Tuesday, October 30, 2012

Rice: Government Says "Up" With the Price

Support prices and actual sale prices from National Development and Reform Commission 
production cost surveys.

This year the Chinese support price for early indica rice was raised 17.65% from 2011. That followed a 9.7% increase last year. A Futures Daily article this week speculated about how much the price will be raised for next year. Despite big increases the last two years and a recovery in production, officials still worry that farmers are not inclined to plant the early-season rice (planted in early spring, followed by a second rice crop in the summer) because it takes a lot of labor and brings a lot less than working off-farm. Officials also worry about the relative prices and returns of different crops and a 9.8-percent increase in next year's wheat support price was announced earlier this month. Some people in the industry think the early rice support price will need to be raised even more than the wheat price.

While officials are worried about raising the price to induce farmers to keep growing rice, lower-priced imported rice has been making inroads in the Chinese market for the first time since the 1990s. Usually, Chinese rice imports are exclusively high-end fragrant rice from Thailand, but this year customs statistics show that China has imported 1.88 million metric tons of rice from January to August of 2012, mostly from Vietnam and Pakistan. Traders in Yunnan say another 1 million metric tons not counted in customs statistics has entered China from Southeast Asia. The imports are mostly low-priced, low-quality rice that competes against early indica rice, historically a low-quality rice shunned by most Chinese consumers.

With cheaper imports available and another record fall rice crop about to be harvested, the market for early rice is limited. Its role is largely to fill up reserves. (A decade ago, rice reserves were overstocked and the government canceled its "protection price" for early rice.) The Futures Daily writer says that in the short term the early indica rice price will be under downward pressure. Yet officials will feel obliged to give another double-digit boost to the support price to "send a signal" to producers. The market says "down," the government says "up," and "up" it will be.

Perhaps we are seeing the beginning of the unraveling of China's free market agriculture experiment.

Monday, October 29, 2012

Re-Coupling Grain Subsidies

When China introduced direct subsidies to farmers in 2004, the subsidies were generally paid out on the basis of each farm family's land holding. This was partly by design and partly out of practicality. By linking the subsidy to an historical base instead of actual production or sales of grain, the payment is considered "decoupled" and is excluded when the World Trade Organization calculates whether support falls under China's limit on "market-distorting" support. The practicality is that it is impossible to collect and verify actual planting and production by 200 million farmers.

There is some grumbling in China about the weak incentives given by grain subsidies. There is also consternation about the practice of paying subsidies to land "owners" who may not actually grow anything on their land. Farmers who rent land from others don't get any subsidies.

In recent years there has been a trend among some localities to pay out grain subsidies based on the volume of grain sold to a state-owned grain enterprise--a coupled method. The latest locality to adopt this re-coupled method is Nanning City in Guangxi Province. According to the Nanning Evening News, farmers who contract with the local government's grain depots to sell rice get a subsidy of 0.12 yuan for each 500g delivered. The rice is sold at the minimum purchase price of 1.33 yuan/500g, so the farmer receives a total of 1.45 yuan/500g. As of October 21, Nanning authorities had procured 705,000 metric tons of early-season rice and paid out 16 million yuan in subisides. This was 80 percent of the planned total.

Such subsidies for rice sold to local government grain depots are used in many areas of southeastern China. In Hangzhou, the subsidy has been raised this year to 0.3 yuan per 500g for early and mid-season rice. Last year the subsidy was .25 yuan for early rice and .23 yuan for middle season rice. The Hangzhou subsidy is given to "large farms" and cooperatives. Hangzhou also has a subsidy for drying grain of 80 yuan/metric ton (that works out to 0.04 yuan/500g).

While the subsidies described above are only given to farms that deliver grain to local reserves, the city of Ordos in Inner Mongolia has begun giving its general grain subsidy based on grain sales. The subsidy is a less-generous .05 yuan/500g. An article about the Ordos subsidy links the decoupled method to the traditional mode of small-scale farms and describes the subsidy based on grain sales as more appropriate for the new era of modern farming. The Ordos article explains that "new countryside construction" entails moving peasants into residential communities and pooling their land in big farming operations. The article says economic returns to land must be higher to make this model work, and the government needs to investigate subsidy methods that encourage production by commercial scale farms and cooperatives.

