Tuesday, February 28, 2012

Minister Han's Village Survey in Guizhou

As reported earlier this week, China's Ministry of Agriculture is sending teams of officials out to villages this month to conduct surveys. Today the Ministry reports on Minister Han Changfu's survey of a village in Guizhou Province during February 24-27.

The article explains that the Ministry has a strategy of matching up each departmental official with a village, farmer cooperative or agricultural company. The official is supposed to form a long-term relationship with his counterpart so that he/she will fully understand the rural situation. While this is an admirable strategy, Han's visit is clearly a scripted propaganda exercise intended to boost the spirits of disgruntled villagers and prod local officials to implement agricultural policies.

Minister Han's village is Songshan village in Guizhou's Weining County. Han visited Songshan on his survey. As soon as he got out of the car, he walked into the fields where villagers were working and began chatting about their daily lives.

According to the article, a 64-year-old farmer grabbed Han by the hands and exclaimed, "The rural policies are good; we are connected to water, electricity and roads...I now have old-age insurance and whether I make money or not I can still eat my fill and have clothes to wear!" The old man’s words brought smiles all around.
Han told the farmers that the party's objective is to give farmers a good life through better farming and health. 

He visited the home of a poor couple. The husband has the ironic name of Cheng Rich Country. Han encouraged them to be optimistic and to overcome difficulties as soon as possible. He brought them some money and a quilt.

Several rural development strategies are promoted: encouraging young migrants to return to their villages as entrepreneurs and encouraging companies and cooperatives to modernize agriculture. Minister Han was pleased to hear that a few young people had returned to the village to bring prosperity and dynamism.  Han heard about Cheng Zonghui, a young migrant who returned and set up a livestock cooperative. Two companies invested in vegetable production in the village. A company representative explained how land rights had been transferred (to the company?) Over dinner, Han heard that another farmer's son had gone to junior middle school. Han encouraged the son to study hard and become a "pillar of society."

The article also emphasizes that the Ministry is including young officials in their 20s in the survey teams. Presumably this demonstrates that the party has a vigorous young generation and the youngsters are being educated about the real situation in the countryside.

In the evening, as snow fell, Han met with 10 village cadres and residents to hear about their difficulties and concerns. Han pointed out that close relations between officials and the rural masses was a good tradition of the communist party. Although the village is lagging behind in agriculture, local officials were optimistic and confident.

The article sends a message to provincial and local officials that they had better toe the line. Han is "extremely concerned about spring planting" and pointed out that this year is very significant because it's the first year of the new five-year plan, economic growth is slowing and the country faces inflationary pressure. The ninth "no. 1 document" was issued this year with favorable agricultural policies. Each level of agricultural departments must grasp the importance of grain production, disseminate technology and motivate farmers to plant grain as required by the central authorities. Officials in areas stricken by serious drought are commanded to provide leadership, disseminate technology, implement policies, carry out projects, mitigate drought conditions and work hard to make sure grain production increases.

Monday, February 27, 2012

Moldy Corn Selling Slowly

A corn inspection tour by the China Grain Net reports that this year's corn harvest in Shandong and Hebei Provinces is afflicted with high rates of mold growth due to wet weather. (Mold releases mycotoxins that can cause digestive problems in livestock consuming feed that contains moldy grain.)

Due to the high incidence of mold in the region, feed companies in Shandong and Hebei are being cautious about buying local corn. The survey team says about 50% of this year's corn has been sold by farmers in Binzhou and Liaocheng of Shandong and less than 20% in Handan, Hebei Province. Feed mills are instead buying corn from the northeastern provinces where the corn is drier. This means demand for northeastern corn is unusually high, pushing prices up there while prices in Shandong-Hebei are weak. Thus, the usual price relationship is inverted--prices in the northeast are higher than in Shandong-Hebei.

The survey team visited a number of feed mills and industrial processors of corn. They found that feed mills are substituting a lot of wheat for corn since corn prices exceed wheat prices. Some poultry feed is using 100% wheat. The proportion is lower for laying hens and piglets.

There are a lot of industrial processing enterprises in Weifang and Binzhou of Shandong. Their requirements for corn quality are not as strict as those for feed mills. The industrial processors buy most of their corn locally, but some comes from Henan Province. However, the processors say the industry is in a downturn now and prospects are grim. A person from the Xiwang Group says that processors are operating at less than 50% of capacity now and the situation is grim.

The livestock sector has seen falling prices after the spring festival. The team says the hog price fell from 12 yuan/500g before the festival to 8 yuan now. The egg price fell from 4 yuan to 3 yuan. It is said that producers are not enthusiastic about increasing animal inventories, so feed demand is soft.

The survey team says the weather in north China has been relatively good lately, favorable for drying corn. This is expected to improve sales and prices of corn in the region but the potential for price increases is limited.

Sunday, February 26, 2012

"Survey Teams" Mobilize Farmers

The Ministry of Agriculture is organizing survey teams of officials who will fan out into villages to drum up enthusiasm among farmers for planting crops, give them guidance, find out about new problems, trends and innovations and report back about farmers' concerns and requests. The survey team campaign is not new (there was a similar campaign last year) but the motivation seems to reflect persistent worries that grain production is not keeping up with demand. Officials want to boost production to head off rises in grain prices. Another motivation seems to be an urgency to head off rural unrest by disseminating propaganda about government policies and gathering intelligence on what's happening in the countryside.

According to the Ministry of Agriculture's web site, the "hundred township, 10,000-farmer survey team" (百乡万户调查组) campaign will organized 123 officials and technicians into 30 teams that will spend a month visiting farmers in their homes in 27 provinces. A training meeting was held on February 7 where the Minister of Agriculture Han Changfu commanded officials to do a good job and take the task seriously. Officials are commanded to go to see "first line" production at the basic level to learn the actual situation in the fields and mobilize, allocate and deploy resources to ensure that grain production increases steadily.

