem with mycotoxins in China. The discovery of aflatoxin in consumer products and the adjective "cancer-causing" got peoples' attention even though no one was actually harmed.

Mycotoxins in moldy grain are a much broader problem that sometimes kills livestock but more often makes them less productive and less resistant to disease. Mycotoxins have been a major concern for the animal feed and livestock industries in China for some time.

In 2009, feed millers in Guangdong Province attended a meeting to hear about a Shanghai company's mycotoxin detection equipment. The article on the meeting said that 100% of corn has mycotoxins in it and at least 90% of compound feed contains them. At the meeting it was reported that feed mills had to compensate farmers for 10 million ducks that died from aspergillus in feed. During a period of high hog prices in 2004, mycotoxin poisoning caused many sows to abort or deliver dead pigs. During 2006-07 there was widespread swine fever (and a big spike in hog prices) that some experts in China link to mycotoxin poisoning. Testing cited by the article said contamination was especially higher in brewers' grains (DDGS) which concentrate the toxins in the residue left after distilling alcohol from corn.

A 2010 article from veterinarians at Sichuan Agricultural University, "Fully Recognize The Danger of Feed Mycotoxins," describes mycotoxins as a worldwide public safety issue. The Sichuan scientists say there is mycotoxin contamination at every stage of the food chain from farm to table and its seriousness should attract our full attention. The Sichuan veterinarians say there are multiple kinds of mycotoxins, and where you find one there are probably others present. They report that FAO says 25% of grain worldwide is contaminated, and samples from China find contamination as high as 70%-100%. There are different contaminants for various feed ingredients, seasons, and kinds of feed.

Toxins cause diarrhea, vomiting, or stomach pain that can lead to coma or death, but they more commonly cause subacute symptoms that reduce animals' productivity and resistance to disease. Results include: decreased feed intake, diarrhea, slow weight gain, lower egg or milk output, reduced breeding ability and lower feed utilization. The Sichuan veterinarians say research shows that low degrees of contamination can reduce feed utilization by 10%-20%. They say this could mean a waste of 10 mmt of feed in China. Another hazard of sub-acute mycotoxin is breakdown of the immune system, weaker resistance to stress and pathogens, and in some cases vaccines are made less effective. The veterinarians suggest that research should be conducted on whether the widespread disease problems and high use of antibiotics are linked to mycotoxins in feed.

A December 2011 article reported that research in southern provinces found 89% of feed was contaminated with mycotoxins. The article attributed high levels of mycotoxins to flooding and inadequate drying of grain that led to mildewing. This article says that mildew can reduce the nutritional value of feed by using the vitamins B and E in grain and reducing amino acids. Mildew can also alter the smell and taste of feed, making it less palatable to hogs.

Financial Derivatives for Peasants?

In his address to the December 2011 rural work meeting, Premier Wen Jiabao emphasized the importance of protecting rural peoples' property rights. He emphasized that rural people have rights to the income from their land whether they are living in their home village or have migrated to cities. He did NOT say farmers have ownership of their land, just that some unnamed authority should ensure that farmers are entitled to a share of the income stream flowing from their land.

Wen said institutional disparities between rural and urban economies are one of the biggest issues to be addressed in China's economic development. He identified the gap in income between rural and urban residents as a major concern. The two institutions that keep that gap in place are the land-ownership system and the household registration system. In his address, Wen called for more tinkering without any fundamental change of the system.

Wen seems to favor reform of the household registration system, pointing out that rural people entering cities must become "real" urban residents. But he adds that changing household registration "is not that simple."

In his address, Wen said that China cannot rely on "sacrificing" farmers' land rights to lower the cost of industrialization and urbanization. This apparently refers to the practice of expropriating farmers' land to build factories and apartment complexes.

In principle, Wen affirms that rural people are entitled to receive income generated from their allocation of village farmland, the land occupied by their house, and income from the village collective. They are entitled to these property rights regardless of whether they live in the village or have moved to a city.

Wen said that rural people must get a much larger share of the increased  value of their land. This means that a larger share of the proceeds from sales of rural land to developers must be paid to villagers.

To implement this, Wen said a land compensation system must be set up. Wen promised (demanded?) that regulations for implementing such a system will be issued next year (The speech was given in 2011, so regulations will be issued in 2012).

