Politicization of Chinese Statistics

China's National Bureau of Statistics (NBS) held a meeting on December 26 to study the communist party's rural work plan for 2014 and to push forward an anti-corruption campaign. The director of the bureau is calling for needed changes to improve the reliability and quality of Chinese statistics, but the politicization of NBS will prevent it from ever being a transparent window for assessing China's economy and society.

The problem starts with the director of the bureau. Ma Jiantang is identified first as the bureau's communist party secretary and secondarily as its director. On December 26, he presided over a meeting of the bureau's communist party organization department where he conveyed the highlights of the central party committee's rural work meeting. China's statistics bureau is fundamentally an arm of the communist party and its mission is to preserve communist party rule, as will be revealed below.

Mr. Ma exhorted NBS party leaders to improve the quality of statistics on the production of grain and other agricultural commodities as a priority for 2014. This followed recent instructions from General Secretary Xi Jinping to improve the reliability of statistics, increase their truthfulness, stop falsification of data, and do a better job of reporting statistics to the public. Mr. Ma ordered statisticians to prepare for the 2016 agricultural census and to carry out a strategy for improving grain statistics, including a survey of major grain-producing counties begun several years ago (but has never been published).

The second emphasis of the meeting was on a campaign to clean up corruption in the statistical system, an issue that gets to the heart of why China's statistics are unreliable. Statistics are the measuring rod for evaluating Chinese officials and the benchmark for distributing money. Consequently, there are strong incentives throughout the system to exaggerate numbers or understate numbers to hide problems.

Mr. Ma exhorted to attendees at the meeting to strictly enforce party discipline and resolutely implement the party's work plan for cleaning up corruption. Each unit in the statistics bureau has a "party discipline leader" who is charged with preventing corruption in his/her unit.

We can learn more on how the party operates in the statistics bureau from an early-December "warning meeting" held for 60 statistics officials in Shaanxi Province to show them the serious consequences of corruption. Officials were shown pictures of prisons and heard testimonies from prison guards and prisoners who are ex-officials convicted of corruption, resulting in "shock" and a "baptism" for the minds of the officials. Sounding like a Confucian religious revival meeting, the officials realized that the prisoners they heard from were once officials with lofty aspirations who made a contribution to society, but they succumbed to temptation in a moment of greed, choosing the criminal path." The felons were described as tarnishing the image of the party and disgracing their families, and "in the end they were repentant." "Their remorse and sighs again warned us to keep a clear head, build strong party discipline and moral defense from deep in the heart  as a preventive measure."

A prison guard warns Shaanxi statistics officials about  

the dire consequences of corruption. Source: Shaanxi Province Statistics Bureau.

The description of the Shaanxi meeting reveals that the ultimate objective is to keep the communist party in control: "Everyone realized the anti-corruption drive is related to the government’s future and destiny...related to the party’s survival and long-term stability of the state, and corruption is the biggest danger facing our party."

Many statistics are used to distribute subsidy funds. For example, counties can receive award payments based on their output and marketings of grain, oilseeds, and pigs. Other subsidies for seeds, breeding stock, and vaccines are distributed based on statistics. Other big programs include "general agricultural development" and "high-yield field construction." Some districts have plans to ban pig production, giving officials incentive to hide or ignore illegal pig sties. As long as statistics and policies are intertwined, respondents have incentive to falsify or massage data. Statisticians may be induced to go along with the falsification by a bribe.

Modern statistical methods endeavor to estimate national totals from sample surveys. Periodic censuses give statisticians a bench mark for making inferences from samples to the population. China's agricultural statistics rely on decennial agricultural censuses (in 1996 and 2006) to give them a benchmark to estimate national totals from sample surveys (they are preparing for the next census in 2016). However, these censuses probably produced fictitious data, making annual statistical estimates meaningless. In a blog-post, "Agricultural census: for truth or corruption," a local official recalls receiving a phone call ordering him to revise census reports because the numbers differed from those reported in the bureau's annual statistical publications. Statisticians were given totals for each district they then had to allocate among the households in the district at random. When the official complained that such data were useless, he was told not to worry; upper level officials had responsibility for revising the data.

Another post told a similar story, saying that 90 percent of the census data on population, land area, rice planting, poultry and livestock in a particular county were made up by allocating numbers from annual statistical reports. Another official estimated that half of the 2006 agricultural census data was made up. Many officials couldn't be bothered to try to chase down villagers who are often away from home working elsewhere. Thus, many of the census forms were filled out by the officials in their offices. Many just filled in information from previous censuses. An industrial district in Suzhou falsified census statistics to report fictitious "green" land and hide their illegal expropriation of farmland.

China's statistical organization has a fundamental internal contradiction. Statisticians are exhorted to be "scientific", but science is a process of formulating hypotheses and testing them against observed facts. However, statistics can never be objective or reliable as long as statistics and politics are intertwined. The reams of numbers released by China's statistical authorities create a false impression of precision when in reality they leave analysts in a fog of confusion.

Reserves Get 32% of China's Grain

According to a news report, Sinograin--China's State-owned grain reserve corporation--purchased 100 million metric tons of grains and vegetable oils during the first 11 months of 2013. That total was reported to be equal to 32.6 percent of grain purchased by all enterprises, the highest proportion in recent years (the percentage excludes grain used on farms). The report attributed the high proportion purchased by the reserve corporation to an effort to support farmers income and maintain production incentives. Authorities have stockpiled grains and oils to support prices this year following a big domestic harvest, with soft demand and global prices plunging for most grains and oilseeds.

The purchases include the following:

• 36.36 mmt in policy-style purchases under minimum price and temporary reserve programs to "stabilize market supply"
• 12.7 mmt in interprovincial transfers of grain (mainly from the northeast to southern provinces), reported to be the largest amount ever
• 4.12 mmt of imports to replenish reserves

Sinograin's purchases also include grain and oils purchased to rotate reserves, but the amount was not reported. The figures were announced in a speech at an annual meeting on grain reserves held in Beijing, December 24-25.

While Sinograin was lauded for its role in carrying out the government's market intervention, the company also has been prodded to clean up its act. Most of the meeting focused on reforms to reduce waste and address corruption issues. This has been a general theme of the Chinese government's work this year, but Sinograin is a rectification target due to incidents of abuse and corruption at provincial and local grain depots under Sinograin's management. The article mentions that perpetrators of a suspicious fire at a grain depot in Lindian, Heilongjiang Province last May "have been severely dealt with." Subsidiary companies gaming the system and failing to implement State policy will be "resolutely investigated and violations resolved." The number of independent grain depots has been consolidated and supervision has been strengthened. The chairman of Sinograin promises that strict corporate governance will be a priority in 2014.

Sinograin ran out of storage space for grain this year. The government ordered 2 mmt of new storage space and it was built in three months. Standards for warehouse construction were raised this year, specifically to resist fire hazards (probably a reaction to the Heilongjiang fire). 

While China's new leadership purportedly is launching a new market-oriented era where prices play a deciding role, the government's grain reserve system is increasing its role in the grain market. The reason is because authorities only want grain prices to decide resource allocation when prices are high. While the new leadership is encouraging growth of the private sector, state-owned companies are still viewed as vital tools to carry out the communist party's policies and strategies.

This year's stockpiling and associated corruption also echoes a similar phenomenon in the 1990s when grain stocks became so huge that the government subsidized exports and the creation of ethanol and other industries to use it up. Other countries' grain exports to China dried up during that period.

DDGS Imports Tested for GMOs

China's Inspection and Quarantine authority has issued a bulletin ordering its local bureaus to test for the presence of genetically modified material in imported distillers dried grains with solubles (DDGS) and related corn and oilseed processing by-products. Shipments containing unapproved GM material are to be returned or destroyed. This issue has already severely disrupted corn trade over the past month and will now likely disrupt trade in DDGS, a substitute for corn and protein meals that has been gaining in popularity among Chinese feed mills.