The Farmers Daily says the spring is the critical period for ensuring the year's grain production. It is necessary to win this "first battle" to restore the confidence of society, reduce inflationary pressure and stabilize grain production.

The Farmers Daily explains that teams are to have four types of members:

  • Publicity personnel. Teams are to inform farmers about government policies and make sure subsidies get to farmers without being skimmed off. The purpose is to make sure policies have their intended effect of motivating farmers. Farmers are to have the desire to plant grain in their hearts.
  • Extension personnel. Spread innovations for increasing grain and cotton yields to farmers. Nurture model farmers and create a class of "local experts" and "field scholars" who have the ability to learn about new techniques and spread them to other farmers.
  • Advisors. The description of this role is vague but seems to include advising farmers on ways of mitigating the effects of frost, drought, and pests and twisting arms to make sure farmers plant early rice crops. Among the tasks are to "mobilize the masses to overcome emotions of blindness and paralysis."
  • "Coordinators" are intelligence gatherers. They are to discover and solve problems with seed, machinery, or labor and adapting measures to actual local conditions. They are to listen to local officials' complaints, problems and suggestions and learn about experience and new initiatives of farmers, new rural trends and emerging problems. They are to report what they find to central communist party authorities. 
According to the Ministry of Agriculture's publicity office, a survey team will spend a month in Ningxia investigating four villages in two counties. They will stay overnight in villages, eat there and visit 400 rural households. They will carry out special investigations of a national-level modern crop production base, the potato industry and dryland farming projects.
Survey team in Ningxia (Source: Ministry of Agriculture Press Office).

On February 11 the team visited villages in Linze County where they learned about implementation of agricultural policies, implementation of rural land contract rights, income and employment of rural people, a model for producing seed by integrating farmers and companies, payments for seed, exchange of land contract rights, and they learned about problems and difficulties. 
Survey team in Ningxia (Source: Ministry of Agriculture Press Office).

China Drought Concerns

A researcher from China's National Weather Center warns that low precipitation this spring could affect crop production in some parts of China.
Yunnan school children collect drinking water in drought-affected area. 

The most serious drought situation is in parts of Yunnan and Sichuan provinces in southwest China. There has been serious drought in this area for three years and dry conditions persist this year. Many reservoirs in the region are dry. According to a news report, 3 million people and 1.6 million livestock in the region are affected to varying degrees by lack of drinking water.

Nationwide precipitation is expected to be low during March-May. Concerns about drought conditions are focused on regions in northeastern China (Inner Mongolia is singled out), north China (the Huang-Huai River region, including Hebei Province), and the Yangtze-Han-River plain (central Hubei Province). The dry conditions come at a critical growing period for the winter wheat crop and dryness could affect spring ploughing and seeding as well. Relatively warm weather has thawed the ground, causing moisture to evaporate from teh soil. Recall that last year there were serious drought conditions in wheat-growing regions until January but there was little effect on the wheat crop since rains came in subsequent months. This year's drought is expected to continue into these critical months.
Forecast precipitation for Feb 27-28, 2012. Gray regions have lowest precipitation. Source: Central Weather Center.

Saturday, February 25, 2012

China's Food Security Worries

An article from Securities Times voices the growing worries in China about food security.

Despite record increases in grain production, the article worries about the growing "imbalance" between supply and demand. The article notes that China is heavily dependent on imports of soybeans and foreign trade in corn, wheat, and rice is shifting from net export to net import status. The writer worries that grain is becoming another commodity that China has to import, following petroleum, steel, and minerals.

Food security is an overriding policy objective in China. The article quotes the chief economist of the Ministry of Agriculture who said that maintaining basic self-sufficiency in grains is the fundamental principle for developing modern agriculture.

China's eighth-straight increase in grain production was confirmed by preliminary agricultural statistics in the 2011 national statistical communiqué issued Feb 22 by the National Bureau of Statistics. Grain production in 2011 was a record 571.21 mmt and the area planted in grain was 110.57 million hectares. The statistics show that grain production increased 24.73 mmt (4.5%) last year and planted area increased by 700,000 ha despite the sprawl of cities gobbling up land, severe droughts in wheat-production areas and southwestern provinces, and floods in southern China last summer. Rice production reached 200.78 mmt (up 2.6% from 2010), wheat output was 117.92 mmt (up 2.4%) and corn output was 191.75 mmt (up 8.2%).

According to the article, rising income and upgrade of living standards is causing demand for grain to outpace supply. Other worries are the influence of climate change and effects of droughts and floods on agricultural production. The effects of disasters are becoming more acute since grain production is more geographically concentrated. Droughts and floods that affect production regions are more prone to affect the national market. The article also worries that fluctuations in international grain prices are having a stronger influence on domestic grain prices. A major problem is rising production costs due to rising input prices.

The Chinese government has issued a flood of documents and policies designed to boost grain production. This week the Ministry of Agriculture released a "modern agriculture" development plan, and there are plans for raising grain production by 50 mmt by 2020, 14 key projects focused on 800 core grain-producing counties, creating high-yield fields, increasing efforts to prevent and mitigate droughts and floods, a pledge to continue direct subsidies to grain producers, improvement of a "dynamic adjustment mechanism" for the general input subsidy, a compensation mechanism for grain-producing areas, canceling local contributions to provincial "grain risk funds," and continually increasing the minimum prices for rice and wheat.

The article tries to sound a positive note by claiming that inflationary pressures are currently under control, but concludes on a pessimistic note. The article notes the potential for weather events to cause fluctuations in prices and warns market participants that they should pay close attention to weather during 2012.