Wen's address seems to have nixed the strategy of knocking down villagers' houses (to create more farmland) and moving them into highrise buildings. Wen said that rural development must not change the basic appearance of the countryside (fields and scenery) and must maintain the ecological environment. Wen said that urban residential communities cannot be reproduced in the countryside by moving people into highrises. This appears to be a rebuke of some of the practices that have been used all over the country recently but are associated with experiments in Chongqing and Chengdu that some commentators have criticized as pretexts for rural land grabs.

No details were given, but based on the dimsums blog's observation of recent experiments, here's what seems to be implied. Wen's comments seem to point to a tangled system of land rights and associated payments that would move with village residents wherever they go. Each family in a village will have rights to a certain amount of farmland, house land, and collective assets (such as factories, land occupied by schools, office buildings, roads, training centers etc.) The villagers will not be able to sell these rights since farmland cannot be sold and by extension ownership of the rights to it can't be sold either. Land rights will be converted into a share in a village cooperative or some other financial asset that entitles the holder to a stream of income from the asset. So, for example, if village farmland is consolidated and rented to an agribusiness the lease income would be paid to the cooperative, divided up and paid out to each villager as a dividend. If the village's school is knocked down and replaced with a hotel the income would be similarly divided divided up and paid out to villagers according to their shares in the collective. Shareholders will be entitled to the payments regardless of where they are actually living.

Basically, it implies turning collectively-owned land into a massive, convoluted system of financial derivatives for a billion peasants. But is it realistic to create derivatives that have an income stream but cannot be sold? A new era of collective capitalism!
Wen also emphasized breaking down the disparities between rural and urban education.  The speech also called for increasing village political autonomy and was careful to mention that rural per capita income was estimated to have reached 6900 yuan (they managed to come up with this estimate before the year was over, yet the statistics bureau has not yet managed to publish the yearbook reporting rural household statistics for 2010).


This announcement seems to be following China's "whack-a-mole" approach to policy-making in which policies are announced in response to whatever crisis has just popped up. Wen's speech comes just after last month's protest in Wukan, a village in Guangdong Province (Wall Street Journal's coverage of the protest here) which drew attention to bubbling rural unrest. Illegal land grabs by local officials were at the heart of the Wukan protest. The timing of this speech on rural land rights suggests that this is a response to that protest.

The measures Wen calls for are not a new direction. The party has been experimenting with land rights and land compensation mechanism over the past three years. Premier Wen may be genuinely interested in guaranteeing the property rights of rural people, but the announcement seems calculated to head off further rural unrest.

Pork Slaughter Clean-Up

Last month Chinese authorities announced an audit of pork slaughter companies that will continue through July 31, 2012. Local authorities have been instructed to check up on the qualifications of pork-slaughter enterprises and make sure they are not engaged in illegal behavior. Those who are don't meet the standards and fail to make improvements demanded by auditors will be shut down.

The crackdown was announced in a noticed jointly issued by nine different ministries and bureaus which included commerce, industry, quarantine, food and drug, environmental protection, finance and health. The announcement said this "cleanup" audit is required to carry out the State Council's food safety work. This is a message to local officials that they should take this seriously.

Local officials have been ordered to form coordinated teams to carry out the audit. Officials promise to set up a "black list" of companies caught in illegal behavior. They will explore setting up a system for rewarding snitches who report illegal pork slaughter behavior. Bad behavior includes pumping water into pigs, selling dead or diseased animals, butchering uninspected pigs, and re-selling products that were recalled.

This audit sounds very similar to the re-licensing of dairy processors that was carried out last year at this time. About half of dairy processors had to shut down at least temporarily after last year's audit.

The audit form for small slaughterhouses in Sichuan includes 18 items to check for compliance. The enterprise must have the proper licenses and certificates, be approved as part of the local government's plan, be in a location distant from bodies of water that could be polluted, and cannot be near a factory or other source of pollution. It must have a plentiful supply of water that meets city drinking-water standards. The layout of the plant must meet required standards and equipment is required for various parts of the slaughter and butchering process. There must be rooms to separate sick animals, equipment for disposal of sick or dead animals, and wastewater treatment equipment. Blood must be drained for no less than 5 minutes. Meat can be transported only in specialized trucks. Slaughter technicians must have health certificates from a county-level or higher medical authority. A traceability system must be in use. Shipments of hogs must have records of the time received, volume, place of production, supplier, slaughter and inspection information, time leaving the plant, products, volume and destination. The slaughterhouse can be graded as "compliant," "basically compliant," or "not compliant."