The December 24 bulletin notified local inspection and quarantine bureaus that the Shanghai bureau had detected MIR162, a GM corn variety that China has not approved for import, in a shipment of DDGS. Local bureaus were ordered to abandon existing safety risk monitoring plans and begin testing samples of all shipments of corn byproducts for unapproved genetically modified material. Shipments that are found to contain unapproved material are to be returned or destroyed and reported to the national inspection and quarantine authority. The order covers corn-processing byproducts, residuals and meals from processing soybeans, cottonseed, and rapeseed. These are materials used mainly for feed manufacturing (The HS codes include 2303300010, 2303300090, 2304001000, 2304009000, 2306100000, 2306410000, 2306490000; 2304001000; 2304009000; 2306100000; 2306410000; 2306490000.)

Most domestic cottonseed meal is derived from genetically modified varieties (most cotton planted in China is genetically modified), but domestically-produced cottonseed meal is almost certainly not subject to such testing for unapproved varieties.

This move comes about a month after authorities began rejecting corn containing MIR162. According to the article, 600,000 metric tons of corn has been rejected by Chinese inspection and quarantine authorities since November 29. (The article reports that this represented 30 percent of corn imports, but this percentage seems far too low; other reports say 600,000-700,000 tons of corn were scheduled to arrive in December.) The article notes that the rejection of imported corn has given a boost to corn prices in northeastern China.

The article says that DDGS imports have risen this year to nearly 3.5 million metric tons (mmt) for January-November (up from 2.38 mmt for the entirety of 2012). The article says that domestic Chinese DDGS has been in short supply this year because corn-based alcohol production has fallen due to weak demand. Starch processing has also been cut back. Chinese DDGS prices are up and imported DDGS is cheaper. The article says that feed mills have increased their DDGS inclusion rate from 5 percent to 15 percent.

Chinese Farm Commodities, Gold and Deflation

Despite being a relatively primitive part of the Chinese economy, the country's agricultural sector is tied in to global financial markets. An example is the surprising correlation between Chinese gold and corn prices shown in the chart below. 

Note: Cash prices from China National Bureau of Statistics, Ministry of Agriculture, and gold.org. 

Chinese gold and corn prices have generally been on the rise since 2000. The link became more clear during 2009-11 when both prices rose at a robust pace. China's gold price peaked in 2008 and fell after the onset of the global financial crisis that year. Chinese corn prices fell later in 2008, along with nearly all other farm prices. Since then, monetary authorities in China, the U.S. and elsewhere have been in expansionary mode, and from 2009 to 2011 there was a steady run-up in both gold and corn prices. The Chinese gold price rose 118 percent from its low point in December 2008 to its peak in September 2011. Chinese corn prices rose too, but about half as fast: 52 percent from November 2008 by their peak in September 2012. 

The gold price plateaued and then began sinking in 2012. By November 2013, the Chinese gold price was down more than 30 percent from its peak. Corn prices also plateaued during 2013. The average Chinese corn price hasn't fallen sharply but the upward trajectory has stopped. The average Chinese corn price is down about 5 percent from its peak value. With a few exceptions, most agricultural prices in China have stopped going up and in some cases have fallen. 

Another example is China's pork price (below). Chinese hog prices are more volatile than corn prices, as there is less government intervention and disease epidemics cause intermittent supply shocks. The peak in China's hog price in 2008 (following the "blue ear" epidemic in 2007) coincided with the peak in the Chinese gold price. The hog price fell sharply in 2009 due to excess supply but probably helped by the global financial crisis. Chinese hog prices began rising sharply during 2010--a period when nearly all commodity prices in China were rising at an alarming pace. Chinese gold prices were rising at the same time. Interestingly, China's gold and hog prices again peaked at the same time in 2011. During 2012-13, hog prices continued to fluctuate but the hog price is clearly not headed back to its 2011 peak. 

Source: China National Bureau of Statistics, Ministry of Agriculture and gold.org.

The gold-commodity link is not unique to China. U.S. corn prices have been more volatile than Chinese prices but they have also followed the general trend in the gold price. The U.S. corn price spiked in 2008 during the global commodity price boom (China banned grain exports during 2008 and thus prevented a spike in Chinese corn prices), fell sharply during the global financial crisis and rose to high levels during the droughts of 2011 and 2012. The U.S. corn price has fallen precipitously during 2013. This is mainly due to this to this year's big harvest, but it also coincides with the collapse of the gold price bubble. Chinese authorities are struggling to prevent a similar collapse of China's corn price by stockpiling the 2013 harvest, subsidizing purchases of domestic corn (and perhaps by rejecting U.S. corn imports).

Chart shows U.S. Gulf price of corn and gold price from gold.org.

Chinese officials are wringing their hands over this year's decline in farm prices. The chart below shows that corn production costs and gross income per-unit-of-land have been rising at an accelerating rate since about 2006. Increases in both price and yield have kept gross income rising fast enough to keep up with the rise in costs. Data are not available for 2013, but reports indicate that yield went up about 4 percent while prices are down about 5 percent. The chart shows that gross income per unit of land would fall under these assumptions. If production costs rise at their customary rate, net returns for farmers will shrink or vanish. This would not only slow rural income growth but also discourage farmers from planting grain in 2014.

Note: Chart shows gross income (price x yield) and costs per unit of land for corn production in China.

Costs of land and labor include imputed costs of family-owned inputs plus costs of rented land and hired labor.

Source: China National Development and Reform Commission data. Gross income for 2013 is estimated.

The chart also shows that the recent inflationary period echoes a similar euphoric inflationary period in China during 1993-95. That inflation came to a screeching halt, leaving Chinese agriculture in a deep funk during the late 1990s. Farmers had difficulty selling their grain, rural incomes were depressed, authorities tried to support prices (with "protective prices") and were burdened with huge grain inventories they couldn't sell. There are signs that we China is at a similar turning point that could bring everything grinding to a halt. 

The growth in China's agricultural commodity prices since 2009 may have partly reflected general inflation due to massive monetary stimulus all over the world. "Quantitative easing" in the United States drove U.S. interest rates to zero, sending investors scampering around the globe looking for returns. China was also boosting its money supply in 2009 when banks were ordered to ramp up lending to support gargantuan infrastructure spending to counter the recession that came with the global financial crisis. Much of that money went into real estate but some went into agricultural commodities. About that time, stories about Chinese real estate and agribusiness companies flush with cash investing in agricultural projects began showing up in news media. During 2010--the year after China's big stimulus program--there were stories about Chinese speculators with wads of cash stockpiling garlic, ginger, and chili peppers. In 2010, authorities cracked down on corn market speculation and desperately sold corn reserves into the market to tamp down prices. 

China's agricultural sector has been locked in to inflation as a fact of life since 2009. Production costs rose every year, so Chinese officials adopted a practice of raising price supports every year to cover rising costs. Ever-rising prices also meant that commodity reserve managers could always sell the grain they bought at a higher price and make a profit. China's approach to managing agriculture is predicated on the notion that production costs and prices would go on rising forever. What happens if prices fall?

The financial world is now focused on "the taper"--the U.S. Federal Reserve's roll-back of its monetary stimulus. China has had two cash crunches so far in 2013. The trends indicate that commodity price inflation has ended and a deflationary period may be about to begin.

Heilongjiang Soybean Area Down 8.8% in 2013

The Heilongjiang Provincial Statistics Bureau has released statistics showing that 2013 grain production rose in large part by replacing low-yield soybeans with high-yield corn.

Heilongjiang is a key province. According to National Bureau of Statistics data, Heilongjiang accounted for about 10 percent of China's grain production and area planted in grain during 2013. According to the new report, the province's grain output reached 60 million metric tons and rose 4.2 percent during 2013. The Heilongjiang report says the province's grain output rose a cumulative 73 percent from 2007 to 2013. The report brags that Heilongjiang surpassed Henan in 2011 and is now clearly the leading grain-producing province.

Heilongjiang's area planted in grain rose only 0.4 percent. This slight change hides big increases in rice and corn area offset by declines in area planted to soybeans, wheat, and other grains. Soybean area fell 8.8 percent. Its decline of 234,000 hectares nearly matched the gain in corn area of 257,000 hectares. Rice rose by 106,000 ha.

Heilongjiang Province Area Planted in Grain
Grain	Area, 2013	Change from 2012
	1000 ha	1000 ha	Percent
Rice	3,176	106	3.4
Corn	5,447	257	4.9
Soybeans	2,430	-234	-8.8
Wheat	133	-77	-36.7
Other grains	378	-7	-1.8

Source: Heilongjiang Statistics Bureau.