Monday, February 20, 2012

The "Hard to Sell" Problem

The "hard to sell" (卖难) phenomenon has been a topic of discussion in Chinese agriculture since at least the 1980s. "Hard to sell" describes a mismatch between supply and demand or poor agricultural market infrastructure that leaves farmers unable to sell what they produce. The "hard to sell" phenomenon was the basic problem addressed by Xi Jinping's thesis and the problem has been serious enough recently that several paragraphs in this year's "Number 1 Document" were devoted to agricultural marketing improvements.

A recent article posted on a "san nong" (agriculture, rural people and rural areas) web site provides a good analysis of the "hard to sell" problem. The article is written by Chu Guoliang, a faculty member at the communist party school of Xiangtan, a region of Hunan Province. Based on his observations in villages, Chu identifies three types of "hard to sell":
  1. When farmers overproduce by "blind" production planning or "following the crowd," resulting in surplus production that has no market outlet.
  2. Seasonal production that is harvested during a concentrated period, resulting in a supply that far exceeds the demand and plummeting prices.
  3. Regional surpluses when producers lack links with consumers, transportation and storage costs are high, and information is poor.
Chu offers a series of different factors that lead to "hard to sell" problems. 

Chu is critical of the tendency of regional governments to hatch schemes to promote production of particular commodities. Sometimes these schemes are misguided. Local officials convince farmers to produce a particular commodity--to become the "potato capital," or the "garlic capital" for example--without adequately researching the market. Chu says that local officials promote "production bases," "cooperatives" and other schemes that sound good, show "nice pictures," give subsidies and build infrastructure to "artificially induce large numbers of farmers to produce a crop." Production expands beyond the capacity of the market to absorb the supply, the price plummets and farmers have more production but less income. Chu says this problem occurred in Inner Mongolia's potato industry this year. 

Sometimes officials in one region make plans without considering the national supply of a commodity. The article cites an expansion of tomato production in Yunnan Province that came on the market at the same time as tomatoes produced in Beijing greenhouses. The Yunnan tomatoes had a cost advantage over the Beijing tomatoes because they were grown outdoors, not in expensive greenhouses. 

In some cases, Chu asserts that companies trick farmers into "hard to sell" problems. He claims that seed companies hire "experts" to promote particular seeds, plant stories in the news media, and form secret alliances with brokers and buyers to hype products and induce "panic buying" of seeds among farmers. He blames the news media and web sites for blindly reporting stories about how producing certain products can make farmers rich but they seldom report on farms that lost money in such schemes. 

Chu identifies a new class of "commercial farmers." These are rural people who went to work in cities and made some money. They are more attuned to market opportunities than are traditional farmers and see agriculture as a money-making opportunity rather than a means of eating or a lifestyle. Commercial farmers see TV programs on crops that can make them rich, go back to the countryside, rent land and start producing, vegetables, fruit or livestock. Chu says many such farmers returned to the countryside to engage in speculative farming after the 2008 financial crisis hit. He says these farmers are common now and are causing fluctuations in prices in Hainan bananas, Shandong garlic, Jiangsu watermelons and Inner Mongolia potatoes. 

Macroeconomic influences also affect rural markets. The increase in the money supply puts money in peoples' hands with few opportunities for investment. Many people invested their funds in buying up garlic or ginger and renting warehouses to store it. 

Chu asserts that marketing costs are artificially high. Highway tolls, transportation fees, market entrance fees (and land rent?) are set on the basis of common charges in other industries, but he says these are too high for agricultural products, presenting a barrier to distribution. 

While the article cites many failings of government planning and subsidies, the article does not dismiss planning; he says the government needs to plan better. Chu acknowledges the role of the "invisible hand," but he says the government's "visible hand" must play an important role in giving farmers information guidance and coordination. Production plans should be nationwide and coordinated. Instead of just setting up as many producer cooperatives as possible, care should be taken to establish marketing, financing, training, and other plans for the cooperative's business to succeed.

Chu argues that information services need to be better. Farmers need to understand how to interpret and use information. Not just "letting the market know about agricultural products," but also "letting farmers know about the market." He calls for establishing well-known brands of agricultural products and investing in storage and processing infrastructure.

Monday, February 13, 2012

Pitfalls of Land Transfer Schemes

Several days ago, the dimsums blog posted news about a scheme to mortgage land rights in Chongqing. Today's post describes a critique of these land transfer and mortgage schemes by Chen Baifeng, a young professor at South Central University of Finance and Politics. The issues are fundamental to the social and economic system of rural China. Who owns the land in rural China? Who will farm and how will the profits be distributed? Can traditional village society adapt to commercial farming?

The critique is aimed at another model region, Zaozhuang Municipality in southern Shandong Province. Zaozhuang has launched a number of innovative schemes in the last several years that include township land transfer systems, mortgage loans secured by property rights and land cooperatives. Delegations from rural areas all over China have come to inspect Zaozhuang's system and many have gone home to imitate it. Such schemes are widely used in Shandong. Chen notes that such schemes get a lot of attention from local governments and the news media, but they have many pitfalls.

Professor Chen is critical of land cooperative schemes in which villagers are encouraged to pool their land in a cooperative. The land is consolidated and rented out to a company or large-scale farmer. The villagers receive shares that entitle them to dividends and land rent. They also may be employed as laborers on the farm and receive wages. One such scheme was reported in the media as paying villagers 900 yuan in rent and 600 yuan in dividends for each mu of land placed in the cooperative, double what the villagers had earned from cultivating the land themselves.

Professor Chen criticizes these media reports of 1500 yuan in easy money for hyping cooperatives as unrealistic get-rich-quick schemes. He says "property rights clarification" propaganda is spread blindly without understanding the real principles. The media never reports on the failures. For example, he says many local officials have sought to duplicate the success of Shouguang, a county in Shandong known for specializing in vegetables, but Chen says there have been more failures than successes. He says many officials give subsidies to set up such projects but are ignorant of the realities of the market and many end up bankrupt.

