Tuesday, July 31, 2012

Confession: Agriculture Pollution "Relatively Serious"

In a press conference this week, Vice Minister of Agriculture Zhang Taolin admitted that agriculture's contribution to water pollution in China is "relatively serious."

Zhang cited the communique from the first census of pollution sources which showed that agriculture accounted for 43.7 percent of chemical oxygen demand emissions in 2007. Agriculture also accounted for 57 percent of nitrogen and 67 percent of phosphorus pollution entering bodies of water. Mr. Zhang said the volume of emissions from agriculture and their contribution to overall emissions are controversial among scholars.

The pollution communique was released in February 2010. It apparently took more than a year to compile and release the brief report on data for 2007. The dimsums blog reported the agricultural pollution numbers February 17, 2010, more than two years ahead of Vice Minister's pollution confession.

Vice Minister Zhang explained that nonpoint pollution from agriculture comes from organic matter, chemical fertilizer and pesticides washed into bodies of water by rainfall and other water flow. Zhang said the concentration of agriculture is steadily rising, which increases the amount of chemical fertilizer, pesticide, plastic sheeting, animal waste and antibiotics used. Moreover, household waste and garbage in rural areas are increasing and treatment and disposal is far behind that of urban areas.

Chinese officials typically don't admit there's a problem until they have "solved" it. The Ministry apparently feels they now have enough programs and campaigns in place to admit that there is an agricultural pollution problem. Zhang says that MOA has been cooperating with other departments to address the pollution problems. They have promoted "cycling economy" to reduce fertilizer use, increase efficiency of pesticide applications, treat animal waste, and reduce use of antibiotics. Zhang promises that additional targeted steps will be taken during the 12th five-year plan.

Early Rice Quality Problems

The early rice crop now coming on the market in southern China has been hit by weather and pest problems. A July 30 posting on China Grain Net's "360-degree early rice purchase" microblog said, "early rice output is not optimistic."

The problems are attributed to cool, wet weather during the key growing period of May and June. The Ministry of Agriculture held training sessions earlier in July to provide guidance for dealing with the pest problems but the crop appears to have been hurt by the unusual pest pressure. There are differing reports on early rice prices.

One microblog post said the price started out high and is stable. Another post said prices are on a rising trend. He says the price in Hunan is 135 yuan/50kg, well above the government's minimum of 120 yuan and could go higher. This year's 120-yuan minimum was already 17 percent higher than last year. The microblogger recommended that buyers pay attention to quality. Another posting from Wuhu in Anhui Province reported that brokers were buying rice in villages at 115 yuan/50kg while grain depots were posting prices of 120-to-125 yuan/50kg, slightly above the minimum.

At the State Administration of Grain's July 10 meeting on early rice purchasing, Vice Director Zeng Liying announced that China was going to have another good early rice harvest.

Wednesday, July 25, 2012

China on the Road to High-Tech Agriculture

On July 20-21 Chinese agricultural officials from all over the country assembled in Jiamusi, Heilongjiang Province, to hear Vice Premier Hui Liangyu give a speech urging them to push forward with "agricultural modernization." The speech seems to be a signal that China is moving toward high-tech capital-intensive agriculture. This was reinforced by the post-meeting visit to the nearby high-tech "Friendship Farm" where huge fields are tended by airplanes, helicopters and massive tractors.

Chinese officials have been talking about "modernizing agriculture" since the 1980s when Deng Xiaoping proclaimed the mantra of "four modernizations" to guide the country post-Mao. The idea was to get away from ideological excesses that produced the disastrous cultural revolution and great leap forward to an era of pragmatism in which technological improvement would replace ideological purity. The rhetoric in Chinese documents hasn't changed that much since the 1980s. What has changed is that China now has money--lots of it--and the problem of massive rural underemployment has now eased after a decade of rapid outmigration that has drained the youth from the countryside.
A helicopter that sprays pesticides is demonstrated 
on the "Friendship Farm" after the modernization meeting.