Heilongjiang's 4.3-percent increase in output derives largely from a substitution of high-yielding crops (corn and rice) for low-yielding ones (soybeans and wheat). The Heilongjiang statisticians calculate that the change in cropping patterns contributed about half of the 2.6-mmt increase in provincial grain output. Increased overall area planted contributed another 0.225 mmt. Increases in yields of particular crops contributed 38.5 percent of the increase in Heilongjiang's grain output. 

At the national level, the National Bureau of Statistics's chief crop statistician estimated that the shift from low- to high-yield crops contributed 3.96-mmt, or 32 percent, of this year's increase in national grain output. He attributed the increase in grain output first of all to subsidies and price supports that increased farmers' enthusiasm for planting grain. He said northern provinces had abundant rainfall and normal sunlight that boosted yields. Corn yields hit 6 metric tons per hectare for the first time. Measures to mitigate the impact of drought and floods are also credited for the increased grain harvest. 

China's Milk Shortage

China's dairy companies are having trouble getting raw milk supplies. They are competing for milk and bidding up the price. According to the Ministry of Agriculture, the average raw milk price is up 18.9 percent since last year.

Average price of raw milk, December 2011-November 2013. 

Source: China Ministry of Agriculture

In August, Chinese officials hit multinational dairy companies with fines for allegedly fixing prices, but since then domestic companies have been raising prices. An article in the Liaowang weekly reported that the major Chinese companies announced increases in dairy product prices for the end of December. In some supermarkets, dairy products are sold out.

Also in August, officials banned imports of milk powder from New Zealand and Australia over a botulism scare. Many Chinese companies had been importing cheaper powder to manufacture milk but now they have to find domestic milk. (Interestingly, in January a China Ministry of Agriculture task force had recommended enacting "technical barriers to trade" to take pressure off the domestic dairy industry.)

At least one "expert" said there is no milk shortage because official statistics show that China's milk production and cow numbers have been steady. However, visits to production areas indicate that dairy cow numbers have fallen 20-to-30 percent. The Liaowang reporter went to a farm he had previously visited in 2009. At that time, the farmer had planned to expand from 1000 to 1500 cows, but his herd actually shrank to 200. Daily production by the "cow hotel" where he keeps his cattle had shrunk from 6 tons to 4 tons. The head of a farm in Hohhot said her town's cattle numbers fell from 17,000 in July to 13,000 now.

The Liaowang reporter said many people in the industry told him they thought the actual number of dairy cattle is less than the 14 million reported by statistics. Estimates vary from 8-to-10 million. One analyst estimated the number of dairy producers fell 10-to-20 percent in 2013.

One dairy analyst said China had had a milk deficit of 2-to-3 million metric tons each year since the melamine crisis in 2008. This year, he estimated the deficit had expanded to 4 million metric tons.

Another article explores the constraints on milk production. Small-scale farmers have been quitting in large numbers. Returns to dairying have been low as costs rose rapidly in recent years. Beef prices are high, so many killed off their cows and sold them for meat. Larger-scale farms are unable to expand due to lack of land and capital.

The article zeroes in on the conflict between investment and returns at different segments of the industry chain. Dairy farming yields relatively low returns but requires high investment. The consequence is that many companies pursue a strategy similar to that of apparel companies that specialize in design, branding and sales, and contract out the manufacturing to small companies. Some dairy companies adopted a "no cows" strategy. Other companies tried to operate their own farms but met with frustration.

Several industry experts anticipate that the milk shortage will be alleviated after a year or so because of the long lag in the milk production cycle.

No More Mixing Pigs and People

A district in Hangzhou's plan to reduce the number of pigs is a bellwether of the vision for undoing the traditional intermingling of people and animals in China. Environmental awareness is one of the factors behind the change, but the result is ironically an expansion of the CAFO model, anathema to most environmentalists in western countries.

Last week, officials in Xiaoshan (萧山) announced a plan to eliminate 60 percent of the district's hogs by 2017. This will be achieved by closing down farms raising less than 5000 head and limiting the number raised on farms allowed to continue operating. Building new farms or expanding farms will be forbidden. The program's principles were stated as: "reduce quantity, raise quality; supervise the entire system; ecological security." The objective is to stabilize the number of pigs at 450,000.

As Chinese cities sprawl outward, urban enclaves of housing complexes, industrial parks and university campuses spring up alongside villages where people still raise pigs in the traditional fashion. Villages turn into exurban shantytowns where houses are rented out to migrants. Many of the stories about underground butchers and garbage-feeding of pigs reported on this blog take place in such villages on the urban fringe. More importantly, the incident of thousands of dead pigs floating in Shanghai's Songjiang River in February this year was traced back to a district of Jiaxing, another small city in Zhejiang that is also a mixture of urban sprawl, tourist areas and small-scale pig-raising.

Xiaoshan is a swathe of territory in Zhejiang Province across the Qiantang River from the urban core of Hangzhou. It was once a small city surrounded by rural villages that has been absorbed by the sprawl of Hangzhou. The Xiaoshan plan bans pig farms in four core urban sub-districts and within a technology park. It calls for reductions of 20-30-percent in drinking-water protection areas, scenic areas, a tourism district where traditional houses are preserved, and a district for school campuses.

In the future, the plan will only allow large-scale hog farms--known as CAFOs (concentrated animal feeding operations) in the West. Farms outside the four inner districts that raise 5000 or more pigs will be permitted to continue, but they have to reduce their pig numbers by 14 percent by 2017. They have to control emissions of pollutants by 2015. Small-scale farms raising less than 5000 pigs will be banned throughout the district. This is based on the presumption that only large-scale farms have the resources to invest in manure-treating facilities.

Farms slated for closure will have to sign an agreement in the first half of 2014. They get compensation for each sow and boar and for buildings. Barns and buildings have to be demolished and land rehabilitated. The district authorities encourage the farms to relocate to another district or to transition to better "ecological" production methods.

Until now, the butchering and small-scale pig-raising in such places was tolerated or ignored, but the floating pig incident triggered a new effort to crack down on pigs. This is not new. Jiaxing--the origin of Shanghai's floating pigs--began issuing similar plans to reduce pig production over ten years ago, but the area still raised millions of pigs. The campaign in Xiaoshan may prove ineffective too. The long-term goal of maintaining a population of 450,000 pigs--still a lot for an urban area--shows that officials know it's unrealistic to eliminate pig farms entirely. (By comparison, Iowa--the leading hog-producing area in the U.S.--has only a handful of counties with more than 450,000 pigs.)

In big sophisticated cities like Hangzhou, officials have a vision of erasing China's rural tradition of intermingled people, animals and crops in favor of an urban society in which they are kept separate. China's new drive for urbanization is supposed to be paired with new attention to environmental regulation. The vision for livestock is to move animals into big modern farms hidden in the hinterland. If environmental regulations are enforced, the number of animals raised will have to decrease and the cost of raising them will increase.

However, officials' dream of clean cities free of pigs is undermined by the persistent underclass of rural migrants. Migrants want/need cheap food--thus creating demand for pork produced at minimum cost--and many migrants are looking for ways to make living--creating a robust supply of garbage-feeders and dead-pig butchers willing to flout regulations to make a little extra money. Moreover, China's urbanization strategy of herding rural people with no means of support into hundreds of new small cities managed by officials with little interest or experience in enforcing regulations could create even more chaotic pig-raising and butchering.

Chinese Flour: Leaded or Unleaded?

Would you like your flour leaded or unleaded?
Would you like a tumor with that rice?

China's soil and water are heavily polluted with heavy metals that are absorbed into grain and vegetables. Chinese officials' insistence that its people eat grains grown in the country may expose them to a heightened risk of tumors and birth defects from ingesting pollutants contained in grains and vegetables.

The dimsums blog has posted reports on heavy metal contamination, "dead soil," "cadmium rice," the secret soil survey, and the Ministry of Agriculture's admission that agricultural pollution is "relatively serious." Today dimsums summarizes "Crisis and Response in the Food Chain," a well-documented article posted on a web site of the Development Research Center, a think tank that advises China's State Council on economic and social issues.