Chen argues that large-scale agriculture and mechanization is unsuited to rural China with its large labor force. These companies and cooperatives must pay high rent and wages, and have a hard time covering costs. Surplus production frequently leads to low prices when many farmers and companies rush into growing a certain commodity. Most of these schemes involve growing crops or livestock that are inherently risky.

Chen asserts that these schemes are a "market mechanism for bankrupting peasants" that ultimately cheat farmers out of their land when the cooperative or company fails. Chen warns of disputes and social unrest when schemes go sour. (In his defense, the mayor of Zaozhuang has given at least one speech where he made a point of emphasizing that the cooperative form of organization gurantees that farmers can't lose their land in the event of a bankruptcy.)

Professor Chen's core critique is similar to the sociological "Goldschmidt hypothesis" critique of large-scale farming in the United States advanced in the 1960s. Chen argues that rural villages need to cultivate a class of "middle peasants" who farm a "suitable scale" of 20-to-30 mu (about 3-to-5 acres) in order to maintain a viable rural social structure. He says farmers can earn a good living of 20,000 yuan from an operation of this size, more than a migrant worker. Chen argues that consolidating land into cooperatives and large operations crowds out these middle class peasants, hollowing out villages and leaving them composed of elderly people,  little interest in public affairs, declining public services and erosion of morality and harmony.

Chen explains that in past years villagers who migrated to work in cities would let neighbors cultivate their land for little or no rent, thus allowing some farmers to achieve "suitable scale." However, Chen argues that large-scale farming schemes raise land rents and push these middle class peasants out of farming. Chen claims that "middle class" peasants are often pushed into putting their land into cooperatives through pressure from village officials, persuasion from their adult children, gossip or implied threats such as loss of welfare payments if the villager refuses to join. After joining, Chen argues, they risk being plunged into bankruptcy.

Chen asserts that middle class peasants live a comfortable life of leisure. It is said that rural people spend three months celebrating holidays, three months doing farm work, and 6 months playing cards, mahjong and going from house to house passing the time. Especially middle-aged and elderly people are unable to engage in heavy labor in factories, construction sites, or agricultural companies, so part-time farming is ideal to keep them occupied and earn enough money to live well.

Chen recounts the unpleasant experience of a village in Anhui Province where he has done research. He identified the village's core "middle class" as a group of 50-to-60-year-olds who farmed and took care of the 70-to-80-year-olds. After the village set up a land cooperative in 2008, the middle class peasants drifted away from the village. Chen cites a series of suicides among the elderly that followed since there was no one to look after them.

Professor Chen suggests that cooperatives are a "stage prop" for capitalists to siphon off agricultural profits from the countryside. Many of the land transfer schemes involve companies coming from outside the village to operate farms. Chen argues that what farmers need is not land-transfer cooperative schemes. Rather, what farmers need is cooperatives that help them farm more efficiently and earn more profits for themselves.

Feed Testing: Low Protein, Chinese Feed Better

China's Ministry of Agriculture announced feed testing results for 2011. The report says that quality of feed continued its trend of improvement in 2011. However, the report highlighted continuing problems with failure of compound feed and premixes to meet stated protein content. The results show that illegal substances like clenbuterol and melamine were detected in only a few samples, but the report notes that these illegal additives remain a "hidden danger."

Of 18,032 samples tested, 95.5 percent were found compliant with standards. The lowest compliance rates were found for premixes, especially for trace elements and vitamins.

The Ministry posted seven lists of companies whose feed failed tests. The first list contains 68 samples of various kinds of feeds in which heavy metals, aflatoxins and salmonella were detected. Other lists include companies supplying uncompliant fish meal, additives that failed to include vitamins stated on labels, companies supplying uncompliant imported feeds, imported pet food, and companies whose feed contained banned additives. A "black list" of imported feeds included companies from South Korea, Spain, Italy, the U.S., Switzerland, Belgium and France. The results reported a higher rejection rate for imported feeds than for domestic feeds.

China 2011 Feed Testing Results
Description Samples Compliant
Number Percent
All feed samples 18,032 95.51
Commercial feed samples 6,686
Compound feed 2,469 98.06
Concentrate feed 1,117 96.51
Additive and premix 786 87.91
  Premix 89.70
  Trace elements in premix 80.19
  Vitamins 81.63
Domestic feed additives 591 96.62
Imported feed additives 203 91.13
Animal-based feeds 697 90.39
Plant-based feed materials 597 98.49
Forbidden additives detected samples (number) samples detected (percent)
Production, marketing and users 10,346
Malachite green 440 0.45
Clenbuterol 4,795 0.91
Melamine 2,514 0.08
Ractopamine na 0.00
Salbutamol na 0.00
Sudan red dye na 0.00
Furazolidone na 0.00
Diazepam na 0.00
Diethylstilbestrol na 0.00
Chloromycetin na 0.00
samples samples passed (percent)
Feed label testing 8,489 93.96
Compound feed 3,522 95.49
Additives and premix 888 95.61
Domestic additives 556 98.38
Imported additives 203 94.09
Imported pet food 199 98.99
Domestic pet food 27 96.30
Animal-based feeds 603 77.94
Plant-based feed 540 94.81
Concentrate supplements 1,431 98.32
Heavy metals
Detected (percent)
Lead 4,055 0.25
Cadmium 2,514 0.16
Fish meal chromium 353 3.68
Salmonella 4,061 0.10
AflatoxinB1 3,344 0.21
Pet food imports 199 99.50

Thursday, February 9, 2012

Why Did Soybean Imports Fall in 2011?

During calendar year 2011, Chinese customs statistics showed that soybean imports totaled 52.64 mmt, down 2.16 mmt from 2010. An article in No. 1 Financial News published in January offers some explanations for the decrease in imports.