Hui's speech stressed that the country is in a key period where it is accelerating the transformation of traditional agriculture. The modernization of agriculture with Chinese characteristics includes upgrading infrastructure, building teams of agricultural personnel with scientific knowledge, adopting a modern management system, and improving the policy system. The "management system" is code for inducing villagers to rent out their land to be operated as a large-scale farm. A key measure is investment in high-tech agricultural demonstration districts like the Friendship Farm. The speech follows similar rhetoric about transforming the mode of production in the 12th five-year plan and orders to develop modern agriculture demonstration districts in the "No. 1 Document" this year.

The urgency of increasing production to maintain food security is the driving force behind the modernization push. Hui cites that plan to increase grain production and the importance of maintaining the supply of major agricultural products. He cites resource and environmental constraints, a shortage of young laborers, rising production costs, natural disasters, price fluctuations, and food safety problems. Hui said modern agriculture faces unprecedented difficulties, complexities, and heavy resistance.

The new mode of agriculture takes money, so the same day as Hui's speech the China Development Bank, Ministry of Agriculture, and Heilongjiang Provincial Government signed an agreement to jointly push forward modern agriculture. The three parties pledged to pursue large-scale, "green," efficient farming in Heilongjiang by boosting provincial government subsidies and expanding bank loans and other financing to 60 billion yuan by 2015. It will create 50 million mu of drought-resistant fields, raise mechanization to 92.5%, and boost agricultural processing

Monday, July 23, 2012

Are Wheat Farmers Impoverished?

The 2012 survey of 600 farms in Henan Province reports that profits from wheat production are rising slowly and complains about rising input prices. Misleading calculations suggest that Chinese farmers are impoverished. However, if the calculations are done correctly one finds that Chinese farmers actually do pretty well since they only spend a few days a year in their wheat fields.

The survey identifies three major cost components: material inputs, services (mainly mechanized ploughing, seeding and harvest), and labor. Most of the cost increase was due to rising prices of fertilizer, seed, and pesticides. Labor costs went down slightly and service costs went up slightly--basically offsetting each other.

The cost of material inputs was 226 yuan per mu, up 39 yuan from 2011. The price of all inputs was up. Fertilizer accounted for most of the increase in cost, rising 27 yuan this year. Seed costs were up 9 yuan and pesticide was up 2 yuan per mu. The price of seeds at planting time last fall was up 5-to-9 percent and fertilizer was up 11.5%.

Services expenses averaged 134 yuan per mu. Nearly every farm hired someone to plough and harvest their wheat fields and only a few sowed their fields by hand. Ploughing cost an average of 57 yuan per mu, harvest 49 yuan and seeding14 yuan. Irrigation expenses this year fell by half compared with last year when Henan was hit by a serious drought.

Labor costs were 180 yuan per mu, down slightly this year. This represents the cost of just 3.2 days of work. This is mainly an "opportunity cost" since farmers mainly use their own family's labor. Daily wages were up in Henan, but the amount of work done in wheat fields decreased 16% this year. This was partly due to mechanization. Many farmers planted their wheat, then went out to work off-farm and didn't come back until it was time for the harvest. The survey report says many farmers didn't bother with weeding and pesticide application. Some farmers are quietly leaving their fields idle, but it's not clear whether such farmers were included in the survey.

The report doesn't mention land costs. The 2011 report on wheat costs in Henan said land cost averaged 199 yuan per mu.

The average wheat yield was 394 kg per mu, up 4 kg from 2011.

The report calculates the average revenue using the government's minimum price of 2.04 yuan/kg, up from 1.88 yuan/kg in 2011. It doesn't report the price farms actually are getting paid for their wheat. Last month it was reported here that many farms sell their wheat below the minimum price. This year the market price was above the minimum in most areas.

The 600 farms reported an average subsidy of 46 yuan per mu, up from 30 yuan per mu in 2011.

From these numbers we can calculate the impact of the main components of revenue and costs on profits for wheat farms:

Increased price = (2.04 - 1.88 yuan/kg) x 394 kg/mu = 63 yuan
Increased subsidy = 16 yuan
Increased input costs = -39 yuan
Increased machinery costs = -15 yuan
Decreased irrigation costs = +13 yuan

Clearly, most of the contribution to increased profits came from the increase in price. The increase in subsidies offset the increase in machinery cost. Farmers got a break by being spared a drought this year which reduced their irrigation cost.

The average Henan farmer planted 5.1 mu of wheat (1 acre = about 6 mu).

