Wheat Scab? We Sprayed it!

Heavy rains this year created ideal conditions for disease in the wheat crop. In particular, there are concerns about wheat scab, a disease that often spreads in China's wheat growing regions during periods of wet and humid weather. The disease can affect output and bacteria produce a toxin that makes the grain inedible by humans or animals.


In April this year, the Ministry of Agriculture was so concerned about wheat scab that a special emergency campaign was launched to douse the wheat crop with chemicals to control the disease. 

Spraying the wheat crop in April (MOA).

On June 21 the Ministry of Agriculture held a press conference to allay any concerns about the wheat harvest.

The first question was a softball: "In Anhui, Jiangsu, and Henan there has been a relatively serious outbreak of wheat scab. What is MOA’s assessment of this problem's effect on summer grain output and quality?

Vice Minister Chen Mengshan responded by acknowledging that, yes, the rainy, humid weather had created conditions for wheat scab, but the disease was kept under control by the big spraying program. He said there were some impacts of disease on the wheat crop but no worse than they had anticipated. The MOA's forecast for another record summer grain crop is unchanged.

Reports from a handful of regions indicate scab is worse than usual, but seem to confirm Chen's assessment that the effects were limited to a few areas.

Today, the Ningbo (Zhejiang Province) branch of the Peoples Insurance Company announced they are paying out 1 million yuan in claims for losses due to wheat scab and lodging due to storms before harvest. The payouts were for 5500 mu out of the 1 million mu of wheat in Ningbo.

In Yancheng City a meeting was held to discuss insurance coverage of wheat scab losses in Jiangsu Province. According to the article, 3.18 million mu of Yancheng's 5.48 million mu was struck by "disaster" and the payout is expected to be 136 million yuan.

In Taizhou, also in Jiangsu, about 5% of the wheat crop is estimated to be lost to wheat scab.  In Nantong, the percentage is estimated to be 8%-12%. The usual proportion of the crop in this part of Jiangsu affected by wheat scab is 1%. The falling weight is also lower than usual this year. The price is expected to be on a downward trend due to quality issues.


According a report from Feixi County in Anhui, about a dozen counties have been affected by scab to varying degrees. A reporter saw the golden fields of wheat, but walked in an saw plants with no grain. In Wuhu County in Anhui Province, an estimated 10%-20% of the crop is affected and the falling weight is just 640 g/l. Wheat failing to meet standards can't be sold. 


One farmer in Anhui said he lost his entire 260 mu of wheat to scab. He had insured the crop, paying 2.43 yuan per mu (I calculate this to be about $2.30/acre; the other 80% of the insurance premium was paid by subsidies from the central, provincial and local governments). Insurance will compensate him 270 yuan per mu, 30% of the value. 

Insurance adjusters checking the wheat in Anhui.

Last month, agricultural experts in Shandong confirmed a relatively serious outbreak of wheat scab there, an unusual occurrence for the province that was attributed to the weather. In Binzhou, scab was estimated to have affected 2.3% of the wheat area. In Dezhou, the crop reportedly was not affected by scab or pests.

Part-Time Farmers and Price Supports

The rapid increase in wages and migration of workers to urban employment has made part-time farming the predominant mode of farm production in China. Journalists are calling it the "sideline-ization" of grain production (种粮副业化) which refers to the traditional classification of farming activities: planting grain was the main activity while commodities like vegetables and pigs were "sidelines." Now grain has become a "sideline" activity that is not very important to family income and gets accordingly little attention or priority from rural families.

A reporter who interviewed farmers in Anhui, Henan, and Hubei Provinces after the wheat harvest found that the part-time farming phenomenon is changing the way farmers sell their wheat. Farmers' time is too valuable to dry, transport and store their wheat. Instead, farmers now like to sell their wheat as soon as they harvest it to traders and brokers who come to the fields.

Villager Zheng Hailong recently sold 10,000 jin of grain to a trader at the edge of the field for about 1 yuan per jin. He told the reporter that he gets a low price selling to the trader but he can make the money back by working one day in the city.

Farmer Dong Xueyi says he hasn't sold grain to a purchasing station in several years. Farmers like to sell to traders who come to their door and don't demand high quality. Grain traders said the wheat purchase is like lightning; it's over in a few days. Farmers don't want to take time to dry and thresh their grain. They don't want to keep it for their own consumption either. They sell it all in one go.