One Chinese market analyst explains that the Chinese government's informal price controls during much of 2011 combined with rising raw material prices to decrease profits from soybean crushing. Many companies cut back on operations and this slowed their demand for soybeans. The article cites third-quarter 2011 results released by one big company which showed profits down 58% in 2011.

A second analyst argues that China's soybean imports were unusually large during 2010. This, he attributes to a ban on Argentine soy oil imports during 2010 which removed 1.4 mmt of oil from the Chinese market. He estimates that this required 7 mmt of soybeans to replace the missing Argentine oil. Thus, the 2010 number was a blip and it's not surprising imports were not as robust during 2011.

The analysts see an expansion in soybean imports this year, close to the USDA's December estimate of 56.5 mmt. The analysts observe that several big Chinese companies--COFCO, Chinatex, and Sinograin--have added a lot of new soybean crushing capacity that will expand demand for soybeans. They also note that low soybean prices are stimulating soybean imports to a rapid pace of 5 mmt per month.

Chongqing Grain Group Invests in Argentina

The Chongqing Grain Group has announced a project to invest in grain production in Argentina. The Chongqing conglomerate has set up a company called "Golden Hope Agriculture Corporation" (金希望农业股份公司) in Argentina with plans to engage in soybean, corn, and cotton production.

The company also plans to grow rapeseed in Canada and Australia, high-quality rice in Cambodia and palm oil in Malaysia.

Other investments by Chongqing Grain Group:

  • In 2010, it first invested in 200,000 hectares of soybean production in Brazil. 
  • Also in 2010, the company set up a 13,000 hectare rapeseed production base in Canada and planned a 200,000 mt/year oil-processing facility.
  • In early 2011 the company launched a processing, storage and port investment project in Brazil.
  • The first shipment of soybeans from the Brazil project was made in September 2011.

Mortgages for Peasants

A Xinhua News Service article describes Chongqing municipality's campaign to give mortgage loans to rural peasants secured by their use rights to their farmland, houses, and forest land. 

There have been experiments with this type of mortgage lending since at least 2008. Some of the experiments were sponsored by the Peoples Bank of China, others by local officials like the mayor of Zaozhuang City in Shandong. The Chinese leadership seems to be cautiously gearing up this type of lending--perhaps propelled by the Wukan confrontation in December 2011--but this does not appear to have full endorsement by central authorities yet. 

Rural mortgage lending seems to be another step forward in the Chinese version of "socialist market economy" in which nearly everything is allocated by markets, sometimes in adventurous ways, but always in a controlled, ordered manner. The fundamental idea of the "three rights" is to carve up the rights to rural property, separating the rights of ownership from the rights to use the property and the rights to the income or products yielded by the property. For example, a plot of land is owned by the village collective, but the rights to plant crops on it and the rights to the crops produced by it are contracted out to village households. The communist leadership has stressed that ownership of rural property still belongs to the ill-defined "collective" and cannot be sold or mortgaged. However, rights to use and benefit from property are in play. The contracting household can sublease the rights to use and profit from the land to someone else, but he can't sell the ownership of the land. Now he can also borrow against the value of this stream of income or rice. In 2008, after the 3rd plenum of the 17th party congress, the communist leaders gave a vague endorsement of transferring rights to farmland. Mortgaging rights was more controversial. Forest rights--which in most cases are not the main source of sustenance for rural households--have been the first to be marketized. Experiments with leasing, other transfers and mortgaging of rights to farmland and houses have been more tentative. 

The article illustrates the campaign with the example of Huang Huayin, who wanted to go into the rabbit-raising business. In February 2010, Huang mortgaged his family's 500-square-meter 3-storey house to borrow 320,000 yuan (about $50,000) which he used to buy 5,000 rabbits (expensive rabbits). He claims to have made net income of 100,000 yuan last year. 

The goal of Chongqing's mortgage initiative is to "enliven" rural assets and inject cash into rural areas. The article notes that urban residents have become accustomed to owning their dwellings and obtaining mortgage loans. However, rural people had few assets to secure loans and little cash to invest in agriculture. The article explains that the government has the responsibility to determine whether or not rural property can be used to secure loans, how loans can be made and repaid, and who will bear the risk. The new campaign is said to be ushering peasants "into the era of mortgage lending."  

This is another step in the transformation of rural land from liability to asset. Ten years ago farmers viewed their land as a liability because they were assessed taxes based on their land holding. Many farmers let neighbors cultivate their land for free as long as the neighbor paid the taxes. With the elimination of agricultural taxes between 2004 and 2006, replaced by subsidies based on the same land that used to be taxed, land became an asset with an income stream attached to it. As land became more scarce, its value increased to the point where rural mortgages are a real possibility.

A leader of Huang's county explained that previously, when land and houses could not be mortgaged, farmers could only get micro-loans of up to 30,000 yuan. With the mortgage program they can get larger loans with a longer payback period and he adds that the mortgage loans are more often paid back. No indication of how the bank forecloses on rural families who don't pay.

What if Huang's rabbits die or rabbit prices sink? Who bears the risk if Huang can't pay back his loan? The article emphasizes that the risk of loans is spread among banks, government, and rural household borrowers. Chongqing set up a fund that partially compensates banks for 20%-30% of the loss when the borrower is "unable" to pay back the loan. 

As of November 2011, Chongqing had given out 9.95 billion  yuan ($1.6 billion) in collateral loans to rural families. Chongqing ultimately plans to give 100-billion-yuan in loans: 6.8 million loans secured by farmland, 7.1 million secured by houses and 3 million secured by forest rights. 