The report erroneously portrays the earnings from wheat as pitifully less than wages from working off-farm.  The report says farmers earned 1600 yuan in profit, but this number deducts the opportunity cost of the farmer's labor. The return to the farmer's labor is the revenue from wheat less the cash costs:
return to farm labor = 2.04 yuan/kg x 394 kg/mu - 226 yuan/mu input cost - 234 yuan/mu service cost
The return to labor from 3.2 days of work is 444 yuan/mu x 5.1 mu = 2,263 yuan.
Earnings from wheat (assuming labor and land are provided by the farmer without cash cost) are higher than the average monthly wage for rural migrant workers of 2,049 yuan.

If a Henan farmer has to rent land, he will have to pay about 200 yuan per mu. That would reduce his earnings by 1,020 yuan for 5.1 mu, cutting his return in half to 1,243 yuan. This takes 16 days of work (3.2 days/mu x 5.1 mu). But this still works out to 78 yuan per day.

By comparison, the off-farm monthly earnings of 2049 yuan works out to 85 yuan per day (assuming 24 days/month worked), so farmers's earnings from farming are slightly lower than the daily off-farm wage.

Consider the return to land, as measured by rent. Last year's Henan wheat report said the average land rent was 199 yuan per mu. If we assume the rent is still 200 yuan/mu, that translates to about $190 per acre. For comparison, land rents for irrigated land in Nebraska were only slightly higher, averaging $200-to-$250. (The Nebraska rents had risen 60% to 90% from 2006 to 2011).

The reported low earnings from wheat farming in China are a reflection of the crowded countryside (and hence small land allocations). The relative returns to factors of production are not that bad.

Sunday, July 22, 2012

10,000 Pigs and 7,000 Rats

A 10,000-head pig farm may also support 7,000 rats, according to an article in Southern Rural News last week. The article is an advertisement for pest control companies disguised as journalism, but it raises another potentially serious problem related to the complex business of raising livestock.

The article suggests that Chinese pig farms lose large volumes of feed to rats. They chew holes in feed bags and eat significant quantities of grain. Moreover, the holes in the bags can promote growth of mold and toxicity in feed that's not eaten by rats.

A representative from a rat control company estimates that a 10,000-head swine farm could be feeding rats 200 kg of grain daily or 73 metric tons a year if each of 7,000 rats eats 20-to-30 grams a day. He warns that rats also chew up pipes, wires and heating equipment.

A more troubling prospect is the potential for rats to spread disease. They carry parasites and their droppings can contaminate feed, fodder, equipment and barns. They can spread 30 kinds of diseases, including major pig diseases like classical swine fever, foot and mouth disease, and pseudorabies.

Of course the article highlights the benefits of hiring pest control companies. A company representative estimates that a large farm could spend 16,000 yuan annually on treatment but losses from rat infestations could be 100,000 yuan. The article also provides some hints for keeping rats under control.

Chinese farms have over 400 million pigs at any given time...and 280 million rats? China has always had rats (they are also a major problem in grasslands); but rats--like pigs--are now being raised on an industrial scale, attracted by the stockpiles of feed. Large farms with deep pockets will take measures to kill them off, but small and medium-size farms probably won't. Another vector for spreading disease that is rarely mentioned.

Saturday, July 21, 2012

Can't Pass On Rising Feed Cost

The drought in the United States has created a lot of buzz in China and has been pushing up feed prices there.

The landed cost of imported corn is reported to be about 2500 yuan/metric ton, comparable to domestic Chinese corn prices. Chinese corn at northeastern ports is 2410 to 2430 yuan per mt and the price at ports in southern China is 2540-2560 yuan/mt. According to one report, the quality of corn coming from the northeast has declined and there is upward pressure on domestic prices.

The most significant impact is a surge in Chinese soy meal prices that began in early June and accelerated this month. The futures price rose from 3100 yuan/mt to 4100 yuan/mt over that period.

Feed production has been booming this year. Recently-released feed statistics show that compound feed production in China during the first six months of 2012 was 53.2 million metric tons, up 20.8 percent from last year. This large increase partly reflects a low base last year due to disease problems in the pig herd and low aquaculture production last year. June compound feed production was 10.6 mmt, up 11.8 percent from last June. One report says that feed companies have been doing well this year; some of the big ones have reported strong profits and earnings per share for the first quarter.