Warehouse managers say small farmers rarely sell grain to them. The grain generally passes through the hands of 2 or 3 traders before it reaches a warehouse or mill.

The article says that this new mode of selling grain makes it harder for the government to use its minimum price policy to motivate farmers to plant grain. Most farmers don't sell grain to the grain stations that pay the minimum price and the price is not that big a motivator since grain sales don't contribute that much to family income now.

Farmer Dong says the price paid by private traders this year is .95 yuan/jin while the grain station pays 1.02 yuan (this year's minimum price) and has strict requirements on moisture and foreign matter. Dong says he will get 50 yuan less by selling to the trader but he's happy to do it.

Farmers interviewed in Anhui Province were often unaware of the minimum price and didn't care about the policy. Most farmers say they wouldn't be motivated by a price that's one or two fen higher.

"Pig Trust" Investment Product

China's 12th five-year plan aims to transform the mode of production in agriculture and break down the dual rural-urban economy. A big part of this is transitioning to larger-scale production that requires high up-front cash expenditures to buy inputs months before products are produced and sold. The pattern of cash flows in "modern" agriculture poses a problem for small farmers who can't get credit. It also poses risks when product prices fluctuate--what if the price of your product goes down so much you can't pay back your loans. There are a lot of experiments with financial innovations in Chinese agriculture and the pork industry is the testing ground for quite a few of them.

The state-owned COFCO conglomerate recently announced a "Pig Trust," an experimental financial product for raising capital and spreading risks of raising pigs. The trust is offered by COFCO Trust co., a COFCO subsidiary set up several years ago to peddle investment products that raise funds for agriculture.
According to terse descriptions in a news article and the company web site, the trust works as follows (please note, this post is not an endorsement of the trust).

Funds invested in the trust are used to purchase feeder pigs at about 20 kg and finance their production through the fattening and slaughter stages. The pig production is managed by COFCO meat (another subsidiary of COFCO) for a 2-percent fee (2 percent of what?) plus an unexplained "float." After the pigs are raised to slaughter weight (about 100 kg) and sold at the market price, the profit (or loss, presumably) goes to the trust. There is no guaranteed rate of return to the trust; it depends on profits earned from the pigs. Thus, the trust scheme provides capital to producers in exchange for the possibility of big profits in the future for investors. Investors in the trust appear to bear the risk.

The initial trust product will raise 15 million yuan and will cover a 12-month period. Production for the experimental trust will take place in Jiangsu Province. It's not clear who will invest in this trust--banks, institutions, or retail investors. The article describes the trust as a means for general citizens to join the stampede of companies--chemical, coal, steel, real estate, and software companies--investing in the pork industry. Neither is it clear who will do the production. Presumably, COFCO Meat will supply the feeder pigs and slaughter them. It seems likely some part of COFCO will also supply the feed. The article describes the model as "company + base + farmer + finance." The article reports that people in the industry say this trust product is experimental and it will probably be hard for most investors to participate in the pilot. The announcement of the trust is symbolic. However, if it works, the pig trust model could be used to finance hog barns and other industries like chicken farming and could be adopted by other companies.

The new "community supported agriculture" (CSA) movement imported from western countries and Japan  also has a financial angle. Little Donkey Farm in Beijing explains that the CSA concept includes joint ownership and bearing of risk by producers and consumers (Little Donkey's business is mainly in vegetables but also includes pork). Consumers pay a subscription fee to the farm before the growing season that provides producers with funds to pay for inputs. Consumers pay up front for their food, not knowing what they'll get. This also sets the price before harvest. If the harvest is bad consumers are out of luck. Thus, the CSA is also a model that transfers some of the risk from producers to consumers. Of course, the prospect of paying for something before you know what you'll get is also an impediment to the spread of CSA's that will help keep them a fringe part of agriculture.

Another financing model is an elaborate "six party + insurance" experiment in Ziyang, Sichuan. Ziyang's "six party" model includes two input suppliers--a feed mill and a breeding farm supplying piglets. It also include producers organized into pig farmer cooperatives, a slaughter/meat company. The innovative part is to include financial organizations: a bank, a loan guarantee company, and an insurance company. The bank makes loans to the feed mill and breeder, and they sell the feed and pigs on credit to the farmers. The pigs are sold to the meat company which deducts the funds to repay the farmers' loans. The bank loans are guaranteed by a loan guarantee company. The insurance company insures the pigs while they are being raised by farmers.