China's pork slaughter industry is huge and widely dispersed. In 1998, authorities set up a "designated slaughter point" system--a hierarchy of slaughterhouses that serve the urban population. In 2008, revised regulations ordered establishment of traceability and product recall systems. The regulations ordered companies to stop production when unsafe products are found, recall and destroy products, and inform consumers. Penalties of 10,000-30,000 yuan were set for selling uninspected meat, improperly transporting meat, or using forged, stolen or borrowed licenses and approval stamps. The 2008 regulations ordered the government to publish a national list of designated slaughter houses.

A google search turns up lists of designated slaughterhouses for only a few municipalities. In Zhoukou, a district in Henan Province, the list shows 140 slaughterhouses. They form a hierarchy: two on the outskirts of Zhoukou city and a network of slaughterhouses in each county city and township throughout the district. One county can have 20-30 slaughterhouses. The government claims that the designated slaughterhouse system covers the entire country except for Tibet.

This clean-up audit likely portends a consolidation of slaughterhouses. Last year authorities announced a plan for the industry that would reduce the number of enterprises by closing small unmechanized operations that don't meet standards.

This forced consolidation could result in a proliferation of small illegal butchers--this seems to have been a result of past rounds of crackdowns. The dimsums blog has frequently reported on raids of "black dens" and underground butchers.

If authorities are able to effectively shut down small slaughterhouses and, in effect, create city monopolies, the remaining slaughterhouses may be able to raise pork prices and make money. This has occasionally led to strikes by retail meat vendors squeezed by slaughterhouse monopolies and attempts by gangsters to monopolize local meat commerce.

High prices for big capital-intensive pork processors (also aided by subsidies for holding government pork reserves) will be able to make money (for a change). High Chinese pork prices will also help keep imported pork price-competitive in China.

Corn: Get Big or Get Out

An analysis of this year's corn cost of production survey results in Jilin Province grapples with the basic economics of small-scale grain production in China.

The analysis is based on the provincial statistical bureau survey team's data collected from 200 farm households in four districts of Jilin Province. The analysis focuses on the importance of net returns for preserving incentives to produce corn. The report says that returns from growing corn have been relatively stable over the last several years despite rising production costs. This is possible because Chinese corn prices have been rising. The corn price rose 20% this year in Jilin.

The analyst worries, however, that the incentives to plant corn are weak in comparison with off-farm work or planting higher-return crops. He says farmers who rely on planting grain are caught in a "low-level trap."

Therefore, the analyst emphasizes the critical importance of the price-support policy which, he says, has built in expectations of rising prices. With costs rising 15%-20% per year, how long can Chinese corn prices rise at this rate to keep profits steady?

Production costs are rising steadily. The analyst recognizes the increasing energy-dependency of Chinese agriculture--fertilizer, mechanization, transportation to market are all dependent on energy prices which are rising. Wages are rising rapidly too. The analyst also notes that land rents are increasing. In this environment, farmers (owners of factors of production) want to put resources into other activities.

One path to higher income is better technology. The report says yields in the Jilin survey were 750 kg per mu (except for Kong Family Village where there was a hail storm that reduced yield to 550 kg). That works out to 179 bushels per acre by my calculation. That compares favorably with Midwestern U.S. yields. This report on 2010 yields in Illinois reports averages ranging from 148 bu/acre in the southern part of the state to 174 bu/acre in northern Illinois. If Jilin farmers are already getting yields comparable to those in U.S. corn-growing regions, how much potential is there for growth? Keep in mind the sample probably is not random; it is possible they chose the "best" farmers to participate in the Jilin survey (or they might have chosen the old guys who have nothing better to do than fill in survey forms).

The average Jilin corn price received by farmers, says the article, was 1.72 yuan per kg, which works out to over $6.80 per bushel. The support price for Jilin corn announced in December was higher, at 1.98 yuan per kg. Presumably, the average was mainly for sales earlier in the year.