However, a feed mill manager in Guangdong Province interviewed in another report says his company will not be able to pass on the rising costs of raw materials by raising feed prices. The manager says he recently bought corn from northeastern China at 2600 yuan, up about 50 yuan. He says the price of soy meal has risen 700 yuan/mt since early June. Corn comprises about 60 percent of his feed and soy meal 20 percent. He says the rising raw material prices raise their costs about 6 yuan per 40-kg bag but they will only raise the price about 2 yuan. They're worried that they will lose steady customers if they raise the price too much. Hog producers in China are caught in a serious profit squeeze.

Hog producers can't pass on higher costs by raising prices either. Hog prices have been falling most of this year while feed prices have been rising. Large hog producers are seeing shrinking profits and small producers with weaker management are losing money already. The pork supply is plentiful and prices are falling. Facing the prospect of losses, hog producers try to substitute cheaper feeds to cut costs. However, prices of substitutes like wheat bran and fish meal are also rising.

Chinese farmers and feed mills under cost pressure are inclined to substitute cheaper, low-quality feedstuffs that are less nutritious and make animals more vulnerable to disease. Losses may induce farmers to cull sows too. This creates conditions for yet another cycle of disease and price fluctuations in the hog industry.

Friday, July 20, 2012

Conservation Tillage Boosts Wheat Yields

According to data collected from 733 plots in Shandong Province, wheat planted using conservation tillage had yields that were 8.7% higher than wheat using traditional methods. The yield from wheat under conservation tillage was 490.5 kg/mu (7357 kg/ha), 39.5 kg higher than traditional methods.

There was a big campaign to introduce conservation tillage last year. Techniques include subsoiling, ploughing wheat straw into the soil, no-till with precision seeding, stratified fertilization and treating seeds with fertilizer.

There is a subsidy for subsoiling which typically requires expensive equipment. Agricultural bureaus have been giving training to members of agricultural machinery cooperatives. The provincial agricultural machinery bureau and agriculture department distributed suggestions for spring that included topdressing with fertilizer and spraying pesticides and herbicides.

Experts check on wheat under "conservation tillage" in Shandong. 

More Snacks, Expensive Peanut Oil

Chinese retail prices for peanut oil are up about 10 percent from last year. One industry analyst cited increased consumption of peanuts as snack food for the higher prices. This leaves fewer peanuts available for  cooking oil. Normally, about 60 percent of peanuts produced in China are crushed to make cooking oil and 40 percent are consumed directly as food. However, now the ratio is about 50:50. Another reason cited is rising production costs for peanuts.

Peanut oil is an expensive oil in the Chinese market and its share of the market is small. One lady interviewed at a supermarket said she would substitute other oils for peanut oil. Another said she would cut back on her purchases of cooking oil, a decision she described as good for her health.

Meanwhile, rising prices of imported soybeans have been pushing soy oil prices higher since June.

In early April, the National Development and Reform Commission asked vegetable oil processors to keep their prices steady. However, the government is not expected to intervene since inflationary pressure in China has weakened.

The Chinese government did order an auction of 690,000 metric tons of soybeans it has had in storage since 2008 when they were bought to support prices. Nearly all of the soybeans were sold despite a record 6.9 million metric tons of soybean inventories in ports and 5.34 mmt of imports expected to arrive in July.

Friday, July 13, 2012

Organic Certifications for Sale

A journalist's investigation of organic food products reveals the confusion and cheating that undermine confidence in "organic" foods that are now commonly on offer in Chinese supermarkets.

The journalist visited supermarkets, interviewed farmers, traders and regulators in Shandong and Guangxi and found that consumers have only a vague idea of what "organic" means, supermarket labels play fast and loose with "organic" labels, and fraud is common.

When the journalist asked twenty shoppers in a supermarket what "organic food" means, he received a variety of answers: "the package is marked organic," "the price is higher," "healthy, nutritious, without contamination." The journalist suggests that consumers' sketchy understanding of what organic means makes it hard to verify that foods really are organic.
Sign on shelf says "organic vegetables" but no certification label on package.