The six-party model has heavy government involvement and uses a number of small subsidies. The bank is the government's Agricultural Development Bank. Loan guarantee companies are usually capitalized by county governments in Sichuan. About 80% of hog insurance premiums are paid by government subsidies. Breeding farms also get subsidies for "improved breeds" and buying breeding stock. Several years ago the New Hope feed company signed an agreement with Ziyang authorities to become at least three of the six parties: feed, breeder, and meat company. While the "six party" model has been praised in a number of news articles the model does not seem to have been adopted elsewhere. Some assessments made passing references to "low compliance by farmers," weak negotiating position of farmer cooperatives, and the potential for the scheme to collapse if one of the parties runs into problems.

There is a lot of experimentation and varying degrees of innovation as China searches for ways to finance agriculture, an inherently risky activity that is mostly conducted by farmers who have few assets and uncertain ability to pay back loans. Lack of profitable investment vehicles for China's compulsive savers is also giving this a push. On one hand this could lead to more innovation, but on the other hand it could lead to more reckless investment and money-losing schemes.

Clenbuterol and Mutton Prices

Yesterday's post on high mutton prices neglected to mention the influence of a crackdown on clenbuterol use. In August and September 2011 news media revealed the "open secret" of widespread use of clenbuterol by sheep herders in Shandong and other parts of northern China (about 5 months after the pork clenbuterol incident hit the news). The Ministry of Agriculture sent out inspection teams and is threatening dealers and users of clenbuterol with big fines or jail time.

An article in the Dalian Evening News in February noted that mutton prices were high and the volume of sales in Dalian was at its lowest point in ten years. Some industry people interviewed by the paper attributed a short supply of mutton to the crackdown on clenbuterol. Clenbuterol reportedly can add 1.5-to-2 kilograms of lean meat per sheep. The ban means that sheep have less muscle and more fat, reducing the supply of meat.

Soaring Mutton Prices and Grassland Policy

The Chinese press has started taking note of soaring mutton prices, up about 30 percent from last year and now the most expensive type of meat in China. Mutton is being affected by broadly rising costs like other foods, but expensive sheep meat is also linked to a new policy to conserve grassland initiated last year.

Sheep meat is traditionally a staple food of poor nomadic minorities in Inner Mongolia and other grassland areas. In recent years it has become popular as the main component of hot pot restaurants, kebabs served by street stalls and restaurants serving ethnic Muslim and Mongolian cuisine. National Bureau of Statistics data on average food prices show that mutton is now the most expensive meat, costing over 50 yuan per kg, equal to about $3.50 per lb. (see chart below).

Source: dimsums chart using China National Bureau of Statistics average urban food price data.

The NBS data show mutton costing double the price of pork in May. But an article from Tianjin says mutton costs 60 yuan per kg there and you can buy three jin (500g) of pork for the price of a jin of mutton. The article calls mutton "unaffordable." Even in Inner Mongolia, a major sheep-producing region where mutton is a big part of the diet, the average price during the first quarter was 47 yuan/kg, up a third from last year. In Inner Mongolia some people are substituting pork for mutton in traditional dumplings. They're cutting back in other ways too. At a market in Tianjin, a vendor says that people who used to buy 3 jin now buy just 2.

At a wholesaler's shop in a Tianjin market, a dealer busy cutting up meat says he buys legs of mutton at 19 yuan per jin, about 2-to-3 yuan more than last year. After removing bones and other waste, the remaining edible meat costs him 28.3 yuan per jin and he sells it for 28.5 yuan, a gross margin of just 0.2 yuan per jin. He thinks he can make a small profit by selling the bones. 

The Tianjin wholesaler's helper holds up a leg of mutton and says, "We don't eat mutton ourselves. We work a whole day and don't earn enough to buy a jin of mutton."

Mr. Mu, a dealer with 10 years in the business, explains that he pays 10,000 yuan a year for stall rent in the market and each of his workers costs 1000 yuan per month. His profit margin on a sheep is 8 yuan and he sells about 10 a day, just 80 yuan per day. He says he has been losing money lately but is not inclined to raise prices for fear of alienating his regular customers. 

The retail price increases include rising costs of fuel, wages, and other costs. In Inner Mongolia the cost of raising a sheep doubled from 2009 to now, from 200 yuan to 400 yuan. There are also fewer young people available to raise and slaughter sheep due to outmigration. 