The article cites a "harsh reality" of contemporary China: a high incidence of cancer reported by China's 2012 "tumor registry," 259 "cancer villages", and a high rate of birth defects. The lifetime probability of contracting cancer is said to be 22 percent. China produces 900,000 children with birth defects annually and is classified by the World Health Organization as a country with a high rate birth defects. The author notes that the human body is an open system that is exposed to its surrounding environment. The article warns that an "alarm bell" has been sounded on food as a potential source of health problems.

The author says he was alarmed when he first tested vegetables from Hunan Province in 2008 and found arsenic and lead content at double the allowed tolerance, cadmium 68.8% over the limit, and nickel 10% over the tolerance. He worried that Hunan, known as "the land of fish and rice," had become a scourge of the Chinese people. 

The broad patterns are "cadmium in the south, lead in the north." Rice in south China is widely contaminated with cadmium and wheat in northern provinces is contaminated with lead. Metals can be absorbed from the air through leaves or from soil and water through the roots. It can accumulate in the stems, leaves, and grain kernels and then be ingested by humans. 

In northern China, lead contamination is concentrated in certain areas, but testing indicates that it is spreading more widely. The contamination problems are most serious in areas near mines and manufacturers where tailings and emissions leach into the soil, wash into the water and pollute the air. Shanxi Province is perhaps the most heavily polluted. Mining areas in northern Jiangsu and industrialized areas around Taihu Lake also show unusually high levels of soil contamination. In a mining district near Xuzhou, wheat had lead content 80 times higher than the allowed tolerance and chromium was 180 times the tolerance. 

Mining, galvanizing, dyeing, and tire manufacturing are major sources of pollutants. Household waste water is often used for agricultural irrigation near cities and in dry regions where water is scarce. Testing of wheat in a 250-meter strip of land along the Shanghai-Ningbo expressway found that levels of lead were double the tolerance.

Standards for heavy metals posted on the wall at a farm growing vegetables for export. 

Farms supplying the domestic market have no such signs.

The article cites several studies conducted in different parts of Henan Province between 2009 and 2012 which found wheat kernels and soil had concentrations of lead, mercury, chromium, zinc, and nickel far above allowed levels.

"Organic" fertilizer may be another source of soil and water pollution. A number of heavy metals are added to animal feed to improve digestion or the animal's appearance, but only a fraction of the metals are absorbed by the animal's digestive tract. Most of the heavy metals pass into the animal's manure which may be used as organic fertilizer for crops. (China is expanding a subsidy program to encourage use of organic fertilizer.) This organic fertilizer may also add heavy metals to the soil which are then absorbed by crops.  

Monitoring by the Shijiazhuang disease control center found that lead residues exceeded tolerances in 50% of pig kidneys, 44% of pork, 35% of rice, and 30% of flour. Testing of seafood from the Bohai Gulf in northern China also showed heavy metal residues exceeded the limits.

Another pollutant is arsenic. China has an estimated 70% of the world's arsenic reserves. Mining and smelting activities in southwestern provinces blow the poison into the air. The heavy rains and steep hillsides common to this region result in mining slag being washed into river systems. Arsenic is also used as a feed additive to give pigs a healthy-looking pink complexion and shiny fur. 

A 2010 academic study found high levels of arsenic in Chinese rice. In mining areas of Guangxi Province, 35% of rice had excessive arsenic levels. Arsenic has been detected in Hubei, a region where arsenic is not prevalent. It is believed arsenic from industrial emissions flowed into the groundwater. Monitoring in north China indicates that arsenic levels are rising. 

Heavy metal contamination is not a new phenomenon. In 1974, authorities found that rice produced in an irrigation district near Shenyang in Liaoning Province was contaminated with cadmium. In 2002, national rice testing by the Ministry of Agriculture found excessive levels of cadmium and lead. 

According to the article, Chinese peoples' intake of cadmium is three times that of people in Japan and the United States. The extreme levels of cadmium in some mining areas has produced epidemics of Itai ("ouch ouch") disease. 

Authorities have known about contamination of food for a long time but have kept it secret. Soil surveys are not published. According to the article, scholars have to publish their research in journals outside the country under false names.

Chinese officials are fond of insisting that "the Chinese peoples' rice bowl must remain firmly in their own grasp." Ironically, their insistence on eating only Chinese grain for so-called "food security" may be poisoning their own people. 

Corn Import Refusals Support Chinese Prices

China's rejection of corn shipments from the United States this month supports domestic corn prices by forcing Chinese feed mills to buy domestic corn instead, according to an analysis by China Grain News. Is it a coincidence that these rejections happened during the same week China announced a subsidy designed to induce companies to buy corn in the northeastern provinces?

On November 29, border inspection officials in Shenzhen rejected a 60,000-mt shipment of U.S. corn because it contained a GMO corn variety that has not been approved by China's Ministry of Agriculture for import. More shipments were rejected in the following days at Shenzhen and ports in Fujian and Shandong Provinces. The total rejected was over 120,000 metric tons. The shipments were turned away and will have to be sent elsewhere, probably at a discounted price with big losses for sellers. The rejections have cast a pall over the market. All the 500,000-700,000 mt of imported corn expected to arrive this month is at risk of rejection. Grainnews says the declining arrivals of imports is putting upward pressure on Chinese corn prices.

The Grainnews report explains that  corn producers and traders in northeastern China are the main beneficiaries of the import rejections. Feed mills in southern China are seeking to build up inventories of corn ahead of the Chinese new year (a period when meat consumption spikes each year). With the holiday approaching and feed demand robust, companies will be forced to buy domestic corn instead of using imported grain. The report says corn prices in the northeast have edged upward recently.

Grainnews notes that the higher prices impose higher raw material costs on Chinese feed mills gearing up to feed pigs for the new year holiday. They estimate the cost of corn purchased from northeastern provinces--including the subsidy--is 2400 yuan per metric ton, 200-to-500 yuan per ton more than the cost of imported corn.

The timing of the imported corn rejections is suspicious. As we have reported here before, China is struggling with a massive grain glut this fall. The rejections came four days after the November 25 launch of this year's program to buy up surplus corn in northeastern provinces to support prices this year. Then, on November 27, the government announced a subsidy for companies outside northeastern provinces for each ton of corn they buy in the region. The first rejection of an imported corn shipment came on November 29.

The application to the Ministry of Agriculture for approval of the "unapproved" corn variety was first submitted in 2010. How was it border officials didn't discover this variety in any of the dozens of shipments arriving in China over the past year--2.3 million metric tons according to Chinese customs statistics--but suddenly every shipment is being rejected starting November 29?

We'll probably never find the "smoking gun," but circumstantial evidence suggests that the rejection is a disguised component of the government's campaign to boost domestic corn sales and prices.

China Jails Rice Smugglers

Smuggling of rice into China has exploded in the last two years since Chinese prices are higher than those in Vietnam and Myanmar. On November 27, Chinese news media reported that 26 accused smugglers are on trial in the Peoples Intermediate Court of Nanning, the capital of Guangxi Zhuang Autonomous region, apparently a signal that authorities are cracking down.

Two men were accused of abusing regulations that allow residents in border areas to buy up to 50 kg of imported rice for their own use tariff-free. The two allegedly collected the names of more than 1000 border residents to purchase Vietnamese rice which they sold in a wholesale market in Nanning. Another method was to bring rice over the border undetected, using small trails that are not monitored by authorities.

Some are accused of smuggling 10,000 or more metric tons of rice; the largest amount is 77,000 mt. The earliest cases occurred in January 2012.

This is a reversal from 2008 when rice was being smuggled out of China to the Middle East. At that time, Ningbo customs officials found bags of rice and instant noodles hidden in crates labeled as containing transportation equipment.

Rice Prices Fall Despite Support Program

Prices for japonica rice in Jiangsu Province are falling despite the fact that officials have begun price support purchases for this crop, another reflection of China's grain glut.

A large-scale rice grower named Xue Lianchun was happy to sell his rice at 148 yuan/50kg, slightly below the support price of 150 yuan. He was happy because he anticipates that prices are about to fall further. Xue wasn't able to sell at the support price because moisture levels in his rice exceeded the standards. He felt fortunate to get close to the support price for his soggy rice. He says the price has already fallen to 146 yuan.