Some foods have a sign indicating they are organic but they lack the required official logo or fail to identify who awarded the certification. The reporter looked up several supermarket items in a government "agricultural product certification database." The listing for a fungus on sale in Jinan showed that the certification had expired in 2010--two years ago. Two other products from a Guangxi supermarket could not be found in the database.

The dimsums blogger has observed this common pattern: there is a big campaign to introduce some new food safety measure but once the measure is in place and attention wanes, no one maintains it.

The reporter consulted a broker who deals in organic food products who said the organic certification is in a state of confusion (see 2011 dimsums post on this topic). According to the broker, the two major certifiers--Huaxia and the Organic Food Development Center--are OK, but there are a host of smaller organizations and companies who offer to give you a certification within a month if you pay 20,000 to 30,000 yuan. If you pay the money, says the broker, the company will send someone to help fill out the application, take care of the documents and get you past the farm inspection.
The Chinese government's certification pyramid: "pollution free" (brown), "green food" (dull green), two organic certifications at the top (bright green). One is for the domestic market and one is for the foreign market.

The manager of an apparently reputable Shandong company producing organic vegetables said that his farm is certified by the Huaxia company associated with the Ministry of Agriculture. However, other people regularly call him offering to get him an organic certification within a month for a small fee.

The reporter spoke over the phone with an individual in Shanghai who offered to print up "organic," "green food" labels or organic certificates "according to requirements of the customer" for fees that varied from less than 1 yuan to hundreds of yuan.

Feicheng County in Shandong has a dozen or more organic vegetable producers and 178,000 mu of organic production area. The reporter visited farms there and saw that they use organic fertilizer, special lights and plastic strips to control insects. A farmer calls organic vegetables "gold" that has gotten quite a few farmers rich.

However, a producer in Guangxi explains that the cost of his greens are several times higher than costs of conventional vegetables. He has to spend 7000 yuan per mu for labor, fertilizer, pest control and certification fees.

As in other industries, high prices and profits from organic foods attract fakes and frauds. The broker said some companies stick fraudulent labels on common food.

Once certified, farmers are rarely checked. Knowing this, the temptation to use prohibited fertilizer and pesticides to boost production is strong.

Organic farmer in Shandong displays nonchemical pest control apparatus.

The reporter consulted the China Certification and Accreditation Commission, the government organizations that accredits and oversees certifications. An official there acknowledged that the system is not perfect and relying on a single accreditation agency to oversee all certification is difficult. A researcher at the Shandong Academy of Agricultural Sciences agrees that the system is lax.

The vice director of the agricultural bureau in Feicheng County of Shandong points out another common problem in China--the fragmentation of regulators. Agriculture departments oversee production, the accreditation commission is in charge of certifiers, the industrial and commercial bureau is in charge of transportation and marketing, the health department oversees food service. No one worries about anything beyond their own purview and no one oversees the whole process of producing, distributing, and certifying organic food.

Wednesday, July 11, 2012

Cooperatives and Land Rental Constraints

The Chinese news media seems to be laying down a propaganda barrage about professional farmers, land rentals, cooperatives and large-scale farming. Could this be preparing the way for a change in rural land policy?

On July 10, the Chinese central broadcasting service reported on the difficulties agricultural cooperatives encounter in renting land--land holders will only rent land short-term, which means cooperatives are at risk of losing access to the land they rent.

The article focuses on a district in Taizhou, Zhejiang Province, a region where many villages have rented most of their land to large-scale farmers or cooperatives. The leader of one cooperative points to a hillside which he says used to be covered with grass but the cooperative has "put a lot of thought" into building infrastructure and roads to transform it into a productive farm. However, the cooperative's rental agreement is about to expire and the villagers plan to rent the land to someone else.

A machinery cooperative leader leased 500 mu (82 acres) to plant rice, but their agreement also expired this year. Some land "owners" wanted to rent to a watermelon farm and others wanted to take their land back. The cooperative now is forced to farm a patchwork of fields that are hard to plough using their tractors.

According to local officials, some farmers have a "traditional concept" of land and don't want to rent their land long-term. Some worry that the village's land use plan may change and they will lose their land.