But the main factor seems to be a shrinking supply of sheep. A grassland ecological award system announced in June 2011 gives subsidies to herders who reduce the number of animals they graze on grasslands. The number of sheep in Inner Mongolia decreased from 97 million in 2009 to 87 million this year. The program moves animals from the traditional nomadic mode to raising sheep in pens and barns. The percentage of sheep raised in confinement is expected to rise from 30% to 70% within a few years. The new mode of production has higher costs that include barns, wells with electric pumps, and feed. 

Demand for meat has been rising and China has also been exporting more sheep. According to one official, Xinjiang has been buying more sheep from Inner Mongolia, reducing the supply available for local processing. Slaughter plants in Inner Mongolia reportedly are operating at 30 percent of capacity. 

Interviews with restaurants around Tianjin found that they have not been raising prices yet. A restaurant manager says they do not change menu prices frequently. This is the low season for mutton-based hot pot and kebabs, so volume is relatively low now and there isn't as much pressure to raise retail prices. If mutton keeps rising restaurants may have to adjust menu prices. 

The price increases hit Mongolians, Muslims and other minorities harder because sheep are such an important part of their diet. A Mongolian lady whose family customarily eats four sheep during the winter says, "We must eat mutton, so we have to cut back on other expenses." 

An economist from the Inner Mongolia academy of social sciences recommends giving temporary subsidies to school cafeterias in Inner Mongolia, but he acknowledges this is only a temporary solution. In the end, only "technology" can produce more sheep and reduce costs.

Sheep are another example of the clash between China's rising living standards and its limited natural resources. Chinese authorities are finally acknowledging the ecological damage due to maximizing food production without regard for effects on future productive capacity. But as farmers cut back on the pillaging of soil, water and grasslands Chinese consumers face higher prices. Moreover, the shift from traditional low-capital-input extensive farming modes to intensive farming raises costs that are passed on to consumers. 

Welcome to the 21st century and the concept of scarcity.

Conserving a "Native" Chinese Pig Breed

A recent article from Xinhua News Service describes a Heilongjiang breeding farm's preservation of Min pigs, one of China's native swine breeds. The article reveals the tensions between commercialization of the pork industry and conservation of disappearing local breeds.

China had dozens, perhaps hundreds, of native swine varieties that have nearly disappeared as lean-type breeds from Europe and North America displaced them. The Min Pig (民猪) is one of China's most prominent native breeds.

Northeast Min Pig (source: Hudong).

The Min pig is native to China's northeast. Over several hundred years of breeding and adaptation to the harsh climate of the region, it developed a tolerance of cold weather and ability to consume coarse feeds. It is estimated that there were 8.5 million Min pigs in the 1930s but their numbers declined over the course of the 20th century. As early as 1963 Israeli scientist H. Epstein's Domestic Animal Breeds of China said there were only a few Min pigs in remote villages of Jilin Province. A conference in 1982 estimated there were an estimated 10,000 or so left in the northeastern provinces.  According to Xinhua, "pressure" from foreign breeds peaked in the 1990s and there were only 100 or so Min sows left at the end of the decade.

The Lanxi County Pig Breeding Farm in Heilongjiang Province is conserving and breeding the Min pig with "foreign" pigs. The farm has 430 breeding pigs and 170 cross-bred sows.

Chinese experts praise the strong fragrance and flavor of pork from the northeastern Min pigs. The muscle is marbled with fat. The Min pigs are said to be more resistant to disease than other types of pigs. In studies, Min pigs had lower incidence of piglet diarrhea than a "control group." They can be raised with fewer pharmaceuticals and are promoted as "healthy," "green" food.

Despite the purported advantages of pork from Min pigs, an official from the breeding farm notes that conservation of the breed has been difficult since the market for pork from Min pigs has been weak. The Min pigs have a lower proportion of lean meat, grow more slowly than "foreign" breeds and can't satisfy demand for pork. The farm official says the breeding farm subsidizes its Min pig herd with profits earned from selling "foreign" breeding animals from Yorkshire, Landrace and Duroc stock.

As Chinese peoples' living standards rise the niche market for pork from native breeds is coming back to life. Many Chinese consumers complain that lean pork has little taste and prefer the strong flavor and smell of pork from min and other native breeds. There are also other purported benefits. The Min pig pork is said to be easier to chew and digest.