The average net return for corn, says the article was 700 yuan per mu. By my calculation, that works out to the equivalent of $664 per acre or $3.78 per bu--that's net return. That's not much if you've only got one acre. But if you plant 700 acres, like an Illinois farmer, that works out to nearly $465,000 in net income! In Jilin that $465,000 would be divided among 500 or so farmers.

The dream of farm prices rising faster than nonfarm prices never came true during the 20th century. Historically, farm prices have fallen in comparison with prices of industrial products. This led to low incomes per acre and complaints from U.S. agricultural economists about "the overproduction trap,"  "technology treadmill" and "the farm problem" during the 20th century, similar to the "low-level trap" rhetoric used by the Jilin analyst. The solution for U.S. farmers during the 20th century was to "get big or get out." That would seem to be a clear solution to low incomes for Chinese farmers but it's hard to do this since land markets are undeveloped. No one expects to see 700-acre farms in China, but something a little bigger than 2 acres would help farmers earn decent incomes.

Another report from a Jilin County with the intriguing name of Jing'le (Quiet Happiness) reports that land transfer increases the net returns of farmers. During the first half of 2011, 28,000 mu (about 4610 acres) in the county were sub-leased, rented, swapped, or otherwise transferred to others. According to the report, farmers earned more rent from these transactions than they would have earned by planting crops on the land. The lessors preferred to migrate elsewhere to work instead of farming, turning over their land to others who are more capable farmers. The lessee is more productive and earns more from the land than the lessor would have. The article claims that concentrating land in larger operations increases the utilization of land (less is left idle),  promotes mechanization and improves productivity of land on hills and mountains.

Corn Production and Costs Up

A handful of local Chinese survey teams have released reports on this year's corn harvest. The results seem to confirm a big corn crop in China this year, but they also show escalating costs and prices. However, the reports are not nationally representative. There are 5 or 6 reports from Xinjiang but only one from the northeastern region. Most of these reports are based on small samples of farms, some as few as 9. The Hebei data are based on 411 farms spread over 45 counties. However, these numbers have some value as a check against the official statistics which come out months later and have been through a long process in which they may be massaged and distorted.

The one provincial report issued is from Hebei (a major corn-producing area but not the biggest one). The article describes corn as the "star" of agricultural commodities this year. Its production, planted area, price and profit were all up. In June Hebei's corn price surpassed the wheat price (an unusual occurrence) and the corn price has hit record highs. In contrast, the article says Hebei cotton farmers are not happy because production went up but price is down slightly from last year.

The table below shows results from 13 production cost survey reports the Dim Sums blog has been able to locate online. Yields for 2011 cover a wide range, from as high as 800-900 kg per mu in regions of Xinjiang to 358 kg in Nanyang where farmers had bad weather and had a late start on planting last spring. Most places said farmers had substantial increases in yields. The biggest increase was in Benxi, Liaoning Province, where yield was reportedly up 34%. Two districts in Henan had bad weather that led to declines in yields. In Qujing, Yunnan, the report says the yield was about the same as last year because last year was a good year. Henan Province published a report for all "fall grains" (which includes corn) showing an increase in yield of 15%.

China corn production, various locations, 2011
Location	Province	2010	2011	increase
		kg/mu	kg/mu	Percent
	Hebei	456	480	5.4
Weishi	Henan	450	404	-10.0
Xinxiang	Henan	449	478	6.0
Nanyang	Henan	404	358	-11.0
Zibo	Shandong	468	516	10.0
Binhai	Shandong	337	413	22.3
Benxi	Liaoning	337	452	34.0
Hengdan	Hebei	514	538	4.7
Huocheng	Xinjiang	846	906	7.0
Fukang	Xinjiang	625	699	11.8
Usu	Xinjiang	804	827	2.9
Qujing	Yunnan	450	450	0.0
Wanzhou	Chongqing	503	514	2.2
Source: Local price bureau statistical reports on production costs compiled by dimsums.blogspot.com.

In Hebei yields were up 5.4%. Planted area was up slightly as well. The Hebei report cites good weather, dissemination of improved seed varieties, soil fertility testing, and techniques that allowed farmers to harvest their corn 3-to-5 days later than usual (allowing more time to grow and mature). Most of the reports give similar reasons (maybe this is what the party secretary told them to say).