According to statistics from the Yellow Rock district in Taizhou, 34 percent of land rental agreements are for one year or less and 45 percent are for 1 to 5 years. Less than 2 percent are for 20 years or more.

Given the land rental problems in Zhejiang, some of the cooperatives have been looking elsewhere to find land. One cooperative leased 2000 mu of rice paddy in Hubei Province. Other cooperatives have expanded to far-flung areas like Hainan, Guangdong, and Shanghai.

The article says cooperatives need to learn the rules of the market. The director of a local research institute explains that a cooperative may have to produce highly profitable products to justify paying high rents. If you don't pay high rent, you risk losing access to the land if someone else is willing to pay higher rent.

Land is not like other commodities. Each tract of land has its own unique characteristics that influences the final product. Therefore, cooperatives can't move around from one piece of land to another.

This article crystallizes the problems involved in China's giant property rights experiment of separating ownership rights from use rights. It's not that simple to consolidate and rent land while keeping it collectively owned. If rents are going up 15 percent every year, why would you agree to rent out land long-term at a fixed rent? If you turn your land over to a cooperative to farm in China's dicey legal environment, what guarantee do you have that you will ever get your land back?

If you are renting a tract of land a year at a time, why would you bother investing in structures and improvements if you might lose the land next year?

Tuesday, July 10, 2012

Corn Processors Statistical Check-up

China's National Grain Bureau last week announced that it will carry out a special statistical survey of companies that process corn. Presumably, this is another measure designed to rein in the aggressive expansion of corn consumption by industrial processors.

The survey will cover enterprises that produce starch-based products and alcohol made from corn in major corn-producing provinces: Hebei, Inner Mongolia, Shandong, Jilin, Heilongjiang, Liaoning, Henan, Anhui, Shanxi, Shaanxi, and Ningxia. Companies have to report their processing capacity, volume of output, exports, average prices, profits, planned expansions, and use of corn per unit of final product. They have to report energy use and environmental impact--two factors that are often cited in government documents as criteria for shutting down plants in order to trim excess capacity.

The survey apparently is intended to address problems with inaccurate (perhaps falsified) statistical reporting. The survey is described as ensuring that statistics are accurate and complete. The survey was prompted by rapid increases in corn processing during 2011. The description of the survey notes in particular that modified starch and corn-based alcohol production numbers were understated in 2011. (There have been rumors afloat that production of fuel ethanol exceeds the official estimates.)

Producers of basic starch and animal feed are not included in the survey. This reflects the concern of officials that robust use of corn for high-value industrial products is increasing the competition for corn. Feed mills--the dominant users of corn--have to pay higher prices which are passed on to livestock producers and to meat consumers. Last year, the head of the grain bureau warned that corn use by processors in some regions was growing too fast, and the government needed to adjust its control and planning of the industry to ensure the supply of feed and keep prices stable.

The survey is supposed to make sure that data is consistent with supply-demand balance statistics from other sources. The survey will be the basis for a statistical reporting system that will be used to monitor the industry, presumably to keep track of its use of corn. State-owned enterprises of the central government and large processors with capacity of 100,000 metric tons will be required to report data directly to their county grain bureau.

Sunday, July 8, 2012

Gresham's Law of Pork Safety

In January, the dim sums blog reported on the campaign announced by nine Chinese departments to conduct a national audit of pork slaughterhouses to clean up the industry. According to authorities, the program is progressing nicely. But the process of cleaning up the industry is more complicated than it seems. China's pork industry shows a strong tendency for "unsafe" food to crowd "safe" food out of the market.

At a meeting in June, Vice Minister of Commerce Jiang Zengwei gave an update on the audit program. He said 4141 slaughterhouses had passed their audits, 994 are undergoing rectifications, 71 lost their qualification as a "designated slaughterhouse," and 93 had been closed. There were another 563 that had not yet been checked. The audits are checking on sources of water, equipment for processing and cutting pork, disposal of carcasses and waste, and making sure that animal inspection certificates are in order.

