Sunday, September 30, 2012

Pessimistic Outlook for China Agriculture

On September 27, the head of the China Ministry of Agriculture's policy and law office gave a mostly pessimistic overview of China's agricultural situation. The MOA official, Zhang Hongyu, announced that output of grain crops harvested in the summer was up 4.1 million metric tons and predicted another increase in overall grain output this year. But Zhang said that the general outlook for agriculture is not favorable due to uncertainty in the international economy and trends in the domestic economy.

Zhang worried about a growing deficit in agricultural trade. He said China's agricultural trade deficit for 2011 was $34 billion on imports of $95 billion and exports of $61 billion. For the first seven months of 2012 the agricultural trade deficit was already $30 billion, nearly equal to the deficit for last year.

Soybeans, cotton, edible oils and sugar remain the major imported commodities. However, grain imports are already at 6 million metric tons for 2012--about 2 million tons each of corn, wheat, and rice. These imports amounted to just 1 percent of production of these commodities, but Zhang worries about the creeping trend of grain imports.

While rural household income rose during the first half of 2012, the rate of growth was slower than last year. Property income (interest, subsidies, income from land rentals) and remittances from family members grew slower than other types of income, reflecting a slower-growing economy.

Zhang worried about declining agricultural prices. As his chief example, he observes that this summer was the first time in several years the government bought wheat at the support price. Zhang said surveys of farmers found that 20 percent of wheat was sold at the minimum price of 1.02 yuan/500g, while 80 percent was sold at prices of .8, .9 or 1 yuan.

While he cited these low prices as evidence of downward price pressure, they likely reflect the low quality of this year's wheat and willingness of farmers to sell to itinerant traders at a price below the support price.

Two days after Zhang's speech, the National Development and Reform Commission announced one of the largest-ever increases in the support price for wheat to 1.12 yuan/500g for 2013. The increase of .10 yuan/500g from 2012 matched the largest-ever previous increase in the support price in 2009.  Zhang noted that international prices have been increasing faster than Chinese wheat prices, a trend that authorities probably took into account in deciding on such a big increase. But what happens if international prices reverse course and fall below the the new support price when it takes effect in May 2013?

Zhang was also pessimistic about the prospects for increasing government spending on agriculture. He noted that tax revenue rose during the first half of 2012 at less than half the rate last year. In some coastal provinces tax revenue even fell. Zhang said the slow growth in tax revenues is unfavorable for increasing expenditure on agriculture.

Zhang's main recommendation was to encourage larger-scale farming. His recommendation was to separate the rights to use farmland from the ownership rights and promote mechanisms for trading the use rights. According to Zhang, increasing the size of farms will reduce per-unit costs, encourage technology adoption and promote "modern" agriculture. He said 17.9% of land-use rights are traded now, and the share is as high as 85% in parts of southern Jiangsu Province.

Zhang also worried about the preponderance of old people in agriculture. He called for improved services for farmers and higher subsidies to attract young people to farming as a new force in Chinese agriculture.

Wednesday, September 26, 2012

Escalating Agricultural Prices in China

There is an upward spiral of prices in China that is hard to stop due to the intertwining of different commodity prices, government policy and institutional constraints.

A short article originating from a local grain bureau in Hubei Province calls for a big boost in the wheat support price of 12 to 15 percent. The article is apparently written to influence the decision on the wheat support price, which is typically announced in late September, ahead of fall wheat planting. Setting prices has always been difficult for Chinese officials and often has had unintended consequences. But the process is even more complex now.
The writer of the article observes that the time for farmers to decide on their plantings of winter wheat is not far off and worries that farmers don’t have much motivation to plant wheat since profits have been low for several years. Rising wages and input costs make wheat production less attractive. The writer says that a survey of 200 farmers in Henan Province found that average returns to wheat from 2010 to 2012 were just 14 percent of what a farmer can earn in a month working off-farm.  Returns rose slightly in 2012, but farmers found that nearly half of the extra income from higher prices was consumed by higher input costs. He asserts that wheat prices need to be increased to keep wheat profitable in the face of rising production costs--the cost of inputs and the opportunity cost of labor (off-farm wages).