The article reports that Guizhou Province also has had a morgage loan program since 2009 which has lent out 450 million yuan. Hunan, Shanxi, Zhejiang and Inner Mongolia also have programs. Shandong has an adventurous program that permits mortgaging of all sorts of rural property, including ocean fishing rights, claims on water management projects, hillsides, embankments, large farm equipment, fishing boats, as well as farmland, forest land, and houses. Shandong has various schemes for guaranteeing loans by individuals, group-lending, guarantees of farmer loans by agricultural companies and loan guarantee companies. 

The article implies that there are still some issues to be ironed out. It concludes by asserting that the government has a responsibility to clarify whether or not the "three rights" can be used as collateral, how to make loans and how to distribute risk [of default]. 

More adventures in capitalism with Chinese characteristics!

Tuesday, February 7, 2012

Xi Jinping's Doctoral Thesis

Xi Jinping is the vice president and presumed next president of China but little is known about him. In this post the dimsums blog offers its contribution to the genre of Xi Jinping-ology by conveying Xi's decade-old views on agricultural markets.

Ten years ago Xi Jinping wrote a thesis, "Tentative Study of Agricultural Marketization" (中国农村市场化研究) for a Doctor of Law degree at Tsinghua University in Beijing, a top breeding-ground for Chinese officials. The dimsums blogger has spent several hours poring over the 200-plus page tome to see what it reveals about Dr. Xi. The thesis is remarkably close to what China has been doing lately in agricultural policy, suggesting that Xi (or the person who actually wrote the thesis) has a major say in policy or is at least in agreement with what's being done. There is nothing adventurous, controversial (or insightful) in the thesis. It seems to be the work of a wonkish technocrat who is not prone to talk out of turn or wander from the standard "socialist market economy" dogma.  Bottom line: the thesis suggests that there will be no significant changes or surprises in a Xi Jinping administration.

The thesis is dated December 2001, which coincides with China's accession to the WTO that month. The degree is for a doctor of laws in Marxist theory and political thought education (a safe major for a budding Chinese communist party leader). Xi's undergraduate degree was in chemical engineering, also received from Tsinghua in 1979. The Chinese wikipedia entry about Xi notes that netizens have raised questions about Xi's thesis (there is no mention of it on the English wikipedia page). People questioned the appropriateness of the topic of the thesis for a doctorate in law (indeed there is no law to speak of in the document), saying it is more of a sociology paper. People also point out Xi was busy working as vice party secretary and governor of Fujian Province during the period when the thesis was written. Others questioned how he could get a doctorate without having first obtained a master's degree.

It is common for emerging leaders to collect education credentials on their way to the top, and the thesis is commonly ghost-written by someone else. Xi probably didn't write this one but he probably agreed with what was in it. 

While it is a doctoral thesis it is more like the final paper for an executive MBA course. The theory and the "Marxism" in the thesis consists mainly of a presumption that countries go through stages of development from feudalism to agricultural to industrial. China is somehow "different" from western developed countries (which seem to include Japan) because China is a socialist country, a big agricultural country, and it has a huge surplus rural population. This construct facilitates China's ideology-free approach of pursuing market-based policies that worked in other countries but reserving the option of government controls when desired since China is "different." Like most Chinese discourse, terms are seldom defined and frequently vague. In its latter chapters the thesis sounds like a Ministry of Agriculture report, spitting out statistics, using tables snagged from other Chinese publications (properly cited but with no value-added) and relying on slogans and aphorisms to make points.

The main point of the thesis is to call for establishing a complete market system to facilitate the modernization of rural China. The alternative to "marketization" is not stated (central planning?) Xi's approach is consistent with the approach of the last ten years--setting up markets to help farmers sell their products, allocate factors of production and distribute consumer products to rural people. The English abstract says, “In particular, [the] market should be relied on to solve the problems in the structural adjustment of agricultural industry and the increase of  farmers’ income…”

While Xi endorses markets as the primary means of guiding resource allocation, he is by no means a libertarian.  Xi makes a passing reference to the "invisible hand" of Adam Smith, but he does not endorse Smith's faith in unhindered markets. Xi calls for "orderly," "fair," and "rational" competition and says the "visible hand" of government intervention is necessary in agriculture.

Xi cites the United States as justification for intervention in agriculture. He points out that the United States had no department overseeing agriculture when the country was founded (imagine that) but after the USDA was set up it intervened more actively than any other department. He notes that U.S. rice producers got 40% of income from subsidies during 1986-93 and sugar producers got 50% of income from subsidies, and the U.S. spent large sums maintaining wheat reserves that reached 50 million metric tons in 1985. Says Xi, "If the United States, a big agricultural market-oriented country, intervenes in agriculture so much, then a developing country like China must intervene even more."

Xi's thesis is to a large degree a product of its time. When it was written China was experiencing declining commodity prices for farmers, there were big concerns about surplus rural labor, and everyone was worried about what WTO accession would mean.

Problems with agricultural marketing were a big motivation for the thesis' call for improved markets. Xi foresaw a nicely-organized hierarchy of national, regional and local agricultural wholesale markets and retail farmers markets. He (or his ghostwriter) did not anticipate the explosion of supermarkets that now dominate food retailing and marketing in China. The thesis called for establishing agricultural futures markets to help farmers manage risk. Ten years later, this is an ongoing project slowed by the tendency for Chinese markets to morph into casinos.

Interestingly, the 2012 "No. 1 Document" released this week includes three paragraphs on improving agricultural marketing tacked on to a document that is mostly about agricultural technology and infrastructure. The first set of recommendations--planning out a national hierarchy of agricultural wholesale and retail markets, exchanges, e-commerce--is strikingly similar to the main recommendations of Xi's thesis. An item in this year's "No. 1 Document" endorsing community vegetable markets is quite out of step with recent policies that have emphasized supermarkets. Apparently somebody besides the dimsums blogger has read Xi's thesis.