A September article in a Chinese journal describes the subsidy based on grain sales as a "so-called" price subsidy that gives farmers stronger production incentives than other methods and allows the government to pay different subsidies for different kinds of grain. However, the writer cautions that this subsidy encourages the restoration of a government monopoly over grain marketing since the subsidy is paid for grain sold to state-owned enterprises. The article calls for subsidies based on actual production of grain, but this would not be practical since it would require collecting and verifying huge amounts of information on subsidy recipients.

The original de-coupled subsidies were designed to spread cash far and wide over a countryside populated by peasant farmers grumbling about taxes, fees, and lagging incomes. Now that the peasants have been streaming out of the countryside for jobs in factories, construction sites and restaurants, officials are looking more closely at ways of changing the mode of farming and subsidy methods.

According to the article cited above, the subsidy based on grain sales is used in eight provinces (Xinjiang, Hebei, Zhejiang, Fujian, Guangxi, Hubei, Guizhou and Sichuan) and 14 provinces link their subsidy to area planted. If this is accurate, then the majority of provinces use coupled methods while China is reporting to the WTO that its subsidies are de-coupled.

Sunday, October 28, 2012

Emergency Grain Measures in East Heilongjiang

Heilongjiang Province's Grain Bureau is taking emergency measures to help farmers in several counties whose grain has been by this year's wet weather. In eastern Heilongjiang Province, farmers are having four difficulties with this year's rice crop: difficulty harvesting, transporting, drying and storing it.

On October 25, the Heilongjiang Province Grain Bureau, the provincial branch of Sinograin (the government's grain reserve corporation), and the Agricultural Development Bank of China (the farm policy bank) announced a program to help farmers who are having a hard time selling their rice in the "Three Rivers" region of predominantly state farms that includes Fujin, Tongjiang, and Fuyuan Cities/Counties.  The regions are referred to as having been affected by unspecified "disaster" (typhoons?).

Township Governments or farmer cooperatives can sign contracts with state-owned grain trading enterprises to purchase, dry and temporarily store grain from this year's harvest. The operations will be funded with loans from the Agricultural Development Bank. The grain depots will hold the grain until official government grain procurement begins later in the season. At that time, the two parties can agree to sell the grain to government reserves at the official price or the farmers can take their grain back after paying the depot's cost of processing and holding the grain and sell it elsehwere.

Saturday, October 27, 2012

China: Land of Expensive Milk Powder

China has the world's highest prices for powdered milk. This assessment came from the chairman of a large German dairy company in an interview with the reporter for a Shenzhen Newspaper.

The article also quotes an agent for a foreign milk company who said infant formula produced by Abbott Labs and Mead Johnson that costs 150-to-160 yuan per can in southeast Asian countries costs nearly 200 yuan in China.

The German company official attributed the high prices in China to high distribution costs and taxes on imported milk powder. He said his company has to market its products through dealers and distributors in China. The extra middlemen add costs that are avoided in Germany where they sell directly from the processor to the retailer.

According to agents of multinational companies, many foreign companies entered the Chinese market after the melamine incident. They say there is no other country that has 100 or more powdered milk brands as China has. With so many brands, retailers can pick and choose which brands to carry. According to one industry representative, you can't access a big retail outlet without paying an entry fee of 1 million yuan.

Thursday, October 25, 2012

Cost Pressure on Chinese Restaurants

One of the big changes in Chinese food consumption over the past decade is the big growth in eating out. However, the rapid growth in restaurants in China fueled by cheap labor and other low costs is coming to an end. During 2012, the restaurant business has been relatively slow and "four highs"--high rent, high labor cost, high energy cost and high raw materials cost--are shrinking profit margins.

An article in the "No. 1 Financial Daily" cites a Deloitte China report which attributes problems in the industry to several factors: rising business costs, food safety is still not under control, and difficulties with internal management, standardization and human resources.

This article emphasizes the increasing rent and labor costs. While restaurants tend to have lower rent than other retailers, the cost of commercial space in China is rising. In Shanghai the cost of space in a mall is around 10 yuan/square meter per day. Another industry research report estimates the average retail rent in Beijing at US$ 404/square foot and Shanghai at US$ 368/square foot.