The prices of other commodities affect wheat. The writer points out that returns from planting rice are three times higher than the returns from wheat. A higher wheat price is necessary to induce farmers to plant wheat instead of rice.

The writer then argues that wheat prices are too low on the demand side because feed manufacturers are using large amounts of wheat for animal feed. The reason for this is that Chinese corn prices are higher than wheat prices. The writer attributes this to a tight international corn market due to “natural disasters” and biofuels (in the United States) which increase the cost of importing corn. With corn prices higher than wheat, the perverse result is that wheat produced to provide “food security” for Chinese people is used to feed animals.
Chinese agriculture used to be a compartmentalized sector of vast numbers of peasants confined to villages with small plots of land where they had no choice but to plant grains using their own seeds, manure, family labor, water buffalo and oxen. As agriculture has “modernized” and globalized over the past 10 years, the prices of petroleum and other industrial inputs began to influence the production costs of farmers.  Jobs in factories and construction sites and good roads make it easy to quit farming. Urban lifestyles mean more consumption of meat and processed food which means more demand for corn and not so much for wheat. Meanwhile, expanding the size of farms--the usual adjustment mechanism for reducing per-unit costs and raising farm income—is constrained by land policies. China’s price policy for farm commodities is to set floor prices that guarantee farmers no downside risk.

The result is a tendency for all prices to go up, never down. And the intertwining of prices means that one price increase leads to another. Thus, ever-escalating prices.

Sunday, September 9, 2012

No Insurance Claims for Army Worms

According the Daily Business News, Farmers in Huajiaqiao Village in Jilin Province have experienced heavy losses to their corn crop from this year's army worm infestation, but they should not expect their crop insurance to give them any compensation because insect damage is not considered a "natural disaster."

The article focuses on losses from the worst attack of army worms since 2001. Some farmers sprayed their plots with insecticide four times but still couldn't get rid of the caterpillars. They bought subsidized crop insurance at the beginning of the year, but the insurance excludes insect damage. The reasoning is that insect damage can be avoided (by spraying insecticide) so it is not a "natural disaster." Insurance only covers what we would call in English an "act of God" like hail, floods, wind, and frost.

The problem is that farmers didn't know what they were buying when they paid for their crop insurance. No one in the village had seen a written policy stating what was covered by the insurance. Farmers were confused even as to which company they had bought their insurance from.

Crop insurance is "sold" through a bureaucratic process in which farmers never have any contact with the insurance company. The insurance company strikes a deal with the county government which then mobilizes township and village cadres to act as de facto insurance agents to sign up farmers for insurance and collect the premiums. For several days in the early part of the year, village officials go door to door telling farmers to sign up for insurance. A village cadre said signing up farmers for insurance is just another one of his responsibilities.

While the insurance is said to be "voluntary," villagers say you can't really say no when officials come to your door. All 300 households in the village bought insurance. Farmers hand over money but never receive a written policy. The funds collected by the village are handed in as a lump sum to the township and presumably passed on to the insurance company. No one has ever seen an insurance company representative in the village.

Many farmers thought the insurance was offered by Anhua Agricultural Insurance Co., based in Changchun,  but the reporter called that company and was told Anhua does not offer agricultural insurance in Huajiaqiao's county this year. The reporter visited the village accountant who had the policy. The accountant said, "This insurance is offered by Anhua Co., but I don't know why it has 'zhong' and 'hang' characters all over it." The reporter recognized that the policy was issued by another company--Zhonghang Anmeng Property Insurance Co. Anhua had offered the insurance in earlier years, but Zhonghang-Anmeng--a Sino-French joint venture that seems to specialize in aviation insurance--now has the crop insurance business in Huajiaqiao's county.

No one in the village even has a claim form. In order to file a claim, the village as a group must file a report with the township government. A group of them went to the township to inquire about whether the insurance would cover their army worm losses. The township office workers said, "The insurance policy is in the computer. Town leaders went to the agricultural trade fair in Changchun and we don't know when they'll be back."