Rather than just warehousing native breeds, there is an attempt to commercialize their production. In Lanxi County there are about 2000 farms in two dozen villages raising Min pigs. They have certifications as a "pollution-free" product and a "geographic indicator." A sales network retails the pork in supermarkets and restaurants located in Heilongjiang and Beijing,

A shop operated by a farmer cooperative in Jilin Province selling Min pig pork.

In reality, breeds are constantly changing and "native" is a relative term. The Min pig is the descendant of black pig varieties brought to China's northeast about 300 years ago by human migrants who moved there from the overcrowded north China plain.Over time, the black pigs adapted to the cold, harsh climate of northeastern China by developing layers of fat and growing thick hair during the winter. Their digestive systems probably adapted to the coarse fodder available there. The adaptations permitted pig production in a harsh climate. However, in today's industrialized pork production model the slow growth of min pigs -- wasting energy on producing fat and extra hair -- raises cost. A professor from Northeast Agriculture University estimates that the feed conversion ratio for Min pigs is 4:1 versus 3:1 for "foreign" breeds. The ability to consume coarse forages is irrelevant when feeds from corn and soymeal are available.

The infusion of European-type swine to China is not new. Epstein's 1963 catalog of Chinese breeds described a "Harbin white" breed that had been developed by breeding Large White stock (brought from nearby Russia in 1896 and later from Canada) crossed with "primitive local stock" (probably a type of min pigs). Epstein also described a "Jilin Black" bred from Min pigs and imported Large White and Berkshires in the 1920s and a "Shanghai White" bred from indigenous Meishan and imported Large Whites. Note that Heilongjiang was part of Russia and Shanghai was a European enclave in the early 20th century.

Epstein noted that purebred Large White pigs were "unaccustomed to the cold climate and rather sparse feed available in Harbin." He also described "very primitive" pig breeds in northwestern Heilongjiang, an area he described as "pure pasture...with a little agriculture restricted to millet, barley, soya bean and wheat." The pigs were small and took 2 years to reach a suitable slaughter weight. They had "a thick layer of lard and kidney fat which is in great demand in this very cold climate."

To some extent, there is no such thing as a "native" breed. Five hundred years ago there were no Min pigs in northeastern China and no pigs whatsoever in North America until Spanish explorers brought them over. In the early 20th century the U.S. Department of Agriculture spent years negotiating with Denmark to get Large White (Landrace) pigs to improve U.S. pig breeds; the Americans finally got some Danish pigs in the 1930s. The lean-type hogs that resulted began to dominate the U.S. swine population in the 1950s and transformed the U.S. pork industry. Many descendents of those pigs now populate Chinese pig farms.

During the 1980s U.S. scientists imported Chinese Meishan pigs for breeding experiments.The Heilongjiang breeding farm also supplies Min breeding pigs to other breeders in 18 provinces of China and occasionally to overseas customers.

Problems in China have arisen because the pork industry was largely neglected and mostly (not entirely) cut off from breeding improvements in the rest of the world for decades. When China re-opened in the 1980s. Instead of developing genetics gradually and incrementally, its pork industry made a "great leap" by importing of genetics that had been developed overseas during its decades of isolation. The imported pig breeds boosted pork consumption with surprisingly little increase in grain consumption, but diseases have multiplied since the "foreign" breeds lack resistance and do not tolerate the harsh conditions, variable feed quality and poor management on Chinese farms.

There is justification for preserving "native" breeds so their genes will be available for breeding needs in the future. Chinese scientists have been aware of this for a long time but native breeds nearly disappeared until "the market" made conservation possible. Conservation is easier to accomplish if it's profitable. Cross-subsidization of conservation with profits from "foreign" breeds and the nascent revival of niche markets for native pork improve the prospects for conserving "native" Chinese breeds.

Save the Family Farm in China

Thirty years after the re-introduction of family-based farming in China there is a sense that small plots cultivated by individuals are not efficient enough to feed China's population. Should China turn to large-scale high-tech farming? Should Chinese companies go out to operate farms overseas?

Top rural policymaker Chen Xiwen pondered these questions in a rambling but candid speech given to a rural development summit at Tsinghua University last month. His discussion addressed the trend of companies entering farming, the rising tide of agricultural imports, and the strategy of Chinese overseas investment in farms.