One manager said rent for a high end restaurant in central Shanghai runs 20 yuan/sqmeter/day. Adding labor expense, decorations, costs for employee housing and other items, an outlet’s up-front cost is 15 million yuan or so. Said the manager, “Under ideal circumstances, it takes 2-3 years to recoup these costs.”

The era of cheap labor that drove China's restaurant business is ending. Two restaurant chains given as examples in the article had increases in labor cost of around 20% last year. The enforcement of a minimum wage policy in 2011 is one reason for the higher costs. One person in the business said you have be concerned when labor consumes 20 percent of costs; he says his restaurant's labor is now 17-18 percent of costs.

Another article on cost pressures says restaurants' cost of raw materials and ingredients has been rising 9-to-10 percent annually. It says the cost of cooking oil has risen 16 percent per year over the last five years. 

This article says wages of restaurant workers went up 10 percent in the first half of 2012. Restaurants are now being required to contribute to social insurance programs for their workers to comply with the laws for labor and social insurance.

Restaurant owners interviewed for the article yearned for the past. One boss with 30 years of experience said increases in costs are not a problem, but the big problem now is finding workers at all. He said young people in Beijing don't want to work in a restaurant and people from elsewhere don't stay in a job for very long. He said in past years he employed people from Beijing but now 90 to 100 percent of restaurant workers come from elsewhere. These "outsiders" don't put down roots in Beijing and they have no sense of loyalty. If you pay someone 3000 yuan per month they will quit as soon as someone else offers them 3100 yuan. Ten years ago, he could be picky about who he hired, but now he has to take whomever he can get.

Another restaurant owner says he hung out a sign when he opened three years ago and had lots of applicants. He paid 1200 yuan per month then. Now he pays 2000 yuan, provides food and housing and still can't find workers. 

A restaurant worker gives her side of the story. She says they have to work hard with only one day off per week. The cost of living in Beijing is high. She rents a place with some other people outside Beijing's 5th ring road and pays 1000 yuan a month. Given the tough life in Beijing, of course she's always looking for better pay, she says.

Restaurants are afraid to raise prices to pass on the higher costs since they fear losing customers. The owner of a hot pot restaurant says he has to accept thinner margins. If he raises prices he may lose too many customers and have to close. Some drop certain vegetables from the menu when the price gets too high. Some of the big restaurant chains are dealing with shrinking margins by diversifying into other businesses.

Restaurants are facing the same cost pressures as Chinese farms and many are failing. One Beijing resident notes that the space across the street from his residence has held three different restaurants. But no one is suggesting subsidies and price supports for restaurants. 

Monday, October 22, 2012

Guangdong's Ag Land Protection Subsidy

Guangdong Province is introducing a new compensation mechanism for protecting agricultural land designed by the province's land resources department.

The province will give a subsidy of 30 yuan each year for each mu of land maintained as "basic agricultural land." The subsidy applies to fields included in land use plans of prefecture-level governments. Last year Guangdong had 39.8 million mu (6.55 million acres) of basic agricultural land. That includes land converted from other uses and amounted to 84% of the province's cultivated land area (耕地面积).

In a group of richer prefectures like Guangzhou, Dongguan, Foshan, and Zhuhai the provincial government pays only half of the 30-yuan subsidy. If the land has been rented out to a company or some other entity, the subsidy can come from the rental payments. Localities can offer a higher subsidy if they want. Some localities are reportedly giving subsidies of 200-300 yuan. The subsidy  is no longer given if the land is used for nonagricultural construction. Local governments have been ordered to implement the system by the end of 2012.

The subsidy is paid to the entity that holds the rights to the land, either the village collective or the household. In many villages in Guangdong land has been pooled and contracted out by bid to be farmed.

In Zhongshan City, it has been suggested that rice paddy land be given 250 yuan/mu and other agricultural land 150 yuan/mu annually. In one town of Zhongshan, land rents far exceed the proposed subsidy which is called "a drop in the bucket." A farmer in Shenwan Town said that you can earn 3000-4000 yuan from growing rice on a mu of land [sounds quite high], but you can earn ten times as much rent (30,000-40,000 yuan) using land for a factory. The farmer says land used for agriculture is mainly used for fish ponds or livestock, and the soil quality has declined.