It was not easy to confirm what the insurance covers. The reporter called the Zhonghang-Anmeng company's headquarters and got in touch with the company's county representative by phone. The county representative told the reporter that army worm damage would not be covered because the policy clearly excludes insect damage from coverage. However, he said the company would have to coordinate with the government and it wasn't clear what form that would take. His response indicated that a decision about covering army worm damage would be made above his pay grade: "As a county branch of the company, we can't solve every problem." He promised to make inquiries and get back to the reporter but never responded.

The reporter found documents specifying that only damage from flood, waterlogging, hail, drought, frost and freezes would be covered. Losses from rodents, insects and weeds were specifically excluded.

A farmer in Huajiaqiao village said, "If we had known insect damage isn't covered, we wouldn't have bought the insurance." Even when incidents are covered, the calculation of indemnities is complex. Losses of 30 percent or less are not covered. Only the losses above 30 percent are covered, multiplied by various "loss coefficients." A farmer named Li estimates that he lost 30-40 percent of his crop to insects this year. He would only be compensated for any losses over 30 percent. He said the farmers could bring suit against the insurance company in court but they would surely lose.

Farmers have a history of trouble filing claims. Last year, there was hail damage in the county that resulted in lodging and losses of 80 percent of the corn crop. They reported the loss to the township but never got any response from the company.
Insurance adjusters estimate compensation for rice in Shangshan town.

In reality, agricultural insurance indemnities are paid in an ad hoc manner at the discretion of the government. An article from Shangshan town earlier this summer reported that the local government held meetings and closely coordinated with the insurance company to cover losses from plant hoppers (an insect) and typhoons. In July, it was reported that compensation for wheat scab (a plant disease) losses would be delivered to farmers by the end of the month. The information was provided by the provincial government's finance department.

Thursday, September 6, 2012

The Invincible Chinese Corn Crop

The Chinese corn crop is impervious to all threats!

The worst attack of army worms since 2001? Not a problem! Typhoons that blow over corn stalks? Bring it on! Flooded fields and disease? Got it covered! Chinese corn is invincible to all comers. The Americans may have to worry about drought, but nothing can stand in the way of a magnificent Chinese corn crop--not weather, bugs, microbes, or statisticians.

Reports say that the third generation of army worms has matured and is attacking corn in broad areas of northern and northeastern China since late August and there is an alert about a fourth generation. The adult moths are said to be able to migrate over wide areas, flying hundreds of kilometers in a single night. But the caterpillars will certainly be wiped out by a massive fog of bug spray laid down by The Chinese Ministry of Agriculture. In August, the Minister of Agriculture personally went out to inspect the work on controlling army worms and proclaimed that monitoring and controlling army worms is crucial to guaranteeing a good fall harvest.

A typhoon blew over 3.7 million acres of corn, accounting for 15 percent of corn area in three northeastern provinces. Five percent of the corn area in Liaoning, Jilin and Heilongjiang was severely damaged. But the Ministry of Agriculture issued an emergency notice on reducing the effects of the typhoon and gave farmers guidance on draining flooded fields, propping up corn stalks and treating plant disease. Experts say the effects of the typhoon are confined to limited areas and won't have much effect on corn production. The corn is about 80-percent mature and the ears from seriously affected stalks can be harvested.

According to experts, the area severely affected by the typhoon amounts to just 0.9 percent of the corn area in the three northeastern provinces. According to the chairman of the Liaoning Province agriculture commission, only the mountainous eastern part of his province was affected; the Liao River Plain, western and southern parts of the province were not affected much. The head of the agriculture bureau in Jilin's Yushu City said the rain from the typhoon restored soil moisture and refilled reservoirs. Other experts claim that the rain may delay the onset of the first frost 3 to 5 days, also beneficial to the corn crop.

Officials say the corn crop is about five days ahead of normal growth and the northeast will have another big harvest if weather is normal. Whatever the Chinese communist party always comes true. Statistics always hit the targets set by officials with uncanny accuracy; those guys are such good forecasters! This year's ninth-straight increase in grain production is assured.

