Tuesday, April 10, 2012

Grain Market Intervention Monopoly Restored

In 2004, China introduced a price support program for rice. Later this "minimum price procurement" was extended to wheat. In 2008 and 2009 intervention plans were introduced for corn, soybeans and rapeseed. Under these programs, companies commissioned by the government buys up commodities when the market price falls below the support price set by the government each year. The government pays the company to buy and store the grain and it is later auctioned off, always at a higher price than the company paid.

Initially, the state-owned reserve-management company, Sinograin, was the single buyer of grain and oilseeds under the price support program. In 2010, the government decided to give Sinograin some competition by allowing three other state-owned companies--COFCO, Chinatex, and China Logistics--to participate in price support purchasing. However, this year that decision has been reversed. Sinograin will again be the sole buyer of grain and oilseeds for the price-support program beginning with this summer's grain crop.

An Economic Observer article explains that the diversification strategy backfired. It led to massive grain-hoarding and added upward pressure on grain prices. There was insufficient oversight and lots of opportunity for corruption and the government found it actually became more difficult to control grain prices.

Authorities became alarmed during the first year of the diversification program in 2010 when there was panic-buying of wheat in Henan, Anhui and Shandong Provinces. This year corn prices are hitting record levels and the government is reportedly restoring the Sinograin monopoly to cool off prices and restore oversight to the price support program.

The price support program gives the designated buyers strong incentives to buy and hold as much grain as they can. They get subsidies for the costs of procuring grain and storing it, and they don't have to sell it until the price goes up enough for them to make a profit. Most of the auctions held to sell off the grain bought under the price support only sell a small proportion of the grain offered. The article calls these auctions "air conditioning." Consequently, much of the grain is locked up in company warehouses, reducing the volume available to processors who actually use the grain.

A separate article, "Research on Our Country's Grain Market-Support Purchase and Sale Policy," that appeared in the academic journal China Soft Science in 2011 had similar criticisms about grain-hoarding and guaranteed profits. The article pointed out that state-owned grain companies made profits for the first time in 47 years after the price support program geared up and the "iron rice bowl" of subsidies weakened the urgency of reforming these companies. Meanwhile, the article observed that inflated corn prices had turned profits into losses for alcohol and starch manufacturers while grain was hoarded by government-designated purchasers.

The Economic Observer says that Sinograin and its agents bought up 60% of all wheat marketed in 2006. Many companies "illegally bought grain," purchased low-quality grain, and stored it outdoors or in poor conditions. In 2008 Sinograin claimed to have bought 80% of the wheat produced in Henan, but many questioned this and claimed this figure implied fake transactions through grain "round-tripping." A number of Sinograin depot managers have been jailed for corruption and one Henan Sinograin official fled the country with millions of embezzled dollars.

Industry sources told the Economic Observer that the government's financial burden became even more heavy after more companies were allowed to participate in support price purchases and control over the grain market was weakened.

The article warned that absence of limits on price support purchases created a danger of duplicating the heavy financial burden that resulted from the "protection price" arrangement during 1998-2001 when there was no limit on government grain purchases, grain piled up in warehouses and the government lost billions of dollars.

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