The local land bureau in Zhongshan says they have already set up a system for assessing agricultural land, and land protection has been included in the job evaluations of township government personnel.

Sunday, October 21, 2012

China's Tangled Cotton Market

China's cotton market is the most extreme example of an emerging divergence between Chinese and international commodity prices that is likely to create confusion in agricultural trade. As Chinese production costs rise steadily, Chinese policy makers are ratcheting support prices upward. The Chinese currency has also been appreciating, pushing Chinese prices higher. At some point China's prices will rise above world prices, leading either to a flood of imports or a retreat from China's free trade stance as a WTO member.

In 2011, China introduced a price support program for cotton. At the time, the support price seemed irrelevant since market prices were about 30% above the support. The cotton market was still in a period of sky-high prices but few people anticipated how fast world cotton prices would plummet last year. By the time China's cotton harvest arrived in September 2011, market prices were far below the support price. Purchases to support the cotton price during 2011/12 totaled 3.1 million metric tons (14.2 million bales)--nearly half of last year's crop. According to one industry report, the government's Agricultural Development Bank of China made loans of 70 billion yuan (over $11 billion) to fund purchases of over half last year's cotton crop.  The Chinese cotton that was not purchased at the support price was largely poor-quality stuff that couldn't meet the government's standard. In order to get decent cotton, textile enterprises had to import it. China's cotton imports exploded to 5.4 mmt (24.5 million bales), more than half of world cotton trade during 2011/12.

For 2012/13 the National Development and Reform Commission raised the price support to 20,400 yuan per metric ton, 600 yuan higher than the previous year. The 2012/13 cotton support program began September 10 and will run through August. Chinese prices are still far above world prices and large volumes of cotton are being added to the reserve stockpile. An NDRC official said that government reserves are at a record-high level, straining storage capacity. (He said the China National Cotton Reserve Corporation has about 4 mmt of storage capacity.) NDRC estimates that this year's cotton crop is 300,000 mt (4.2-percent) less than last year, but the supply of newly-harvested cotton exceeds the demand for it.  From September 10 to October 15, another 841,100 mt had been added to cotton reserves from the new harvest.

A recent commentary described a perverse three-stage process that draws cotton from low-price to high-price locations. The highest price is paid for Chinese cotton stockpiled in reserves. The high support price sucks cotton out of the domestic market where prices are less than the support price. This creates a vacuum that is filled by cotton imported from the world market where cotton prices are lower still.  Thus, cotton bought at high support prices accumulates in warehouses while imports dominate the market.
Three-level cotton market with successively-higher prices--imported cotton, 
Chinese market, and reserves--as described in a recent commentary.

Demand from Chinese textile producers is relatively weak, due to the world economic slow-down and the erosion of their international competitiveness due to appreciation of the Chinese currency, Chinese textile manufacturers' high raw material (cotton) costs, and rising labor costs. A recent industry report said that China's small and medium textile manufacturers are under mounting pressures from soaring wages and rising energy prices, and many are short of cash.

Farmers are said to be pessimistic about planting cotton despite the higher support price. According to a report from Shandong, a farmer said that seed, fertilizer, labor and other costs total 1400 yuan per mu (about $1350 per acre) and gives a net return less than a third of what he can earn growing winter wheat followed by summer corn. Cotton also uses more labor, an important consideration since so many farmers are working off-farm. Moreover, the cotton price fluctuates more than grain prices and there is a risk that the crop will have to be sold at a low price if quality is degraded by heavy rains and lodging experienced in many areas. The Shandong Agriculture Department says cotton area has fallen five years in a row in their province.

As cotton production falls in eastern provinces, it is becoming concentrated in Xinjiang, in China's far northwestern corner. Chinese officials built up a cotton industry in Xinjiang during the 1990s to expand the domestic supply, and the region now accounts for roughly half of China's cotton output. This is another costly fiasco. Xinjiang's cotton price exceeds the price in eastern China, and Xinjiang accounted for 80 percent of cotton purchased under the price support program (648,000 mt) so far this year. A Xinjiang farmer reports his production cost is 1714 yuan per mu--higher than the Shandong farmer's 1400 yuan--and he complains that labor costs 1000 yuan, including food and housing and train fare back home after the harvest.