Chen Xiwen speaks at Tsinghua University. (Source: Tsinghua News Net)

Chen observes that China imported 62 million metric tons of soybeans and grain last year, which was equal to about 10 percent of China's production. China has about 9 percent of the world's arable land and 17 percent of the world's population. Under pressure to feed such a large population with a small endowment of natural resources China needs to convert those resources into food more efficiently and to find new sources of food overseas.

Chen cites the attention-getting announcement that Wuhan Steel Group plans to begin raising pigs (dim sums post on this). Chen thinks "we should pour cold water" on the trend of companies getting into agriculture. He draws a parallel between company-operated farms and the failed collectively-managed farms that existed from the 1950s to 1970s. Both types of organizations rely on hired workers to do the actual farming which creates incentive problems. Chen cites his own experience working on a collective farm for 10 years. Everyone got the same salary no matter how hard they worked so everyone tended to slack off. Family-based farming gives individuals incentive to maximize output from their land since they are the residual claimants. Chen notes that farming has been family-based in China for thousands of years and nearly every country organizes their agriculture as family farms.

Chen says that from a technical standpoint China could operate even larger and more technically-advanced farms than in the United States. And in fact he says there are officials in Heilongjiang eager to bring in the most advanced technology and operate 30,000-mu (4,900 acre) farms. However, Chen says, the problem is that China has 600 million people in the countryside. Where would they go? What would they do? He notes that in some places village houses are being demolished to create new fields, but this is destroying the traditional village social structure.

Chen seems to endorse family-based farms but insists that individual farmers need help from companies to obtain technology and training. He also endorses farmer cooperatives as a means of providing extension-type services to farmers.

Chen then grapples with the issue of utilizing international resources and international markets. He acknowledges that China doesn't have enough resources to feed its population in the future. Should China just buy commodities from the international market or should Chinese companies operate farms overseas in Latin America, Southeast Asia and Africa and ship commodities home to China?

Chen's views on this are not entirely clear. He notes the overseas investment strategy has met a lot of stumbling blocks and has not made much progress. Acquiring large tracts of land in other countries is difficult since they have private ownership and restrictions on foreign control of farmland. He cites a plan to grow corn on over 2 million hectares of land in the Philippines, but this would be unrealistic since it would be such a large proportion of that country's land. He says a lot of [Chinese] people went to Africa to acquire petroleum and fish but not much was sent back to China. The commodities are sold where they can generate the most profit [which is not necessarily in China].

One of the arguments Chen makes for family farming in China is that local people have the best knowledge of how to farm in their locality's resources and environment. By extension, why should anyone expect Chinese companies to be more efficient than local people at operating farms in Latin America or Africa?

Chen concludes that these issues require a lot of strategic thinking. More food for thought...

German Seeds Push Corn North

One of factors contributing to China's big expansion of corn production is the availability of a new seed variety that extends the frontier of corn production further north into regions that are frozen most of the year.

According to Farmers' Daily, early-maturing corn varieties Demeiya Nos. 1, 2, and 3 imported from Germany have become very popular in recent years among state farms in China's northern latitudes along the northern border. The German company KWS has a joint venture with Kenfeng, a Chinese seed company that also has its roots in the state farm system of Heilongjiang, and Kenfeng markets the seed. According to Farmers Daily, Demeiya is high-yielding, good quality, resistant to lodging, can be densely planted and dries quickly. The seed was introduced in China during 2007 and quickly gained popularity [perhaps helped along by Kenfeng's links to the state farm system?] Farmers Daily reported that Demeiya accounted for 65% of corn seed used in the state farm area of northern Heilongjiang this year and is expected to reach 80% next year.

Farmers Daily explained that other high-yielding corn varieties get low yields in northern Heilongjiang due to cold temperatures. The KWS varieties mature early, in 108-115 days or so. Demeiya no. 1 has a thin stalk and can be planted densely, about 7000 plants per mu.  It also dries fast, an important feature. Grain traders liked buying Demeiya since the corn could be immediately threshed and loaded. The yield was said to exceed 10,000 kg/ha. In state farm demonstration fields the yield reached as high as 13,500 kg. It has spread to Heihe, Jiamusi, Yichun, Hegang and most parts of northern Heilongjiang. Previously, only soybeans could be grown during the short season in this region, but the new variety is allowing farms to make more money growing corn.