The boss of a local rice mill in Jiangsu says the price of rice has been falling for about 10 days. He attributes it the government's subsidy to transport rice out of the northeast. Companies are now getting a subsidy to buy rice from northeastern provinces and ship it to Shanghai or other places, but there is no such subsidy for rice from Jiangsu. The influx of rice in the south is pushing prices downward.

Jiangsu has launched price-support purchases of rice for the first time in the province since the program was introduced ten years ago. An official explained why rice prices can be below the minimum floor price. Rice that doesn't meet the standards can be sold at the minimum price. The minimum price is intended to guide prices in a certain direction--it doesn't mean that all rice can be sold at that price. He explains that only a small part of the province's rice will be purchased at the minimum price.

The grain official also attributes the decline in Jiangsu rice prices to the southward shipping of rice motivated by the subsidy and, more broadly, to the large harvest of rice and inventories that are already ample. Imported rice is also putting downward pressure on rice prices. With these influences, Jiangsu rice mills are not eager to buy and they are offering lower prices.

By the end of November, only a third of Jiangsu's rice had been purchased. Authorities have instructed the Agricultural Development Bank to make loans available to make sure farmers don't get paid with IOUs.

Counties Mono-cropping to Get Subsidy?

China's farm subsidy program targets local officials as well as farmers. Since 2005, top grain-producing counties have been eligible for subsidy "award" payments for the county treasury. The payments generally amount to 7-to-10 million yuan (about US$1-to-1.6 million). Initially this was a payment to fill in financial holes in poor agricultural counties, but later officials added criteria that include the amount of grain produced, commercial sales, and planted area to motivate local officials to boost production. There is an extra payment for the top "super" grain counties. More grain output increases the chances of getting these payments.

An article from the China Management Net, "The Flip Side of Ten Straight Increases in Grain Production: Pollution and Imports," implicates this county subsidy for motivating local officials to push out soybeans in favor of corn mono-cropping.

According a Ministry of Agriculture report quoted by the article, "Some counties in Heilongjiang Province enthusiastically push production of corn instead of soybeans in order to get the cash award. The corn yield is 425 kg/mu while soybeans yield just 125 kg/mu. Switching land from soybeans to corn increases the 'grain' yield by 300 kg." The report says it is common among county officials in northeastern provinces to induce farmers to switch crops in pursuit of pure volume in order to improve their chances of getting the grain county "award" payment. The potential impact on the environment is ignored.

The pursuit of grain volume damages the environment in other ways, said the article. In Heilongjiang much land that used to be planted in soybeans and spring wheat--which require little or no irrigation--is now being planted in japonica rice paddies which require large amounts of water to flood and irrigate. Thus, Heilongjiang's agriculture used to worry about floods but now farms are putting stress on the province's water resources. In southern regions, farmers use large volumes of chemical fertilizer to maintain high rice yields, but the crops absorb only about 35 percent of the fertilizer with the other 65 percent going into the soil and water systems.

More on Price Support to Subsidy Transition

A November 27,2013 Daily Business News article offered more clues on China's intent to transition from market-distorting price supports to direct subsidies which has been grinding through the rumor mill since last year.

The article included quotes from several of the government's mouthpieces on farm policy who indicated that trial target-price subsidies for cottons and soybeans would begin in 2014 with plans to eliminate "temporary reserve" price supports on an unspecified timetable. The article seemed to suggest that minimum price policies for rice and wheat would continue. Prospects for corn policy were not specified.

The article described the price support policies as having seriously distorted prices and caused confusion in their implementation. Cotton was offered as the clearest example of distorted prices, as domestic cotton prices were described as decoupled from the world market and inflicting losses on textile companies.

A well-known cotton analyst from The Ministry of Agriculture's Research Center for Rural Economy said the cotton temporary reserve policy will no longer be implemented during the 2014/15 market year, “But new policies for 2014/15 are under discussion, including direct subsidies based on yield or production although the amount and method have not yet been set.”

The article dutifully recited the "third plenum's" mantra of giving markets a "decisive role" in setting prices. Li Guoxiang of the Chinese Academy of Social Sciences said cotton's price formation mechanism would be gradually be marketized after trial reforms for cotton and soybeans with farmers receiving a target price subsidy instead.

Li also said wheat and rice, as staple food grains, would still have minimum price policies.

Similar views were offered at a "food security summit" in Beijing. Han Jun, of the Development Research Center indicated China would remain close to self-sufficiency in wheat and rice but would import more corn to feed its livestock. Fang Yan, of the National Development and Reform Commission, said China would move toward policies that allow markets to decide prices, replacing temporary reserve procurement prices with direct subsidies and possibly revenue insurance schemes like those being tried out for vegetable growers in Beijing.

The move to market-pricing is efficient from a resource-allocation view. However, the payments required to maintain a "reasonable" profit for farmers experiencing ever-rising costs would balloon.  Keeping minimum prices for rice and wheat but not for other commodities would create cross-commodity price distortions and send consumer prices for rice and wheat higher and higher above other food prices. The result would be Japan-style sky-high rice and flour prices which probably could not be maintained in China's much larger and impossible-to-control food sector.

China Grain Transport Subsidy

China is trying to move grain out of its northeastern provinces by offering companies from other provinces a subsidy to ship it home.

On November 27, the Ministry of Finance, National Development and Reform Commission, National Administration of Grain, and Agricultural Development Bank of China jointly issued regulations on the subsidy program. The subsidy is 140 yuan per metric ton for newly-harvested corn or japonica rice produced in three northeastern provinces--Jilin, Liaoning, and Heilongjiang--during 2013. Companies from any other province can get the subsidy if they buy the grain at the government's support price for the grains and ship back to their province. The subsidy recipients must submit documents showing plans for storing, processing, and selling the grain in their home province. They also have to submit receipts showing their purchase of the grain and payment for transportation. The program runs through May 31, 2014 for rice and June 30 for corn.

The subsidy is in large part a bribe to companies to buy grain made artificially expensive by support prices. Storage space for grain is tight in the northeastern provinces and officials are constantly voicing concerns about farmers being unable to sell their grain. They are unwilling to let prices fall since that would discourage farmers from planting grain and prevent their incomes from rising. Moreover, authorities already have large inventories of grain from last year that is falling in value as market prices fall.

The 140-yuan-per-ton subsidy is equal to about 6.4 percent of the "temporary reserve" support price for corn and 4.7 percent of the minimum purchase price for rice. This is in addition to producer subsidies paid to farmers (probably in the range of 70-to-100 yuan per mu) for the grain which translate to about 175-to-200 yuan per metric ton. Thus, total subsidies could be in the 10-to-12 percent range. It is unclear how much grain will receive this subsidy.

The subsidy discriminates against imported grain. The grain must be produced in northeastern provinces (other regulations recently explicitly forbid selling imported corn at the support price). The implicit intent of the program is to move northeastern grain to other parts of China, tamping down the inclination to buy much cheaper imported corn and rice.

The subsidy also is a revival of the past. In the 1990s China had a similar grain glut in the northeast and relied on a heavily subsidized state-run grain bureaucracy to market the grain. However, farmers often had their grain refused or were given IOUs. The direct payment to grain producers begun in 2004 was a shift of subsidies from grain bureaus to farmers. It took the funds used to subsidize the grain bureaucracy and divided it up among farmers as a (small) direct payment.

This new northeast grain transport subsidy appears to add a new subsidy for the vestigial grain bureaucracy that still exists to manage grain reserves. Although the  subsidy is available to all companies, the document implies that provincial grain bureaus acting at the behest of provincial officials are the main targets of the subsidy. Recipients of the subsidy must be approved by their provincial grain administration and other departments. Each province can designate one local enterprise to participate, plus an unlimited number of other enterprises who apply on their own. Scale requirements will rule out small trading companies; the recipient has to transport at least 5000 metric tons of grain to its province.

China Grapples With Grain Glut

Suddenly, China has a surplus of grain and authorities are struggling to prevent prices from falling. China's grain imports are surging despite the big harvest because Chinese prices exceed world prices.

Futures Daily recently pronounced that the arrival of China's new rice crop on the market is dragging down prices. The article estimates that China produced 11 mmt more rice than it will consume this year. Yet China is set to import 2-to-3-mmt of rice this year to surpass Nigeria as the world's leading importer. Customs statistics through October show China has imported over 1.8 mmt of rice in 2013, slightly behind the 2012 pace when it imported 2.6 mmt. These numbers don't include undocumented border trade which may push the annual total to 3 mmt.