Wednesday, September 5, 2012

Soy Crushing Capacity Up; Profits Down

According to a report in a financial newspaper, earnings per share by China Agri-Industries Holdings Co. for the first half of 2012 were down 68 percent from last year. This was the company's poorest earnings performance since 2008. The article attributes the relatively poor performance to excess capacity in soybean-crushing.

China Agri-Industries is the Hong Kong-listed parent company of COFCO, the state-owned giant involved in all types of grain, oils, pork and other agribusiness ventures. Its gross earnings were up a robust 24 percent this year, but earnings per share were HK$ 12.43, down from HK$ 39.68 in 2011.

The strong increase in gross income reflects a big expansion of oilseed-crushing capacity. The company added 2 million metric tons of capacity this year to reach a total of 10.38 mmt in the first half of 2012. Sales of vegetable oil were up more than 10 percent this year, reaching 1.38 mmt. Sales of rapeseed meal were up  63 percent, reaching 3.17 mmt.

The article notes that industry-wide soybean crushing capacity has risen dramatically from 80 mmt in 2008 to 100 mmt in 2012. Imports of soybeans rose 41 percent during 2008-11, from 37.4 mmt to 52 mmt. The article estimates that only about half of soybean crushing capacity is utilized.

Industry people estimate that vegetable oil consumption is rising about 5 percent annually, but supply has been growing 10 percent. Minor oils like corn and rice bran oil have been growing rapidly. The article doesn't mention the phenomenon of "gutter oil." The rapid growth in supply implies heated competition and downward pressure on vegetable oil prices.

The article comments that domestic (Chinese) and foreign markets have been in a downturn this year. Edible oil consumption is not robust, prices are soft (someone tell the National Development and Reform Commission), and companies face a lot of pressure.

A COFCO spokesman says the company faces a challenging business environment during the second half of the year that will lead to a shake-out of uncompetitive capacity in the industry. Profits should improve as the peak season for edible oil and soymeal consumption arrives.

Tuesday, September 4, 2012

Shoddy "New Village" Housing Construction

Chongqing Municipality has often trumpeted its program of moving villagers into new urbanized housing. (An example from last year here.) Building "social housing" for low-income people is one of the Chinese government's big initiatives.

Last week, the Workers' Daily reported that some villagers refuse to move into their new houses because the construction is so shoddy. One villager told the Workers Daily reporter that last year the local government urged everyone to move to new buildings in the Yuanming "new village" and everyone was eager to do so. However, a year later the houses are nearly finished but prospective residents are unhappy with the poor quality of construction and refuse to take up residence in the new buildings.

On August 23, the reporter went to visit the new development. From a distance it looked quite nice, but close-up the slap-dash construction was evident. There were bent beams, crooked columns, doorways out of alignment, cracks in load-bearing walls, ground subsidence, girders of differing lengths, and walls with missing or cracked bricks. A worker said the buildings were nearly completed and ready for occupancy.

Villagers paid for the houses last year and were later asked to pay more to cover the rising cost of building materials. Ms. Liu paid 95,000 yuan (about $15,000) last year and was later asked to pay an additional 10,000 yuan ($1,560). Now she says, "I see so many quality problems, I certainly won't live here."

The town government claims it had no involvement. It claims villagers paid the contractor to build the houses and blames the poor quality on their low price.

Villagers said inspectors were seldom seen at the project during construction, causing them to worry. The reporter was presented with engineers' reports showing use of high quality construction materials. When asked if the reports could be verified there was no answer. The builder said the town government had just invited an inspector to come and said quality should not be a problem.

A district official admits that building the houses was a "political task" throughout Chongqing that had to be completed in a short time period. Many villages constructed houses in a similar manner without following regulations and procedures. The houses were built by developers working on behalf of villagers; the government only gave "guidance."

Monday, September 3, 2012

"Service charges" to Pass on Food Safety Costs

A fish company in Shanghai has introduced a "service charge" on fish feed in the name of food safety that has outraged local farmers and feed dealers. The fee is another example of the complexities of introducing costly food safety controls in a highly competitive market. It also reflects a subtle trend toward monopolization of agricultural markets in the name of strengthening food safety.

