Dim Sums: Agricultural Markets in China

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 pric...

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...

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 ...

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, retaile...

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 ...

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 ...

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 duri...

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...

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 ...

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 im...