China has had another big corn crop but demand is not robust. The hog and poultry sectors are recovering from a deep downturn earlier in 2013 and processors of starch and alcohol are operating at about half of their capacity.

The grain surplus is concentrated in China's northeastern provinces. The government has a "build some, move some, sell some" strategy for dealing with the surplus. This means building new storage capacity, subsidizing transportation of grain to the south, and auctioning grain from current reserves."

Authorities have launched programs to buy up corn, rice and soybeans in the northeast to prop up prices, but the bins still hold grain from last year's crop. Sinograin, the government's reserve-holding company, expects to purchase 60 mmt of grain in the northeast this year, but only has 40 mmt of storage capacity. They are renting warehouses and plan to build 20 mmt of open-air temporary storage facilities. These new storage facilities will be less susceptible to fire and rats than old ones.

New-style temporary grain bins were put on display in downtown Shenyang as a 

promotional activity in 2011. Source: Zhejiang Online.

The Chinese government has also launched a subsidy of 140 yuan/mt for enterprises from outside the northeast to compensate them for buying grain at the government's minimum prices in the region. This appears to be both an attempt to alleviate the northeast surplus and to open policy-purchase business to other companies besides Sinograin.

According to one Chinese grain analyst, imported corn is 500-to-600 yuan per mt less than domestic corn, so he thinks the subsidy for buying corn from the northeast will not have much effect.

Another Futures Daily article forecasts that the government is about to roll back its interference with market prices. One futures market analyst said, "After a close reading of the 'Decision' [of the third plenum] I feel we are closer to the market dream and the futures dream."

"Ecological Migrants" in Guizhou

In past centuries the Han Chinese ethnic group settled the valleys of southern China, pushing weaker ethnic groups into the marginal lands on mountains and hills where they scratch out a living. Now Chinese authorities with a new appreciation for the environment are moving minority peoples off the mountainsides to urban enclaves, purportedly to rescue Chinese hillbillies from poverty and ease pressure on the environment.

Guizhou Province has announced a nine-year plan to move 2 million people off mountains and hills into urban enclaves and industrial districts. Mountains and hills cover 95 percent of the province and it has 10 million people. The description of the program complains that the plots of mountainous land cannot be formed into contiguous areas for commercial farming. Most of those being moved are members of the Miao (also known as Hmong elsewhere in Asia) ethnicity.

This year, Guizhou has moved 59,000 families. The 70,500 mu of land they formerly occupied has been "reclaimed" or returned to "ecological" uses. "Reclaimed" usually refers to land used for agriculture. The article features an "ecological migrant" named Liao who was moved to a district for rural migrants-turned-entrepreneurs where he started a business making lanterns. The article claims ecological migrants have an average family income of 5520 yuan, much higher than Guizhou's rural average of 767 yuan.

Guizhou plans to move 150,000 people in 2013. The actual number depends on funding availability in various localities. It seems each locality is responsible for funding its migrants. Localities are not given a quota of migrants that exceeds funds available to support the program. The article doesn't explain where these poverty-stricken areas are getting the funds for the program.

In one Miao "autonomous" county, migrants formed a committee to negotiate on housing construction, supervise program fund use and allocate new housing. In another district, migrants say officials came to seek their opinions on the program and sign agreements to move voluntarily.

This appears to be an enlightened experiment in environmental protection, poverty alleviation and self-governance. It bears some resemblance to the United States' movement of its Native American population on to reservations in the 1800s and paying hillbillies to move out of the mountains that became National Parks in the early 20th century. The more cynical observer might ask whether the vacated land in Guizhou is being used to develop plantations or logging operations or to sell carbon credits to overseas companies.

"Third Plenum": Where's the Agriculture?

The documents from this month's "third plenum" of China's 18th communist party central committee included many adventurous reforms. Chinese leaders propose to finally dismantle 1950's-era economic barriers between rural and urban sectors and give rural people stronger property rights. The document seems to lay out a vision for clearing small-holders off the land and facilitating their entry to urban life, with a new generation of larger-scale farmers filling the vacuum. However, the documents don't offer much detail on how this might be carried out. The character "农" appears 51 times in one section of the 20,000-character "decision" on the third plenum. The plenum's focus on cities and companies echoes the 1990s "Shanghai" leadership of Zhu Rongji and Jiang Zemin which gifted urban citizens with real estate wealth, reformed State-owned enterprises and gained WTO accession.

The third plenum prominently features the principle of market-directed resource allocation. But will officials find market-directed resource allocations in agriculture acceptable? When farmers have to pay high market prices that are needed to ration scarce resources like land and water, the farmers are likely to use those resources for activities that produce high value. The tendency for large-scale farmers who pay high rents to shift land into nongrain crops like vegetables and fish ponds is already a frequently-cited phenomenon. Moreover, the high cash expenses incurred by the new cadre of "professional" farmers makes it hard for them to earn a profit and creates a pressing need for production credit. Until now, small-scale Chinese farmers produced crops on a shoestring with minimal cash expenses for land and labor.

The third plenum amplifies themes that were set forth in the last "third plenum" in 2008--encouraging the formation of "family farms," large farms, cooperatives, and enterprises by creating open land markets. There has been much progress in promoting land markets since 2008 with Ministry of Agriculture statistics indicating that the share of cropland subleased or rented rising from 7 percent to over 25 23 percent since 2008 in 2013. While the 2013 third plenum emphasizes giving farmers stronger property rights, it does not appear willing to give farmers actual ownership of their land. This means sticking with the convoluted approach of separating land ownership rights from the rights to use land and reap its products. Land is still owned by an ill-defined "collective" while the rights to use it can be traded, rented, or leased. It seems unrealistic to expect a fairly sophisticated derivative market for land use rights to succeed in the barely-literate Chinese countryside.

The third plenum proposes to address the shortage of credit in rural China by allowing land-holders to use land-use rights as collateral for mortgage loans. The immediate question is whether a banker would accept temporary rights to products from small plots of land in some remote gulch as security for a loan. If the borrower defaults--quite common when prices of many commodities fluctuate wildly--and the banker takes possession of these rights, what will he do with them (assuming he can even find the plots of land)?

While rights to land may be traded and marketized, officials still have tremendous power over the determination of land values because rural land is carved up into different designated uses: cropland, housing, construction and forest land. Maintaining the "cropland" designation depresses its value. Conversely, requisitioning "cropland" and redesignating it creates massive increases in wealth. There is still huge incentive for land grabs.

The mortgage proposal also is emblematic of the weakness in the legal system that undermines long-term investment. Mortgaging rural land is actually illegal, according to China's land contracting law and its property law. In 2009, China's Bank Regulatory Commission initiated some rural land-mortgaging experiments even though they were illegal. One central government official warned publicly that mortgaging was illegal but the experiments continued anyway. The same official warned earlier this year that mortgaging programs were experimental and not official policy. Now mortgages are a featured measure in a major policy document. This demonstrates that what is legal depends upon the opinions and whims of those in charge, regardless of the "law." And what officials give, they can also take away. Without the long-term legal protections of ownership, why would anyone make long-term investments that raise the productivity of land?

Investment and a growing stock of fixed assets are the key to higher agricultural productivity. To achieve sustained investment, individuals have to make the investments on their own volition based on the expectation of future returns. Rural Chinese people have capital but they invest it primarily in rebuilding their houses, starting nonfarm businesses or investing in get-rich-quick schemes. Since the people who "own" the land are not inclined to invest in it, the third plenum advocates "encouraging" and "guiding" entrepreneurs and companies from cities to invest in agriculture--people who don't have a clue about how to grow crops or raise animals. 

Finally, the third plenum also portrays a new seriousness about an "ecological civilization" and environmental protection. This is overdue, but it may be a rude awakening for China's livestock sector which has prospered by moving from animals scattered in backyards to giant CAFO operations. Manure that once was spread on fields now washes into waterways, creating a nation of bright-green rivers and lakes choked with algae nurtured on massive amounts of nitrogen. If regulations are enforced on locating livestock farms away from human habitations, roads, other farms and markets, they will be forced far into the hinterland. It will be hard to find space for 400 million pigs. If farms have to treat their manure and bury their dead animals properly they will face higher costs.