Beginning July 20, the Shanghai Ruihua Company began requiring fish feed dealers on Chongming Island to pay a fee of 2-yuan per bag. If a dealer doesn't pay, he is not allowed to sell feed on the Island. The company pitches this fee as a "service charge" to compensate them for the services they provide to farmers and feed dealers. One farmer angrily denounced it as a "protection fee" (presumably to protect the Ruihua Company). Most dealers and farmers refused to pay the fee.

With so many food safety incidents in recent years, companies and governments are trying out a lot of  measures to improve food safety. These generally entail companies working closely with farmers so they can control the inputs, management and marketing to reduce the risk of toxic additives or other hazards and facilitate traceability of food products.

Ruihua is a state-owned company that markets fruit, crabs, shrimp and fish raised on Chongming, an island in the mouth of the Yangtze River that is part of Shanghai. Ruihua rents out fish ponds to farmers who raise fish and sell them to the company. The farmers buy feed from local dealers.

There have been a lot of efforts to improve fish-farming on Chongming Island in the last 3 years. The local government upgraded large areas of fish ponds and has tightened control over feed and pharmaceuticals used in fish farming. Only fish feed from six or seven companies that have manufacturing licenses and provide testing reports can be sold in Chongming. The local government chose the feed suppliers that are eligible. Dealers have to be licensed. Two years ago Ruihua wanted to implement a tightly-controlled production model in which it would have dealt directly with only three feed suppliers, but Ruihua gave up on the plan due to resistance from local farmers and feed dealers.

The Ruihua Company's vice chairman claims the fee is justified to compensate them for the quality services they provide to dealers and farmers. He claims the company provides free warehouse space to feed dealers in production areas and the fee covers the free rent. However, a feed dealer says this is false; he says feed dealers pay their own rent.

The Ruihua vice chairman claims that his company helps the feed dealers collect payments. Fish farmers often buy feed on credit and the vice chairman claims some farmers fail to pay. (Presumably, Ruihua would deduct the feed payment when farmers are paid for their fish.) The feed dealer questions this assertion as well, asserting that the dealers and farmers do business transactions without the involvement of Ruihua. The dealer says the farmers just pay rent to Ruihua (for their fish ponds).

A Beijing lawyer agrees that the fees are not legally justified. If the company and feed dealers had a direct relationship in which the company provided a service to the dealers, they would be justified in charging a fee. They can't charge a fee if there is no legal relationship between the company and the dealers.

Dealers say the fee will wipe out their profit margin of about 2 yuan per bag unless they raise feed prices to pass it on to the farmers. They say farmers wouldn't be able to bear higher feed prices. The price of fish in Chongming Island is already about 0.5 yuan/500g higher than in neighboring provinces of the Yangtze delta region. The article warns that assessing an unpopular fee like this could provoke social unrest.

This incident is an example of a subtle reversal from the free-for-all competition that prevailed in rural China during the last few decades. Food safety is prompting a revival of practices that resemble those of the planned economy era--unified supply of inputs, unified sale of products, herding farmers into cooperatives and administered prices. In order to pass on the higher costs of "safe" food production practices, companies need to have their monopoly enforced by shutting down competitors who don't meet "standards" or enforcing trade barriers.

In the case of Ruihua there is a direct link to the planned economy era. Chongming Island was historically divided up into state-owned farms and the island's map still shows districts named after production teams like the "Friendship team," "Red banner team," and "Advanced village." One of Ruihua's farms is the "Red Star farm." Ruihua is a state-owned company. Since it rents out land (and thus owns it), Ruihua presumably is descended from a state farm (its parent company, Guangming, was formerly the local bureaucracy that operated Shanghai's government dairy farms). This arm of the state is subtly trying to restore its monopoly over fish-farming and the associated supply chain in this small corner of the Chinese economy.

In this instance the Ruihua company is acting like a government authority by charging what is, in effect, a tax on feed dealers. The article points out that "Ruihua is a company, not the government." Or is it?