Xinjiang's expensive cotton also requires subsidies to transport it thousands of miles across the country to the east coast where most of China's textile mills are located.  During the first nine months of 2012, 3 million metric tons of Xinjiang cotton was transported out of the region--essentially the entire crop. The 12th five-year plan calls for raising the transportation subsidy from 400 yuan per ton to 500 yuan. (During the first nine months of this year, 3 mmt of cotton was transported out of Xinjiang, a total subsidy of 1.2 billion yuan or $190 million.) Yarn spinners in Xinjiang are also subsidized and the plan calls for extending the subsidies to cloth manufacturers.

The NDRC official said that the government will do all it can to maintain farmers' enthusiasm for planting cotton. One of the concerns is that purchasers will refuse to buy cotton or discount the price based on quality. Authorities have issued orders to strictly prohibit any such downgrading or refusals that would make it hard for farmers to sell their cotton at a good price.

China's rising costs put an ever-rising floor under agricultural commodities. With costs rising about 10 percent a year, Chinese prices are bound to rise above world prices. Cotton is the most extreme example. We see shadows of this process in other markets like pork, rapeseed, and early indica rice. If the United States has normal weather next year and grain prices plummet we could see the cotton phenomenon duplicated in corn, soybean and wheat markets.

Sunday, October 14, 2012

Special Port for Meat in Chongqing

Chongqing, the giant city in western China, has built  the first inland port for receiving imported meats. According to an article from the Chongqing Commercial News, the facility is expected to reduce the cost of imported meats by reducing the number of intermediaries between the coast and the final consumer. The port, built by Chongqing's inspection and quarantine authority, includes cold storage facilities and appears to be a measure intended to reduce food prices.

Chongqing's famous hot pot cuisine, which involves cooking all kinds of animal parts in a pot of boiling water, is said to be a driver of this trade. According to sources, Chongqing imports 40,000 metric tons annually of beef stomachs and other meat byproducts imported mainly from the U.S., Brazil, India and other countries. (Stomachs, brains, organs and other offal are much cheaper overseas than in China.) The new facility is expected to cut the cost of meat for Chongqing consumers by 350-to-400 yuan per metric ton, standardize procedures for importing meats to Chongqing and improve the quality and safety of meats.

The meat import facility is a bellwether of China's expanding meat trade.  Chongqing is in the middle of China's biggest pork-production area--which also has the highest animal feed prices in China. Yet it has become public policy to promote imports of meat there.

According to the report, Chongqing's inspection and quarantine authority is also requesting authority from the national inspection and quarantine agency to set up similar facilities to promote imports of seedlings, fruit, automobiles and scrap metal.

In a reflection of China's desperation to kick-start its export business, Chongqing's inspection and quarantine authority also waived fees for inspections, testing and other services for about 2000 exporting businesses. The fees are estimated to be worth 12 million yuan annually. The electronics industry is said to be the biggest beneficiary of the export fee waiver.

Wednesday, October 10, 2012

Chinese Milk Production Predicament

During the last decade China's dairy industry was often described breathlessly as a major success story with endless potential, but the melamine milk adulteration crisis in 2008 revealed the industry's weak foundation of scattered farmers milking poorly-nourish cattle. Reports posted this week reveal that the industry still has not recovered and is in a serious predicament. Dairy farmers are squeezed between rising feed costs and downward pressure on milk prices, Meanwhile, processing companies are still preoccupied with marketing and have little inclination to develop reliable supplies of raw milk.

A survey report from Hohhot, Inner Mongolia--the home base of two of China's biggest dairy companies--notes that small farmers with a few cows who benefited from the industry's frenetic growth in past years are now caught in a trap. They borrowed money with high interest loans to buy cows during the industry's flush years, but now they are losing money after several years of stagnant milk prices and rising feed prices. Many farmers are inclined to sell off their cattle but they can't get a good price for them. 

Another report from 21st Century Business Herald reports similar struggles of dairy farmers across the northeast region--the source of 70-80% of China's domestic raw milk output. The fundamental problem is that imported milk powder from New Zealand and Europe is about 30-percent cheaper than domestically-produced milk. One company in Heilongjiang Province is buying milk at about 4 yuan per kg, which translates to a cost of milk powder of 34,000 yuan per metric ton, assuming it takes 8.2 kg of raw milk to make 1 kg of milk powder and adding processing costs. 

