Tuesday, March 26, 2013

China's Social Trust Crisis

In November 2012, heavy snow closed a highway outside Beijing. A township government sent workers out to deliver free boxes of rice to drivers stuck on the road. Most drivers were suspicious of the workers and refused the rice. Many would not even open their doors.

This is one of many incidents reflecting the collapse of trust in Chinese society. With trickery and deception so common, China has become a giant "market for lemons." How can you have a healthy economy and society if every product is assumed to be defective or fake and every person offering a service is assumed to be duplicitous?
A man steals what looks like a traditional Chinese coin, 
making the Chinese character for "trust" collapse.

In January 2013, the sociological research institute of the Chinese Academy of Social Sciences released a social attitudes survey that showed a declining degree of social trust. Over 70 percent of respondents do not trust strangers. Their trust in business operators was particularly low. People in eastern cities had a lower degree of trust than those in western and central cities. It found "complicated" attitudes unfavorable for "social harmony" that were nearing a "tipping point."

One commentary on the CASS findings cites the string of food safety incidents, revelations of abuse of funds by the Chinese Red Cross charity, and corruption for fueling the attitude of distrust.
A mother with her baby runs in fear from a can of China-made milk powder.

Another CASS survey of rural migrants living in cities found a widespread feeling that people are treated unfairly. Forty-seven percent of the migrants said they had been treated unfairly and 64 percent said they thought society was unfair. CASS wrote that people will think society is unfair if they perceive that success is due to external influences like luck, connections, or government policies.

A story about distrust of testing organizations circulated widely last week. The 20,000 residents of a town in Hunan Province refused to believe test results from the county environmental protection bureau and disease control center which purportedly showed that the local tap water was safe to drink. Commentary in the article pointed to a widespread suspicion of testing and certification organizations. In this instance, the article pointed out, the interests of the environmental bureau, disease control center and the water-supply company are aligned since they are either government organizations or owned by the government. It cited a series of incidents where testing results were manipulated and the common practice of buying organic food certifications. According to the article, officials complain that people refuse to believe anything they tell them. The article points out that testing organizations have lost their credibility and authority due to their loss of independence.
Inspections, tests and certifications in a 
pharmaceutical factory are depicted as puppets for show. 

In 1999, a Beijing University sociology professor's incisive article, "How Can I Trust You? The Current Crisis of Trust and Solutions," observed that "counterfeits, swindling and corruption became a kind of harmful social pathology," and called it "a crisis of trust." He wrote that, without trust "people live in fear, whether real or imagined." If you see wine, the first thought is whether it will make you blind. A friendly smile makes one think of a wolf in sheep's clothing. You can't set foot on a bridge without fearing that it might collapse under you. If you go to the hospital to have your appendix removed, you worry that your stomach will be cut out.

He commented that the troubling thing is that such things are happening all around us. The article cites examples of counterfeit products, shoddy construction, swindlers and cheats going back to the early 1990s. Today, nearly 15 years after the article was written, it still accurately describes the pervasive distrust in Chinese society.

The Beijing University Professor observed a declining sense of morality and trust among younger generations. He commented that counterfeits had become pervasive and officials were often in league with counterfeiters. "Crackdowns on counterfeits" often became "counterfeit crackdowns." He observed that even trust among acquaintances and family members was breaking down, citing a "cooked to kill" phenomenon in which friends set each other up for a swindle.

The roots of the distrust problem are deep and complicated. A CASS sociologist cited a dynamic transformation of society, changes in social attitudes and diversification of interests. With people moving outside their established social networks they lose traditional mechanisms for trust. He blamed the growing divide between rich and poor which leaves many lacking a voice in society.

The Beijing University Professor delved deeper into the issue. In traditional Chinese society individual trust is established through mutual obligations and expectations in positions of hierarchical networks in families and villages. The traditional trust mechanisms rely on a patriarch who typifies moral authority. It depends on "gentlemen," "sages," and "heroes" who pull along everyone else. Laws are not very important in the mechanism for establishing trust in traditional Chinese society. He cited a deeply-rooted "rule by man" that trumps "rule of law" in traditional Chinese society. The trust in laws themselves is minimal. More important is to trust the people who enforce the laws.