Xi's thesis worried a lot about surplus rural labor. He cites studies purporting to find that 40%-50% of the rural labor force was "surplus." In a number of provinces the surplus share was about two-thirds. Xi's thesis didn't seem to offer any startling measures to address the labor surplus other than encouraging companies to contract labor for overseas projects. Amazingly enough, ten years after Xi's thesis was written labor shortages and rising wages are the main feature of Chinese agriculture. The estimate of surplus labor force of about 150 million cited in Xi's thesis is about equal to the official estimate of the rural migrant population now.

One of the ways China differs from western developed countries, says Xi, is that China has large numbers of  surplus agricultural workers. According to the thesis, China cannot allow agricultural modernization to push large numbers of rural people into cities to become a poor class. These worries continue to constrain leaders in their liberalization of rural land and household registration systems that keep peasants tethered to their villages. Xi's thesis says agricultural marketization must have socialist guidance, which consists of a rural welfare system (a favorite of the current government), development aid to poor districts, unspecified rural management, and training in technology. The thesis calls for surplus workers to be absorbed both by creating "small towns" in the countryside and by letting them enter cities.

There are few clues as to Xi's views on private enterprise. The thesis gives a run-down of the various forms of business organization in a rural market but the discussion is largely factual. The thesis seems to endorse the "share-holding cooperative" form of business operation associated with coastal regions of Fujian Province. This has long been a socialist favorite and is often used to pool village land, but such organization have sometimes been accused of being a front for fleecing farmers in the last few years. Xi's thesis endorses many of the features of farmer cooperatives that have been emphasized since the new farmer cooperative law was introduced in 2007, but the endorsement of cooperatives as a form of organization seems lukewarm. The thesis discusses rural traders, brokers, and non-state-owned businesses as participants in the rural economy. Xi calls for improved management of village collective organizations but seems to presume they will continue to operate.

Xi's views on foreign trade appear to be in the mainstream of the recent Chinese leadership--in favor of trade but averse to a high degree of reliance on imports. Xi's thesis endorses WTO accession and stress the urgency of upgrading the quality of Chinese agricultural products to make them more internationally competitive. It reproduces some indexes of regional "comparative advantage" that were used to guide specialization of particular regions in the agricultural products they produce most efficiently. The thesis notes a transition from quantity to quality, for example, an emerging demand for high quality fruit and high-protein wheat for making bread or crackers. Xi's thesis insists that imports cannot be relied upon to meet these emerging demands.

Saturday, February 4, 2012

Wen Jiabao: Agricultural Work for 2012

On July 31, Wen Jiabao addressed a meeting of the State Council where he discussed six points for government work this year. The main themes included worries about how the slow world economy is affecting China, keeping the funding spigot turned on, ensuring supplies of basic commodities like food and housing to keep the masses happy.

Wen said this is an important year for implementing the new five-year plan, it's the final year for the current leadership, and the task of reform and development is arduous. He said the government needs to get the views of the common people and make sure decisions are based on the interests of the masses and based on the actual situation.

Wen said impacts and pressure from the world financial crisis had become evident over the past year and China now faces an important period of strategic opportunity with many favorable conditions for sustaining relatively fast economic growth. Wen: "We must inspire the people, mobilize the people, strengthen the confidence of all peoples nationwide, utilizing every favorable environment and factor, meet challenges, overcome difficulties, and maintain stable economic growth."

The discussion of agricultural work is brief and terse. The first point (and the only one described by multiple sentences) is to continue doing a good job on "macro control." Wen worried about the current international economy and called for watching carefully for signs of economic trouble. Policy interventions should be targeted and flexible. There seems to be an undercurrent of concern about the financial system; he says that it is vital to ensure stable funding for important State projects, start new projects in an orderly manner and make sure that spending on projects keeps rising steadily. He called for emphasis on credit support for small and medium enterprises.

In a seeming reversal from the general trend in Chinese industry structure, Wen called for expanding market access, promoting fair competition and encouraging private enterprise. This contrasts with the "state in, private out" (国进,推民) trend, and plans for industry consolidation through mergers and acquisitions, and raising the threshold for entering industries (for example, there was a paragraph on the seed industry with this type of verbiage in the "Number 1 document" just released). This call for private enterprise probably reflects the effects of the current economic slowdown which is hitting small businesses hard while big companies are kept on life support by bank loans.

Wen's second point is an emphasis on agricultural production. He tells us to implement the spirit of the "number 1 document" and to implement all the agricultural policies and subsidies. Do a good job preparing for spring planting, stabilize grain plantings and expand production of crops that are in short supply or good quality. Monitor markets for seeds and other farm inputs [watch out for fakes and price-gouging], prevent animal disease epidemics, and prevent fires in forests and grasslands.

Wen's third point is to maintain strict control over the real estate market and prevent inflationary speculation. Adopt measures to increase the supply of common [i.e. low cost] commercial housing.

Wen calls for stabilizing exports and continuing to upgrade the structure of exports. He calls for keeping an eye on the supply of key non-ag commodities like coal, electricity, oil, and gas to make sure supplies are not disrupted and prevent unspecified major incidents.

Wen's final point is to implement  policies that protect peoples' living standards. This includes an integrated system of minimum living standards [welfare], unemployment insurance and controls to prevent spikes in prices [of food and other necessities]. Strengthen monitoring of the quality and safety of food and drugs and the safety of school buses and other transportation.

Perhaps the speech calls for good work to ensure a positive legacy for the Hu-Wen administration in their final year at the helm. Wen concludes with: "Let us all, under the central communist party leadership of General Secretary Hu Jintao, forge ahead, rely on the people of the whole nation, innovate, work hard, welcoming with honors the victorious convening of the 18th [communist party congress]."

Friday, February 3, 2012

China's agricultural trade promotion strategy

China's new plan for agricultural trade promotion advocates more support for overseas marketing, more systematic use of safeguards to protect domestic industries, better information and other services, financial support for exporters and a more active role in international trade negotiations.

