Sunday, June 3, 2012

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.

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