The third plenum reforms look good on the drawing board, but it's not clear that China's new leadership really appreciates what lies ahead. Agriculture is a complex biological, physical and social process that can't be easily drawn out on a whiteboard in Beijing.

Soybean Support Price Held Steady

China's National Development and Reform Commission announced that the 2013-14 support price for soybeans in the northeastern provinces would be set at the same level as last year, 4600 yuan per metric ton. The November 15 announcement is a departure from past years' practice of raising the minimum price each year to help farmers cover rising costs.

According to one grain analyst from an official think tank, "With international prices falling, the government did not raise the soybean price this year." Chicago soybean futures prices have fallen 6.8 percent since August.

As it is, Chinese soybean prices are said to be 10 percent higher than "American soybean prices," encouraging more imports.

Chinese authorities had announced increases in minimum prices for wheat, rice, and corn this year. Many had expected an increase in the soybean support price to 4,700-4,800 yuan.

China's soybean production has fallen three years in a row. China's National Grain and Oils Information Center estimates that Chinese soybean production fell 6.5% in 2013 to reach 12 million metric tons. With costs rising and the price steady at best, another decline is likely in 2014.

Holding the line on the soybean support price may also be a symbolic action reflecting the principle of letting markets decide resource allocation that was emphasized in last week's "third plenum" document.

Another analysis suggests that the steady support price might address the "price without a market" phenomenon in which enterprises are unwilling to buy soybeans at the (high) support price. It is estimated that the government has accumulated soybean reserves in the northeast totaling 8-to-9 million metric tons, equal to about two years of production in Heilongjiang Province. Procurement for the reserves has fallen from about 3 million metric tons annually in 2010 and 2011 to just 1 million tons in 2012. The inventory remains high despite the government's efforts to move the reserves to other provinces or auction them off during the summer. Another increase in soybean price would have left farmers unable to sell their soybeans.

Stamping Out Swill-Feeding of Pigs

Many local authorities in China are trying to stamp out the practice of feeding restaurant waste to pigs. The practice illustrates the tension between biosecurity and utilization of food waste while the campaign against it illustrates the vagueness and arbitrary nature of law enforcement in China.

This week, an article on a reporter's discovery of swill-fed pigs on the outskirts of a city in Shandong Province was widely posted on Chinese news sites. The reporter found a villager on the outskirts of Zibo City who raises about 100 pigs on garbage from restaurants. The reporter said he was kicked out of the farmer's home but he found another villager nearby also swill-feeding pigs.

The farmer visits a restaurant daily to pick up waste on his 3-wheeled motorbike. He pays a varying price depending on the quality of the slop, but it can amount to thousands of yuan paid to the restaurant annually. He generally buys a piglet for 700 yuan and spends 900 yuan on slop to raise it to market weight. The price for pigs is about the same as that for other pigs. His net earnings are about 300-400 yuan per head higher than using conventional feed.

Restaurant waste tends to produce fatty pigs, and the reporter learned that the swill-fed pigs are actually valued by people in "the south" who don't like pigs raised on grain because they have little taste and are too small. Some of the swill pigs are sold in the local Zibo market too.

The disadvantage to swill-feeding, said the farmer, is that they are more prone to disease. The reporter said the farmer had recently lost about 30 pigs to foot and mouth disease. The farmer said he sells diseased carcasses for varying prices--some for 100 yuan, some for 80, and some couldn't be sold at all.

Mr. Zhang is stopped in Qingdao carrying barrels of restaurant waste and tofu dregs. 

A reporter just happened to be there.  Source: Kaixian TV

A TV report in Qingdao showed police stopping a man named Zhang who was collecting restaurant waste to feed to pigs. Mr. Zhang came to Qingdao from Rizhao, a city about 50 miles south, to do construction work. Earlier this year he rented some land outside the city to raise chickens. However, feed was too expensive so he started collecting restaurant waste to feed pigs. He claims he didn't know this is illegal.

These articles appear to be a propaganda campaign against swill-feeding. The articles make the practice sound disgusting but they don't establish that it is illegal. According to a footnote accompanying the Zibo article, feeding swill to animals is not entirely illegal. China's 2006 livestock law says it is illegal if the swill is not treated at high temperature. Swill-feeding was common in the United States until the 20th century when everyone knew the term "slopping the hogs." It was only banned recently in England and Australia because the practice was linked to outbreaks of foot and mouth disease. The ban is vigorously debated there with environmentalists supporting the practice for utilizing waste.

Animal Feed Output Plunges in 2013

Statistics from China's Feed Industry Association show that the country's output of manufactured animal feed plunged by 8.7 percent during the first three quarters of 2013 compared with same period last year.

The feed and livestock sectors were hit by a series of unfavorable incidents during the first half of 2013:

• The "quick chicken" incident late in 2012 revealed that many chicken producers were abusing pharmaceuticals, discouraging poultry consumption.
• In March an outbreak of avian influenza prompted closure of poultry markets, slaughter of birds and scared consumers from eating poultry.
• Pigs were in over-supply after a big build-up of inventories in 2012, putting downward pressure on hog prices after spring festival. 
• The discovery of thousands of dead pigs floating in Shanghai's Huangpu River in Feb-March discouraged pork consumption and prompted a crackdown on small pig farms. 
• Periodic reports of sale of meat from diseased pigs also cut into consumer confidence.
• Numerous cattle and sheep were killed by winter snow storms
• Hot temperatures, rain and typhoons during the peak season for fish-farming cut into aquaculture feed demand.

Production of feed for all types of livestock except aquaculture were down, suggesting generally weak demand for animal protein. Even aquaculture feed's growth was tepid in comparison with previous years' growth. Feed for meat poultry was down 16.3 percent due to the deep freeze in the poultry market caused by the avian influenza outbreak. Swine feed output was down 7%, a dramatic turnaround from torrid growth in 2011 and 2012. 

China animal feed production, January-September 2013
Type of feed	2013 output million metric tons	Change from 2012 percent
Swine	53.0	-7.0
Egg layers	22.4	-7.8
Meat poultry	39.0	-16.3
Aquaculture	16.9	2.4
Ruminant	5.4	-5.3
Other	2.3	-8.0

Sum of numbers exceeds reported total of 133 mmt.

Source: China feed industry association.

The feed industry association said feed additives and premixes were one bright spot in the industry. In order to economize on costs, many farms bought grain directly from farmers or bought premix and additives to mix feeds on-farm instead of buying compound feed from mills. 

The disease and floating pig incidents brought pressure to close down small farms and consolidate livestock. On October 8, the state council issued draft regulations for prevention of livestock pollution that are designed to "raise the threshold" for livestock farming. The government is pushing industrialized business models and increased scale of operations. A 2013-2020 plan for cattle and sheep industries called on each locality to boost "company + farmer" models.

Downward Pressure on Chinese Grain Prices

By all accounts, China has had a good fall grain harvest but prices are down and farmers are holding on to their grain.

The "voice of China" broadcast reports that grain prices are down all over China. A farmer named Liu in northern Jiangsu Province harvested 2500 kg from his five mu of land (less than an acre) but "has no joy from his harvest." Traders offered 1.25 yuan per jin and he wasn't satisfied even with the government's support price of 1.35 yuan. He drove into town on November 1 to try his luck at private grain depots but came back disappointed.

With expenses rising each year, farmers need an ever-higher price to cover their costs but prices are down this year.

In Henan Province, most farmers have wire corn cribs in their yards filled with newly-harvested corn cobs. Very little has been sold because the price is just 1.07 yuan or so. Farmer Liu Xinzhong planted 900 mu (about 150 acres) of corn and harvested 1300 jin per mu. He pays rent of 500 yuan per mu (about $500 per acre) for nearly all of his land (he "owns" 10 mu). If he sells corn at the current market price, he would lose 400,000 yuan (about $65,000).

Farmers in Henan say the corn price was about 1.2 yuan per jin before the harvest (for old corn), but now the price has dropped to 1.04 to 1.05 yuan.

Officials have announced the start of price support purchase programs for rice in five southern provinces. However, for corn there has been no news about the start of price support purchases in northeastern provinces. The price support programs don't normally operate outside the four northeastern provinces.