The reports also show corn prices up 20 percent or more year-on-year. Hebei's report cites several reasons for increasing corn prices. One is the upward pressure from rising production costs. Second, industrial processors and feed mills have had strong demand for corn. The article says that demand for industrial products revived due to global economic recovery in 2011, citing higher profits for starch and alcohol. Livestock producers have been expanding in response to high pork and egg prices. The third reason for high corn prices is that farmers have been hesitant to sell, waiting for even higher prices. The article says on 9% of this fall's corn harvest has been sold--most is still in farmers' hands.

Production costs are up across the board. In Hebei the total production cost rose 15.8%. Cost increases included three broad categories: labor, land rent, and cost of materials and services. Most of the reports say seed costs have risen 20%-to-25%. The Hebei report says that seed producers have been hit by rising labor costs, packaging, transportation, fuel and marketing costs. Of course, when all farmers are buying more improved varieties of seeds the supply is likely to be less than perfectly elastic and prices will rise. Energy costs are also hitting Chinese farmers as they become more energy-intensive. Fuel and natural gas are boosting the cost of chemical fertilizers and mechanized services.

Of course, a massive corn harvest tends to put downward pressure on corn prices. Prices are still at high levels but they have been falling since October. According to the Hebei article, the decrease has been clearest for corn, which fell 7% from October to December. The article says grain prices as a whole have fallen 2% over that period.

More Reserves, Imports Rumored

According to an unnamed source quoted in a terse, widely-circulated news article, the Chinese government plans to boost reserves of a number of commodities and import more of others.

According to the source, the government plans to buy up 6 mmt of paddy rice to add to reserves and will give subsidies to companies to hold more pork reserves. These reserves would most likely be obtained by buying commodities on the domestic market. 

In the last two years companies buying rice for reserves have complained about having to compete with foreign companies who have gotten into the rice milling business and who pay higher prices. This announcement suggests that rice reserves are getting thin. Pork reserves are probably depleted too. There was some anecdotal evidence of meat companies who stopped buying hogs during the period of high prices in August-September and were selling off their inventories of pork.  

The source also claims that the government plans to expand commercial imports of corn, soybeans, edible oil, and cotton. The source also reports that the government will continue to clamp down on "blind" addition of corn processing capacity to maintain "stability" in the corn market. The government will continue its provisional price support program for cotton and rapeseed. 

The government plans to set up a chemical fertilizer reserve and a reserve of petroleum products to add to its strategic reserve of raw petroleum. 

The increase in reserves reflects the Chinese obsession with having massive reserves that they think can be used to stabilize the market, but such buffer-stock management rarely works. The urgency to add to reserves despite a series of massive grain harvests suggests they have been lying about grain reserves. In recent years a number of observers questioned the government's claims of large reserves when they saw empty warehouses. The grain bureau continually pooh-poohed these concerns and insisted they had large grain reserves on hand. 

Slaughtering Dead Chickens

Last week a Beijing reporter exposed the processing of dead chickens and other nasty practices that take place in slaughterhouses.

The reporter conducted investigations and took video images in November and December at slaughterhouses in Tongzhou and Daxing, outlying districts of Beijing. One slaughterhouse worker told the reporter that the Tongzhou slaughterhouse routinely sent birds that arrived dead into the slaughterhouse and sold the meat to traders who knowingly buy dead chickens. He says most of the dead chickens are bought by hotels.

Dead chickens with green spots and red skin found in a slaughterhouse.

According to the article, nearly every load of chickens includes dead ones--sometimes a few, sometimes dozens. They may die of disease, suffocate or freeze to death during transport.

Rather than incinerate them as regulations require, the slaughterhouse butchers the dead chickens and sells them at a discount. The worker said the slaughterhouse doesn't even have any equipment for incinerating the carcasses.

The worker describes the arrival of a small van in the courtyard. The buyer asks to purchase as many dead chickens as the slaughterhouse can supply. Fifteen crates of chickens, some of them with green spots and decomposed, were loaded in the van. The worker showed the reporter records of sales of dead and deformed chickens to particular individuals during October and November.

A Beijing Agricultural University veterinary professor said that it is unsafe to eat dead chickens. After decomposing the carcasses may contain toxins. If they died of disease they could carry germs that could be transmitted to humans.