Shanxi Province reports statistics on their crackdown that portray a much more grim situation than the statistics disclosed by the commerce ministry. Shanxi officials said only 67 of the province's 367 slaughterhouses passed their audit. Shanxi officials gave 210 slaughterhouses notices that they needed to make improvements. Shanxi said they closed 70 slaughterhouses--that would account for most of the 93 that were reported closed in the whole country by the commerce ministry. Shanxi also shut down 39 illegally-operated slaughterhouses. In Guizhou, citizens have been given a special cell phone number to report illegal slaughterhouses. Some cities are creating "black lists" of illegal slaughterhouses.

This is not the first crackdown on slaughterhouses. In June 2010 the Ministry of Commerce announced a similar remediation program that was supposed to be completed by the end of 2010, but it seemed to quietly slip into oblivion. The schedule for this year's program seems to have slipped a bit too. When it was announced in December, local authorities were supposed to finish their audits by July 31 (this month), but the Commerce Minister now says they have until the end of September. Provincial authorities are supposed to conduct sample audits (presumably to catch possible lax inspection by local authorities) by the end of November. Why is it so hard to straighten out slaughterhouses? An article about Shenzhen City's plan to replace its 16 old slaughterhouses with four new modern ones reveals the fundamental problem.

In 2005, Shenzhen authorities announced a plan to build four modern slaughterhouses to improve food safety in the city. However, this year--7 years later--only one of the four slaughterhouses is open. The No. 1 slaughterhouse opened in 2010. Ceremonies to lay cornerstones for two others were held in 2007 but are not open. Shenzhen authorities recently announced that these two slaughterhouses will be open by the end of 2012 and the fourth will open in 2013.

A reporter consulted the manager of Shenzhen's No. 1 slaughterhouse to find out why the slaughterhouse plan is going so slowly. The manager told the reporter that the slaughterhouse is actually operating at only 10 percent of its capacity (see March 2012 dimsums post on this topic). The manager said the large modern slaughterhouse has fixed costs that are several times higher than those of Shenzhen's 16 old slaughterhouses. The slaughterhouse cost 300 million yuan ($45 million), can process 600 hogs per hour (as well as 20 cattle or 50 dogs, by the way), has cold storage for 5000 metric tons of meat, automated equipment imported from Holland, and water treatment equipment.

With its high interest and depreciation expenses, the No. 1 slaughterhouse sells pork at 48 yuan/kg, higher than the 40 yuan/kg that prevails in the market, and it still loses money. The company's sales are primarily to high-end supermarkets, restaurants, hotels and cafeterias. The larger retail markets are dominated by meat from the old slaughterhouses.

The old slaughterhouses lack the modern equipment of the new facilities. More importantly, the old slaughterhouses operate as agents--they receive a commission for each hog slaughtered. The wholesalers who bring the hogs for slaughter procure them from widely-scattered farmers and then sell them on to retail vendors. There is no way to trace the source of the animals. City authorities want to move away from this agency model to integrated procurement, slaughter and marketing of hogs/pork with company brands.

The No. 1 slaughterhouse manager said the government must "have determination" to close down the old slaughterhouses. He says that his company would have lower unit costs if they produced a volume near their capacity.

It seems that the investors in the three unbuilt modern slaughterhouses have ownership interests in the old slaughterhouses. A representative from the company investing in the No. 3 slaughterhouse spoke at a meeting on Shenzhen's slaughterhouse plan, expressing hope that "the government will not make us lose money."

The four planned new slaughterhouses would have a capacity of 20,000 hogs per day, enough to meet the daily consumption in Shenzhen. No. 1 slaughterhouse manager says that these new facilities would have higher costs and charge higher prices than the prices that currently prevail in the market. But he says it wouldn't be that much higher.

The article gives the example of Hong Kong. It says the city used to have 6 or 7 slaughterhouses but now has only two. Its pork prices are only slightly higher than in Shenzhen.

Thus, China's food safety issue is one of prices and market structure. Safe food is more costly. It entails high (fixed) costs and the final product is not necessarily discernible from "unsafe" products of small producers with low costs. Low-cost producers will emerge to undercut the "safe" producers, so "unsafe" food crowds out "safe" food, a sort of "Gresham's Law" of food safety.

Thursday, July 5, 2012

China's Crop of "Professional Farmers"

Chinese officials have lost patience with ignorant, lazy farmer/peasants who farm in a lackadaisical manner. This year's "Number 1 document" called for replacing these "traditional" farmer/peasants with "new-style professional farmers" (新型职业农民) who have education, training, and commercial skills.