There has been no news about soybean price support purchases either. The current market price in Heilongjiang province of 4200-4600 yuan/metric ton is below last year's support prices of 4600 yuan/mt. Market participants think the soybean support price might be held at last year's level or even reduced.

Government officials, including vice Premier Wang Yang and the grain bureau's communist party secretary, have been giving speeches and going on inspection tours to forestall the payment of farmers with IOUs and preventing difficulties selling grain.

Imported U.S. corn is said to cost about 1900 yuan per metric ton at the port. In southern China that's about 500-to-600 yuan less than domestic corn prices.

With rising costs, can China keep raising prices above international prices? Economist Li Guoxiang of the Chinese Academy of Social Sciences says China needs to consider the ability of consumers to bear higher prices. Competition from imports keep prices from rising too high. Li thinks China will ultimately have prices a little higher than international prices but it will not follow the example of Japan which has rice prices ten times the world price.

China's Vegetable Oil Prices Slide

Prices for vegetable oil in China are being cut during a seasonal lull in demand and the market impact of plentiful global oilseed supplies are transmitted to China.

China's Daily Business News reports that major cooking oil brands are preparing their second round of major price cuts and promotions for 2013 (the first was in May). The wholesale price for Jinlongyu (Arawana) brand of soybean oil has been cut 1.15 percent to 172 yuan for a case of four 5-liter bottles. Jinlongyu peanut oil is being cut 2.33 percent to 430 yuan per case. News media in five different provinces report that cooking oil prices are falling.

A Guangzhou news site reports larger cuts in retail prices. Jinlongyu soybean oil is being cut from 78 yuan to 68 yuan per bottle, a 12.8-percent reduction. Eagle brand peanut oil is being cut from 105 to 95 yuan, a 10-percent reduction.

An oilseeds analyst consulted by Daily Business News attributed the decline to a glut of soybeans and peanuts coming on the market after harvest, soft demand after the National Day holiday, and companies wanting to clear out inventories. The analyst blames excess capacity in the soybean processing industry--the analyst estimates capacity at 126 million metric tons, nearly double current production.

The United States is having a big soybean harvest, and Chicago futures prices for both soybeans and soy oil fell. Canada also had a big canola harvest this year. Daily Business News notes that China's rapeseed (canola) imports are surging, also contributing to plentiful supplies and putting downward pressure on Chinese veg oil prices.

Meanwhile, there are more articles on crises in China's soybean industry. Ninety percent of domestic crushing enterprises are said to be idle and farmers are said to be abandoning soybeans in favor of more profitable corn and rice. Heilongjiang's "non-GMO" soybeans are said to be facing "potential extinction." A Grain and Oils News reporter traveled through northeastern provinces and said it was hard to find soybean fields; one crushing plant affiliated with the Jiusan Group operated at only 30 percent of capacity last year because it couldn't get enough soybeans.

Relatively weak food prices across the board in China contradict international news media stories this year reporting food-price inflation. Many of China's major food retail prices turned down in mid-October data released by the National Bureau of Statistics (declines in veg oil prices hadn't shown up yet). Weak international prices due to big harvests are being transmitted to the Chinese market and domestic demand is still not that robust.

Well-Oiled Woks Via Trade Policy

Greasing a billion woks and filling them with pork is not easy, especially if you want some rice to go with the meal. An analysis published in Economic Times last month reveals that China's low barriers to agricultural imports have allowed the country's population to increase its level of food consumption--especially intake of fats and animal protein--to unusually high levels for a low-income country. The study's author argues that reversing the country's reliance on imports of soybeans and vegetable oils would hurt consumers more than it would help producers by raising prices and reducing food intake. His main point is that the country needs to view "food security" in a more "rational and scientific" manner.

Cheng Guoqiang, the author of "Causes and Consequences of Our Country's Increase in Agricultural Imports," is a leading authority on China's agricultural trade and a senior economist in the State Council's Development Research Center. His article debunks the fantasy that China can raise its standard of living and remain self-sufficient in agricultural products. He shows that China's availability of calories, fat, and protein have risen to first-world levels--improving the welfare of its citizens. But scarce land, water, and other resources dictate that China has had to increase its reliance on imports to do so.

Cheng says that it is now widely accepted that importing agricultural products is equivalent to importing land, water, and labor from foreign countries. He estimates that importing 10.7 percent of China's grain and soybean consumption is equivalent to importing 20 percent of the land needed to meet its food needs. The relatively large amount of land for imports reflects the low per-hectare yields of soybeans. China has pursued a strategy of importing soybeans to free up land for grain production, so-called "abandoning oils to maintain grain."

Cheng estimates that China's available supply of fats has risen by 321 percent since 1991--from 19 grams to 80 grams per day. He estimates that more than half of the fats come from imports--presumably soybeans, vegetable oils and other oilseeds. Cheng acknowledges that obesity and heart disease have risen in step with the consumption of fats. Cheng estimates that China is 83.9-percent self-sufficient in calories and 77.6-percent self-sufficient in protein. Cheng doesn't mention it, but the protein figures reflect a decrease in protein from wheat and rice offset by an import-dependent increase in animal-based protein.

China's estimated daily availability of food measured in calories, protein and fat
		1991	2012
Calories	kcal	2,000	3,100
--imported	kcal	90	500
--self sufficiency	percent	95.5	83.9
Protein	grams	55.0	76.0
--imported	grams	3.0	17.0
--self sufficiency	percent	96.1	77.6
Fats	grams	19.0	80.0
--imported	grams	0.02	42.0
--self sufficiency	percent	99.9	47.5
Source: Cheng Guoqiang, "Causes and Consequences of Our Country's Increase in Agricultural Imports," Sept. 2013.

China's focus on importing soybeans originated in the 1990s when the country's livestock sector development faced a severe lack of high-protein feeds. Authorities slashed tariffs, waived value added tax and eliminated quotas on imports of certain feed ingredients--chiefly fish meal, soy meal, distillers dried grains and other feeds that were high in protein and in short supply in China. (The VAT on soymeal imports was restored shortly thereafter because imports of soy meal were undercutting margins for domestic soybean crushers.) The tariff on soybean imports was cut to 3 percent and quotas were eliminated, setting off China's soybean import boom in the late 1990s. Soybean imports were minimal in the 1990s and are now approaching 60 million metric tons, providing oils for stir-frying (and greasy hot pot!), plus over 45 mmt of high protein feed ingredients.

Cheng's analysis makes clear that China imports mainly fats and protein. What he doesn't mention is that China's main agricultural exports are products largely comprised mostly of water: fruits, fish, and vegetables (mostly canned or processed using a lot of water). Thus, China's agricultural trade can be described as largely importing fats and protein in exchange for exports of water.

Cheng performs some simulations using a commonly-used economic modeling package called GTAP. He finds that banning soybean imports would raise domestic oilseed prices by 120 percent. That might be good for a few million soybean producers in China's northeast, but food prices would rise for consumers. He estimates that a 5-liter bottle of soybean oil would rise in price from 60 yuan to 110 yuan. Rice and pork prices would also go up. He doesn't explain how China could maintain domestic prices well above international prices if it wanted to do so without violating its WTO commitments and creating a huge smuggling problem (meat and rice smuggling is already rampant.)

Cheng Guoqiang's analysis clarifies China's agricultural trade and policies by reducing them to their fundamentals. While China was a nation of farmers until recently, its policy promoted cheap food for the urban population. Despite having a still-low per capita income, China's supplies of protein and fats are at first-world levels. Authorities selectively opened their borders to imports of fats and protein imports so they could concentrate on maintaining self-sufficiency of food grains--carbohydrates and basic energy.

The problem Cheng doesn't acknowledge is that authorities now have to raise grain prices above international levels (via trade barriers) to stimulate production and maintain their self-sufficiency (he does grapple with this issue in his other writings that recommend deficiency payment subsidies). Raising grain prices creates big distortions vis-a-vis oilseeds--minimal barriers to trade keep prices of fats and oilseeds at international levels while grain prices are elevated annually. The result is expensive grain and cheap oils. Excessive amounts of oils and protein are consumed (mainly from imports). Meanwhile oilseed production in China vanishes--an outcome which is blamed on bogeymen like multinational companies, USDA, and GMOs, but is really a creation of the Chinese government's own policies.