According to a source in a dairy company based in Heilongjiang Province, companies lose 6000-8000 yuan on every ton of domestic milk they process. Farmers in northwestern Heilongjiang are having trouble selling their milk. Heilongjiang has a system for setting milk prices which forbids companies from paying more than 10% less than the reference price of 3.27 yuan/kg set during the fourth quarter of 2011. Unable to lower their purchase prices, many of the milk processors have cut back on the volume of milk they procure. During the peak production season in July-August, companies often declined to buy milk on the pretext of purported quality concerns.

Chart from 21st Century Business Herald shows imported milk powder cost is 22,000-24,000 yuan/mt, compared with cost of 30,000 yuan/mt for powder produced from Chinese milk.

Instead, companies are processing imported milk powder. China's milk powder imports totaled 400,000 mt through August 2012 and are expected to reach 600,000 mt this year. That's nearly half of domestic milk powder production in 2011 (1.25 mmt).

It is reported that milk processors have "reported the situation to the Ministry of Commerce." One Chinese dairy analyst recommends that the government start up a milk powder reserve. Two others recommend Chinese people switch from UHT milk (that can be stored for long periods and transported long distances without spoiling) to pasteurized milk (which could not be easily imported).

The Hohhot report complains that big dairy companies have been slow to develop stronger relations with milk suppliers by building their own farms, investing in cattle-raising communities (known as "cow hotels"), and developing fixed supplier relations with farmer cooperatives. 

Post-melamine-crisis, companies have been under pressure to gain more control over their source of raw milk to improve quality and safety, but the Hohhot report says companies have invested minimal funds in farms. The report criticizes milk companies for building just a few symbolic big farms as showcases or museums that have high operating costs while continuing to procure most of their milk from scattered farmers. The companies' attention is still occupied with marketing and developing new products. 

The government has reportedly not put much money into building farms either. In some instances companies commissioned construction of farms, but the company operating the farm had to come up with the investment capital or borrow it from the processor. The provincial government budgets only 70 million yuan for support of farm construction per year. In 2009, the Inner Mongolia government formulated a plan to construct 33 new 20,000-head farms and expand others over four years, but only 28% of the planned construction has been completed.

At the end of 2011, Hohhot had 700,000 dairy cattle, but only 359 "scale" farms: 271 farms with 100 head, eighty-four farms with 1000 head, and four with 10,000 head. These "scale" farms accounted for two-thirds of the dairy cattle in Hohhot. The Mengniu company has 6 large farms with 18,000 cows and Yili Company has one farm with 10,000 cows.

The report says a 100-cow farm requires investment of 3 million yuan which is hard to raise. It says banks don't lend much to dairy farms. Loans have strict collateral requirements, high interest, short payback periods. Investments in collectively-owned land can't be used as collateral since it can't be sold or transferred. 

The Hohhot report calls for measures to reduce the monopsony power of processors and put farmers and processors on an equal footing. The main recommendation is to develop farmer cooperatives. It calls for setting "fair" prices--perhaps they have in mind a reference-price-setting system like Heilongjiang has. It also calls for improving the availability and quality of forage by planting corn for silage and alfalfa.

This seems to be another example of the unraveling of China's model of low-productivity micro-farming with minimal investment. One sector after another faces cost pressures from rising raw material prices. Cost increases can't be passed on by increasing final product prices since cheaper imported products (milk powder, vegetable oil, meat) are available. While banks lavish funds on space-age infrastructure in cities with seemingly no limit, food processors and farms in the countryside are unable to make fixed asset investments to upgrade quality due to lack of credit and vanishing profits. 

Monday, October 8, 2012

All Policy is Local: Pigs in China

Is China a highly-efficient subsidizer of world-beating industry or a massively wasteful bureaucracy?

Western analysts get a misleading answer to this question when they assume that the Chinese government operates like a well-oiled machine in which decrees from Beijing authorities are carried out by a compliant government bureaucracy. The reality is that the bureaucracy--from the capital city down to the farm--is an active player in the policy process that seeks its own interests. Consequently, the outcomes of policies and industry plans are highly variable and considerable resources must be expended to induce officials to actually implement policies.