Worker holds water "gun" preparing to inject water in chicken

Another nefarious practice is the injection of water into carcasses to increase their weight. The reporter describes an assembly line in which a worker wields a gun that shoots pressurized water through a pair of needles into each chicken carcass just below its wings.

A third practice turns white-skinned chicken carcasses into fake yellow-skinned chickens that look like a local variety of chicken that brings premium prices. To do this, the slaughterhouse sets carcasses out on large tables and blows a fan on them for an hour or more. The skin hardens and turns yellow through this process. These fake yellow-skin chickens are mixed in with real ones to trick consumers, the reporter says. The slaughterhouse can sell 1000 of these fake birds per day.

Fan blowing air on chickens to turn them yellow

According to the slaughterhouse worker, they blow the fan on the chickens indoors during the summer because they decompose faster and attract flies.

On December 15, animal health inspectors raided the slaughterhouse and found 2,880 kilograms of uninspected poultry meat. The slaugterhouse had an animal quarantine inspection certificate and animal health license hanging on the wall but both were expired.

This article looks like adventurous investigative journalism but it may actually be government-approved propaganda. The article was widely disseminated on Chinese web sites, recites regulations on meat slaughter and urges readers to be vigilant in preventing spread of highly-pathogenic avian influenza. The reporter apparently accompanied officials on the December 15 raid.

Apparently authorities have decided to air some of this dirty laundry to alert the public and crack down on risky practices that could spread avian influenza.

Limits on Foreign Investment in Grain/Oil Processing

China's National Development and Reform Commission released a revised list of industries in which investment by foreign companies will be limited. The new list adds a number of grain and oilseed-processing sectors. The previous list compiled in 2007 included soy and rapeseed oil processing. The new list expands the scope of ag-processing sectors covered by foreign investment limits to include rice-milling, wheat flour-milling, industrial corn processing, and processing of oils from peanuts, cottonseed, teaseed, sunflower, and palm kernels. The limits take effect January 30.

According to China Grain Net, the limits are motivated by several concerns. Authorities have been alarmed by a rapid expansion of foreign-owned processing capacity in recent years. This led to excess capacity in some sectors. "Disorderly" competition in some industries led to fluctuations in prices of grains and oilseeds. China Grain Net says the limits on foreign investment are intended to increase the government's ability to control markets and maintain "grain security."

Last year, the China Grain Net put out reports complaining that foreign companies had entered the wheat and rice milling industries and outbid state-owned companies for grains, driving prices up.

The China Grain Net article explaining the foreign investment reports on massive capacity expansion in grain and oilseed processing industries to explain why the government feels they need to limit foreign investment. The article emphasizes the large percentage increase in multinational company capacity. In the rice-milling industry the article reports that capacity shot up by 50 million metric tons (MMT) in 2010. The article emphasizes that foreign capacity rose 57% that year. But it fails to mention that the increase in foreign company capacity accounted for only 1.3 mmt of the 50 mmt increase in rice-milling capacity. The expansion of domestic capacity far exceeds the expansion of foreign capacity in all industries except corn processing where the government has been trying to clamp down on capacity for the last four years.

The article reports that capacity utilization is low in all grain and oilseed processing industries. But the data clearly point to over-expansion by domestic companies as the source of the excess capacity problem.

China grain and oilseed processing capacity, 2010
Product	2010	2009	Change	Change	Utilization
	MMT	MMT	MMT	Percent	Percent
Rice	250.0	200.0	50	25	40%-45%
Multinational	3.6	2.3	1.3	57
Domestic	246.4	197.7	48.7	25
Flour	165.0	125.0	40.0	32	65%-70%
Multinational	7.4	5.3	2.1	40
Domestic	157.7	119.8	37.9	32
Corn industrial products	70.0	58.0	12	21
Multinational	16.0	10.0	6	60
Domestic	54.0	48.0	6	13
Oilseed processing	137.0	115.0	22	19	Oilseeds, 55%-60%
Multinational	37.0	30.0	7	23	Oils refining 45%-50%
Domestic	100.0	85.0	15	18
Source: Dim sums blog, data from China Grain Net.http://www.cngrain.com/Publish/Vision/201112/512910.shtml MMT=million metric tons.