Kenfeng seed company's Demeiya No. 1 corn seed. 

One post on an electronic bulletin board last October asked, "Are people planting Demaiya No. 3 this year? How is the output and cost of seed?"

One response was, "The price is high and production is OK. It produces hard, quality corn that sells well." A second response concurred that production using Demeiya No. 3 was extremely good in Baoquanling district and cited some high yields, adding "of course the price of the seed is relatively high."

Of course, any product--especially seed--selling at a high price draws knock-offs. In March this year, authorities discovered 30,000 kg of fake Demeiya No. 1 seed in Heilongjiang's Suibin County. County officials gathered samples from the Kenfeng Company for testing at the local agriculture bureau's testing center where they found bags labeled as Demeiya No. 1 contained a different kind of seed. Local police confiscated the seed and are conducting an investigation.

The new seed illustrates the fantastic growth in China but also exposes the hollow core of its development model. Beneath all the hype over China's amazing economic growth is the lack of real innovation. Nearly all the basic technology is imported--the seeds, animal breeds and the designs and fundamental components of high-speed trains and automobiles. Seed companies that give the illusion of being "technology" companies or "hi-tech" are little more than glorified salesmen, making (and spending) most of their money by reselling imported seeds, jockeying to get control of seeds from some agricultural institute and buying up competitors. Seed companies put their brand name on the bag but don't always know what's inside the bag.

An incisive analysis of China's seed market by Tong Pingya in January 2011's China Seed News observed that seed companies market seed based on which company gives them the largest rebates, not quality of seed. He also estimates that over 40 companies are illegally selling the leading corn variety, Zhengdan 958. Two of China's biggest seed companies, Denghai and Dunhuang, attributed booming profits during 2010 to their sales of Xianyu 335, a wildly popular corn seed variety produced by a multinational company.

The same issue of China Seed News reports on China National Seed Group, the only state-owned enterprise in the crowded seed industry and apparently the government's choice to be the flagship enterprise of the industry. The article reports that the company--once the largest seed company in China--has had its market share chipped away for foreign and domestic seed companies. One of it's great achievements reported for 2010 was that it became the fifth company licensed to produce and sell Zhengdan 958, but this corn variety is losing share to other seeds like Xianyu 335. China National Seed is in a cooperative venture with another multinational to develop a corn variety in southwestern China.

On a related note, see this Wall Street Journal video on China's imports of dairy cattle:



There's little incentive to invest in long-term research in China's get-rich-now culture.  If I were to invest in developing my own seeds, the market would be quickly undermined by knock-offs. Why spend years paying scientists to breed seeds when I can get them today from my joint venture partner?

Onfarm Storage Subsidy

Large amounts of China's farm products spoil or are otherwise wasted due to poor onfarm storage. On May 23, the Ministries of Agriculture and Finance issued a new subsidy program for onfarm storage facilities. The program pays 30 percent of the cost of building storage, preservation and drying facilities built by farmers or farmer cooperatives. A special subsidy fund of 500 million yuan is being established. The subsidy is paid after the facility is built. The program was set to be launched May 31 in eleven provinces, mostly in northeast and western regions: Inner Mongolia, Liaoning, Jilin,  Hebei,  Henan, Sichuan, Yunnan, Shaanxi, Gansu, Ningxia and Xinjiang. 

According to the announcement, China loses 7-to-11 percent of grain, 15-to-20 percent of potatoes and apples, and 20-to-25 percent of vegetables to waste each year. This program, which was called for in the "Number 1 Document", is expected to address this problem. The government has for several years been calling for local governments to give financial support to farmer cooperatives for building such facilities  but local governments have generally been slow to cough up the funds. 

Jilin Province's announcement says the province has 40 million yuan to give out in 15 counties. A farmer can apply for up to 2 projects and a cooperative can apply for subsidies for up to 5 facilities. They can include facilities for cleaning, grading, storage, preservation, drying, packaging, cooling and treatment. 

The Ministry of Finance's Q&A reveals that the project will be integrated with regional development and demonstration projects for developing contiguous areas specializing in particular crops. There are maximum awards set for each size of storage unit. The largest is 105,000 yuan for a 100-metric-ton cold storage unit. The smallest is 2000 yuan for a 2-mt storage shed. A 2-mt capacity hot-air drying shed can get a maximum subsidy of 20,000 yuan. The subsidy cannot exceed 30 percent of the cost. 