Officials at each level must expend resources and effort to carry out policies and they require inducements to do so. The policy implementation process includes constant bargaining and an ongoing cat-and-mouse game between officials at different levels of government. The active involvement of local officials in policy implementation is true in every country. But the influence is especially true in China where there is a centuries-old tradition of bureaucracy that exerted influence over Chinese society long before Mao Zedong installed a communist party hierarchy that extends from Beijing to the village.

Pork industry policies are a prominent example of this phenomenon. China's pork industry policy consists of a few small subsidy programs and general development strategies sent down to be implemented by provinces through five-year plans, "Number 1 documents," other obscure documents and instructions to communist party authorities. Provincial authorities are responsible for formulating plans that are then passed down to prefecture and county authorities. At the county level authorities then implement the plans by inducing township and village officials to carry out the measures. Policies have multiple targets besides farmers: local agriculture bureau offices, other government departments, banks, and companies.

Xuan'en County, a poor remote mountainous area in western Hubei Province has a plan to turn its pork sector into the county's first billion-yuan industry. Xuan'en County's pork industry plan is a component of its broader strategy of becoming a “National Organic Agriculture Demonstration Base County.” The county's plan reflects a Hubei Province plan to upgrade and transform the pork industry during the 12th five-year plan and instructs each locality to carry out a wide range of programs designed to shift from the traditional mode of scattered backyard to production to "standardized," "scale" production, with better disease control and less cyclical fluctuation in production.

In Xuan'en, the county's communist party committee conducted a survey of the hog industry and set up a county leadership group and issued a document describing objectives for pork industry development. Each township had to sign a responsibility document. There are carrots and sticks to induce local officials to comply with the plan. Success in pork industry development was included in the annual evaluations of local officials (stick) and a system of awards (carrot) was instituted for township officials. The county livestock and veterinary bureau set up a pork industry work office which published its own document on evaluating township veterinary offices' work in implementing the county's "4450" plan for pork industry development. This also included a system of awards, inspection visits and "responsibility evaluations."

The county set concrete objectives for setting up large- and medium-scale farms. One township was targeted to set up thirteen "big hog villages" raising 10,000 head each annually, including 45 farms raising 500 head or more. Plans call for building a 10,000-head hog farm, two 3000-head farms, forty-five 500-head farms, and thirteen 400-499 head farms. Two water treatment projects are now being built, each costing 800,000 yuan or more. The county also plans to build 82 village level animal disease control offices.

The county's plan features its "4450" model for hog raising which includes a "fermentation bed" technique that  breaks down hog waste through a biological process. The 4450 model was introduced in 2008 and aims to spread new pens of at least 40 square meters to farmers raising 4 sows and selling at least 50 pigs annually. County officials claim that the model produced sales of 1 million yuan during the first 5 months of 2012, reduced hog waste by 390 kg per head, and reduced waste water (by reducing water use to clean pens) by 4 metric tons.   The county plans to add a thousand "4450" farms during 2012, ultimately adding 10,000 farms by 2015. This strategy is described as a foundation for the county's "organic" strategy, although there is no mention of feeds, pharmaceuticals or other aspects of production that would make production "organic." (The processing company's web site reveals that some of its suppliers meet "pollution free" and green food standards--these fall short of organic production standards.)

In the pork industry, subsidies to incentivize local officials are arguably more important than subsidies to farmers. The local system of awards is an extension of the central government's program of giving awards to about 500 major pork-marketing counties. Funds of 2500-to-6000 yuan per farm are passed down to Xuan'en County townships for support of the "4450" program although it's not clear whether the funds actually are paid to the farmers. The county has given 5 million yuan (about $780,000) in subsidies for the 4450 program over the last 3 years. According to the Hubei Province plan, central government subsidies for operation of township veterinary stations are to be increased to 1200 yuan per employee per worker per year (from previous 1000 yuan).

Funds are targeted to villages with special designations as "poverty" regions and "old liberated" villages. The "old liberated" villages are rewarded for coming under communist control prior to 1949--sixty to seventy years ago. The hog project makes use of other programs such as the "sunshine project" for rural training and a related "rainfall" project for training large-scale farmers.