An opinion article published last month in Farmers Daily described this as a new change related to the increase in off-farm employment, aging of the farming population and the urbanization-industrialization-modernization of agriculture (the new "san hua" slogan). The Farmers Daily writer explains that most people engaged in farming don’t rely on agriculture for their income, have low education, often leave land untended and are not motivated to become sophisticated managers. Professional farmers who specialize and operate on a larger scale are more inclined to adopt new technologies, have lower production costs, higher yields and better feed-conversion ratios.

The Farmers Daily article explains that professional farmers are expected to come from the ranks of capable and entrepreneurial farmers who have become large-scale farmers, leaders of cooperative organizations, founded their own processing businesses, become brokers and traders, and those who supply other farmers with machinery, extension, veterinary and pest control services. Returned migrants who have learned business skills and an awareness of the outside world are viewed as another source of “professional farmers.”

In a strategy that resembles the 1970s campaign to send intellectuals to the countryside, college students are being encouraged to become farming pros. A Henan Daily article features a group of nine young ladies from Henan Agricultural University doing their "practical training" in a greenhouse. One student who was awarded a May 4 medal by Premier Wen Jiabao at a rally of grassroots masses in Zhongnanhai explains that they volunteered to come here to put their textbook knowledge into practice. Now they all want to be professional farmers. The students say there are many policies issued by central and local governments to encourage college students to become a new class of professional farmers with new concepts, education, an understanding of technology, marketing and management skills.

An article on the Ministry of Agriculture web site calls nurturing professional farmers an "urgent requirement" for the new trend in modern agriculture. The Ministry's article describes a gathering of personnel from the agricultural broadcasting school in the "revolutionary holy land" (革命圣地) of Yan'an, the region in northern Shaanxi Province where Mao Zedong and the communists hid out after their "long march." The broadcasting school is set to play a key role in training this new cadre of "professional farmers" through distance education delivered to rural areas.

The agricultural broadcasters made a series of visits to counties in northern Shaanxi that are model areas for developing professional farmers.

Luochuan County is described as the world's ideal apple-growing area. In the 1990s, officials formulated a national plan for the apple industry and created a massive apple industry in this formerly destitute region. Northern Shaanxi's fruit farmers are described as the vanguard of professional farmers. According to the county director, Luochuan's apple farmers have a high degree of technical knowledge, an understanding of quality management, and how to use brands in their business--all characteristics of professional farmers. However, says the director, the farmers still have a low degree of organization--they're not joining cooperatives--so their ability to enter the market is insufficient.

Jingdian County formulated a plan to transform its sheep industry by replacing shepherds who lead their sheep around looking for grass with professional farmers who raise their sheep in pens and barns. In Jingbian, professional farmers need subsidies. The county has a “nine free, ten subsidy” support program that includes free breeding services, training, subsidies for disease prevention, and loans for barn construction. Jingbian has nurtured a cadre of 600 professional farmers through a system of training and accreditation.

Officials are now in the process of synthesizing experiences from different provinces to set up a national system for raising the new crop of professional farmers. An important part of the system is education programs delivered by agricultural broadcasters. Officials are putting together a process for attaining credentials and certifications. The system will target professional farmers for subsidies, loans, participation in social insurance, land rentals, and services in marketing and extension. Professional farmers are expected to be leaders in industry and regional development and act as a vanguard that pulls along other farmers. These professionals are also viewed as a pool that a new generation of rural officials can be drawn from.

Following their usual pattern, Chinese officials have recognized an emerging trend of agricultural entrepreneurs that they think needs to be brought under the communist party’s control and tutelage. They are devising an elaborate scheme to replicate it on a massive scale by turning an organic process into a formula and a giant social engineering program. While the idea looks good on paper, implementation will be difficult in the thousands of local fiefdoms that comprise modern China.

Who will provide all this free education and training on a paltry government salary? Will students who learned things from a textbook but have no practical experience be more productive than farmers? The strategy of dangling subsidies, herding people into training programs and telling them to focus on earning government-issued certificates is at odds with the goal of nurturing a generation of self-motivated entrepreneurs.  Abuse and confusion are sure to follow.