Farmers or cooperatives first apply to their township for approval. If granted, then the county agriculture and finance departments must approve. Then the facility can be built. After construction it has to be approved again (to verify that it was actually built and meets standards). A public notice is issued and 7 days later the the subsidy funds can be paid out. 

Rapeseed Industry's "Waterloo"?

China's strategy of continually raising crop prices to maintain farmer incentives is running into trouble. It is rumored that a minimum price of 5000 yuan per metric ton for this year's rapeseed crop will soon be announced. That would be a relatively large increase of 400 yuan from last year and above current market prices. However, processors can't make a profit buying rapeseed at this price.

Processors can't raise the price of their final product. Rapeseed oil must compete with soy and palm oil, both of which are cheaper. In recent years Sinograin has resorted to paying processors a 200-yuan-per-ton feed to process rapeseed into oil which is then stored in government reserves. Meanwhile, there are a lot of rapeseed processors around with no rapeseed to crush. They have turned to processing cheaper imported rapeseed.

A May 31 article from New Countryside Commercial News says rapeseed production has been on the decline since 2009 and experts are worried that rapeseed is facing a "Waterloo" moment, a sort of tipping point where it will follow the soybean industry in becoming dominated by imported raw materials.

According to the article, the rapeseed oil is 9900 yuan per metric ton, the soy oil price is 9500 yuan or so, and palm oil is 7600-7800 yuan. The article concludes, "The price advantage of soy and palm oil is clear."

An article from Futures Daily also says the rapeseed industry should be the focus of concern. A COFCO manager in Hubei's Jingmen says this year's production volume and quality are down and the oil content is low due to cloudy and rainy weather in southern China this spring. The COFCO manager says farmers have expectation of rising prices due to the decreased volume of production this year. This exacerbates the "agency processing" trend described above.

An earlier May 23 article from New Countryside Commercial News reported that production costs in an area near Wuhan in Hubei Province are up about 50 yuan per mu this year. Processors are buying at about 4600 yuan/mt, a price that a farmer says would bring him no return on his effort. The farmer says rapeseed returns are not attractive compared with alternative crops like rice and wheat.

The director of the rapeseed institute at the Chinese Academy of Agricultural Sciences says that area planted is down this year, especially in parts of Anhui and Jiangsu Provinces. Yield is up, he says, but overall production will be down. China Oils Net estimates that national rapeseed area is down 5.4% this year and production is down 1.3%. If the government's minimum is 5000, the research director thinks the purchase price should be around 4800 to 5200 yuan/mt. (The government's minimum price has quality and moisture requirements that much of the rapeseed can't meet, so not everyone gets the minimum price.)

China's main concern has been to keep grain prices rising fast enough to maintain profit margins as costs rise in order to maintain self-sufficiency in rice, wheat and corn. However, as the government raises prices and subsidies for grains it has discovered it has to raise prices and give subsidies for oilseeds and cotton too in order for farmers to keep planting them.

This subsidy escalation strategy worked OK as long as world prices were rising too. But world commodity prices tend to rise and fall in cycles. Now that world prices have stopped rising China's strategy is undermined. It's easier to jack up domestic prices for grains since imports of grains are controlled to some degree by tariff rate quotas and other barriers, so there's some insulation from the world market. It's more difficult to raise prices for oilseeds and cotton since tariffs are low and there are no quotas. The government can't force processors to pay high prices for oilseeds either since processors can't raise the price of their final product. Cheaper imported oils are available that put a ceiling on vegetable oil prices. The result is development of a segmented market: a free market for crushing imported rapeseeds and a "policy market" for high-priced domestic rapeseed that is processed into oil that is stashed in warehouses.

The "waterloo" theory is that the industry is reaching a tipping point where crushing plants begin to use more and more imported rapeseed that "invades" the market. A second theme is that the "threshold" for the Chinese industry is low and there are large numbers of small, weak crushing plants that are vulnerable to competition or takeover by multinationals. Industry people worry that this is setting the stage for rapeseed to become "the next soybean" that will be dominated by foreign operations.

The Rural Commercial News warns that: "...after the fall of the soybean industry, it seems our country's rapeseed is also gradually moving toward a dead end. With excess capacity, fragmented structure, and a low threshold to enter, the industry has no way to regain its vitality." The article concludes by noting that some experts predict an increase in imports, which does not bode well for the industry.