Another important aspect of Chinese agricultural policy is the bargain between companies and the communist party/government. Plans for the development pork industry incorporate meat, feed, breeding and veterinary drug companies that are designated as "dragon heads" that lead agriculture toward modernization and commercialization. In Xuan'en a centerpiece of the plan is its support of Hubei Dapai Meat Co., a company that sells pork, hams and sausages in a number of provinces. The county gave the company 1 million yuan this year for technology upgrades (presumably to buy processing, water treatment and/or laboratory equipment), 2 million yuan in financial aid, and a 10 million yuan revolving credit fund, plus access (presumably free) to 26 mu (about 3 acres) of land to expand its plant. These subsidies are modest in comparison to its 178 million yuan in annual sales but exceed its 2.9-million yuan profit reported for 2011. The company has reportedly paid 560,000 yuan in taxes in 2012.

According to the Dapai company's web site, it is a formerly state-owned company that has been privatized (the site gives no clue as to who owns it now). Dapai can slaughter 300,000 hogs annually, which exceeds the entire output of the county last year. It highlights two producer cooperatives that supply the company with 25,000 hogs. The company says it has begun procuring hogs in neighboring provinces to meet its requirements.

Hubei Province's plan calls for both fostering local entrepreneurs and attracting outside investment. A brief story on a new investment in a Xuan'en County hog farm gives some insight on how investment is attracted. On July 12, Li Family River Township Government signed an agreement with Hongkun Ecological Agriculture LLC to invest 10 million yuan in a hog farm that will hold 1000 sows and market 5000 finished hogs per year (presumably the farm will sell mostly feeder pigs). The investor was Qu Hongkun, a successful businessman who left the township as a migrant worker 25 years ago and likely still has ties to the area. The investment involves moving a hog farm from Fujian Province to Li Family River Township in Xuan'en County. The agreement was described as the township government's energetic work to attract investment to support the plan to develop large-scale farms following the county government's exhortation to local officials to offer a favorable investment environment for "scientific development" for the rapid development of the rural economy.  The project also seems to reflect the trend of pig farms from coastal areas--where they are viewed as a polluting nuisance--to poor western provinces that are still eager for any investment they can get.

Digging into the details of Chinese agricultural policies shows that there are many links in the policy chain between Beijing and the fields where production occurs. Each link involves multiple economic actors--human beings who are each allocating their own resources and attention among competing projects. Whether the outcome at the end of the chain reflects Beijing's intent depends on striking bargains and giving inducements and punishments to each player in the process. The impacts of policies varies widely and is virtually impossible to evaluate since officials have incentive to report dramatic results up the chain while minimizing efforts and collecting subsidies.

We don't know and Beijing doesn't know either whether its programs are implemented at the local level. All the documents cited above could be just plans that exist on paper and are not really implemented. (As a reflection of the verification problem, Hubei Province's sow subsidy system demands that statisticians verify sow numbers by "seeing pigs, seeing people" to forestall false reporting of sows to maximize subsidies.)  Implementation of policies varies from place to place depending on local officials' priorities and from year to year depending on what crisis has popped up recently and the amount of energy spent on inducing officials to implement policies.

Rarely is anyone satisfied with subsidies. A July 2012 assessment of a the "4450" hog farm project in Badong County (a neighbor of Xuan'en) concluded that there had been significant transformation of the industry, but worried that the government's support is uneven and does not meet the needs of producers. In particular, said the Badong reporter, many policies are aimed at large-scale farms and companies but there is little support for small-scale producers. Policies also come and go from year to year depending on government priorities and campaigns. The Badong assessment remarked that low-interest loans had been available in the past (probably referring to the panic during 2007-08 following the big price spike after the "blue ear" disease epidemic), but complained that no cheap loans were available in the past several years.

The chance of a policy being effective depends on its ability to pass through this chain of officials from Beijing to the local level. The receptiveness of the bureaucratic chain to a policy plays a role similar to the conductivity of material in a wire transmitting an electric current from the power plant to the electric socket in your home. Bureaucracy introduces resistance to the policy implementation process. Energy must be applied to each point in the chain in order to ensure its "conductivity." The resources expended on inducing the bureaucracy to carry out policies offset--and may even outweigh--the social benefits of the policies.