The plan for agricultural trade promotion (2011-2020) was released by the Ministry of Agriculture December 29, 2011. The plan emphasizes the importance of international trade for creating jobs, raising farmers' income and guaranteeing the supply of important commodities to the domestic market. It also worries that large volumes of imports are putting downward pressure on prices for some Chinese commodities. The plan voices concerns that rising costs in China are eroding international competitiveness and it worries that exports have low value-added, are sold in small batches and often face quality barriers overseas. The plan calls for promoting exports more actively, exports with higher value-added and higher profit margins, and controlling imports to preserve "industry security."

The plan calls for central and local governments to pay more attention to promoting agricultural trade. According to the plan, Chinese support comes in many forms:

  • Trade fairs held in China (there were 260 such fairs held in 2010)
  • Financial support for Chinese companies to participate in exhibitions overseas, take overseas trips for market research or scouting missions
  • Favorable tax policies, including value added tax rebates and giving preference to exporters for other tax reductions
  • Subsidized or earmarked loans for exporters
  • Helping Chinese companies build brands, advertise and sell directly overseas
  • Helping companies obtain certifications and registrations
  • Reducing or waiving fees for quarantine and inspection, expediting and simplifying procedures for exported agricultural products
  • Collecting and reporting foreign market information
  • Special credit and insurance for exporters from the Export-Import Bank and China Export Credit Insurance Co.
The plan says there have been many achievements, but funding is unstable, central and western regions have fewer resources for exporting, and more coordination and organization is needed. 

A set of "model exporters" and model export bases will be set up to show others how to export. China hopes to create well-known brands overseas produced by leading Chinese companies. 

Another strategy is to diversify agricultural export markets. Chinese exporters are to keep traditional markets in the United States, Europe, and neighboring countries as a base, and develop new markets in Latin America, Eastern Europe and Africa. 

The plan suggests learning from the experience and practice of developed countries and calls for using WTO-approved measures to protect domestic industries. The measures include antidumping, countervailing duties and other safeguards. The plan calls for setting up a system for monitoring losses and negative trade impacts on domestic agricultural industries. It calls for industry associations and companies to work together to file antidumping complaints. The Chinese government will strengthen its monitoring of overseas markets, collect trade laws and regulations, and conduct trade barrier investigations.

China wants to strengthen its negotiations in bilateral and multilateral forums. This includes active participation in a new round of WTO agricultural negotiations, genetic resource, intellectual property, and trade liberalization negotiations. They will pay for more training to develop personnel who are knowledgeable on agricultural trade issues. 

Thursday, February 2, 2012

OK Everybody, Innovate!

Since 2004, China's central authorities have annually issued a "Number 1 Document" stating rural policy priorities for the year. These documents state general policy directions for agriculture with few specifics. Each one tends to emphasize a different theme.

This year's "Number 1 Document" covers a lot of different topics and doesn't seem to contain anything new, but its chief emphasis is on technology and "innovation." Innovation (创新) is a word thrown around a lot in China but it's not clear what it means. The document's title is (loosely translated), "Ideas on Pushing Forward Agricultural Science and Technology Innovation to Continue Increasing Agricultural Production Capacity." Minister of Agriculture Han Changfu, commenting on the document, said that agricultural science and technology is indispensable, noting that S&T accounted for 54.5% of growth in agricultural output.

The document starts off by emphasizing production, reflecting the government's worry about food security. It calls for keeping grain planted area stable and raising yields, working toward achieving the 550 million metric ton grain production target. The document calls for taking seriously the "governors rice bag responsibility system" (which requires each province to make sure its grain needs are met) and the "mayors' vegetable basket responsibility system" (which requires city authorities to make sure vegetable, fruit and meat supplies are adequate). The next paragraph calls for more spending and subsidies for agriculture. There are no new subsidy programs; it calls for maintaining and expanding the many existing subsidy programs and doing a better job of monitoring where funds go. Two additional paragraphs emphasize measures to improve rural financial services and clarification and stronger protection of land rights.

The second section of the document focuses on technology. It calls for a focus on the long-term, cutting-edge technology and basic research, pushing back the frontiers of research and taking a prominent place in the world. It calls for the usual generalities like mechanization, improved breeds/varieties, water-saving irrigation, ecological methods, processing and storage, farming in oceans.

One paragraph calls for marshaling research institutes, universities, and companies to focus on agricultural research and extension. There will be more support for research, including an agricultural science and technology fund, a seed industry fund, and "guiding" financial institutions to make loans. There will be more agricultural demonstration areas and agricultural science industrial parks. Schools and research institutes are encouraged to set up experimental farms.

The seed industry is singled out for support. The document wants to nurture a set of big seed-breeding companies, consolidate the seed industry through mergers and acquisitions, "raise the threshold" for entering the industry, strengthen intellectual property rights, and improve seed production bases.

The document also devotes several paragraphs to improvements of the extension system and other means of providing public services to farmers. This includes the usual public extension services, TV programs, etc., as well as involvement of educational institutions and a paragraph on encouraging cooperatives and farmer associations to serve as intermediary organizations to bring services to farmers, and something called "expert courtyards."

Agricultural education and training gets a whole section in the document. More support for schools, universities, and institutes. University students will be sent to serve as rural officials and to work in western China.

Two other big sections call for more investment in agricultural infrastructure and improvements in agricultural marketing.

Minister Han reported that the Ministries of Agriculture and Science and Technology will work on three projects in innovation in science and technology with a focus on crop production. They will work to create a set of breakthrough plant varieties while strengthening the research system. Second, they will work on setting up a grassroots extension system to address the "last kilometer" problem--getting technologies out to the fields. Third, they will nurture agricultural human resources, addressing the problem of "who will farm in the future."