The Professor says this system can mobilize people quite well, but only under certain conditions. People have to be indoctrinated in expected attitudes of self-discipline, leniency toward others, shame in making requests, refraining from advocating one's own rights. Patriarchs must be exemplars of morality, role models, and not face threats from competing leaders.

These traditional trust mechanisms don't translate well to "modern" globalized society. A market economy is based on interactions with large numbers of people and organizations outside one's social network. In contemporary China laws are still not taken seriously, but there are no "gentlemen". If you behave as a gentlemen, you will soon get swindled since you deal with many people who feel no sense of obligation to you. If you expect everyone else to flout the laws and act in their own interest, you will do the same. You can't rely on laws for your protection--it's rule by man, not rule by law. You must give gifts and red envelopes filled with cash to the man (or lady) and build a new network of obligations. Anyone you don't have an obligation to is a mark for a swindle.

Tuesday, March 19, 2013

Tracing Dead Pigs to the Source

Shanghai and Jiaxing Prefecture officials have been jointly trying to use information on dead pigs' ear tags to trace floating pigs back to their original owners. The vice mayor of Jiaxing says that 8 have been traced to their farmers who have been slapped with penalties of 3,000 yuan ($475).

Reporters have been snooping around Jiaxing and finding out about where dead pigs came from. In 2010 Jiaxing authorities built pig-disposal pits in every village. These are large cement tanks that break down pig carcasses using anaerobic fermentation. Each one holds about 40 metric tons of pig carcasses.

Pigs are heavy and it's troublesome to transport them to a disposal site. Farmers had to pay someone 80 yuan ($13) to haul a dead pig away, so it was cheaper and easier to put the pigs in a bag and dump them on a creek bank or by the side of a road late at night. One person said that if you drive on the expressway from Hangzhou to Shanghai with your car windows down you can smell the rotting carcasses.

"Dead Livestock and Poultry May Not Be Discarded Along the Road"

Over the past nine days Jiaxing officials have been conducting a big dead pig clean-up. As of March 17, they had collected 4,664 carcasses (these are in addition to the 9,460 dead pigs picked up downriver in Shanghai). An official estimates that the number of new carcasses will gradually decrease.

A reporter visiting villages was greeted by the smell of manure and saw several decomposed pigs floating under a bridge. A villager encountered on the street volunteered that he had just thrown a dead pig out his back door into the canal.

On March 13, a reporter sat in on a meeting in Xinfeng Town where a town official said the dead pig problem was an open secret. The official blamed village and town officials for allowing the behavior to go on. He said town and village leaders live next door to people raising pigs, so how can they not know when their neighbors are throwing pigs in the canals? Another official said villagers throw the pigs away late at night when no one sees them.
Dead pigs under a bridge.

Bamboo village has 7 pig-disposal pits that have been built over six years, but they're mostly full. Mr. Gao, who is in charge of collecting dead pigs, has been busy during the past week. The reporter saw him collect 20 dead pigs to take to the disposal pit on his tricycle in an hour. By one estimate they have been collecting 60 to 100 a day. One farmer in the village said 100 pigs a day have been dying but the village committee only reports 30 to the town government.

The pig pollution problem has been around for some time. Bamboo village in Xinfeng Town has been a major pig-producing area for 20 years.There are 140,000 pigs and it supplies pork to Hong Kong. As production expanded, environmental problems became more and more serious. Pollution comes from manure and dead pigs.
Dead pigs collected on a cart.

Although they acknowledged that the number of dead pigs had been higher than usual lately, people interviewed by a reporter denied there was any disease epidemic. The cause of the pig deaths was "a closely guarded secret in the village."

One of the reasons for the large number of pigs in the water is that authorities cracked down on an illegal trading-butchering network that sold meat from dead pigs in Jiangsu, Zhejiang and Shanghai. The business was estimated to be worth 1 million yuan.

Local authorities have raised concerns about the high density of pigs in Jiaxing. In September 2012 authorities issued a plan to ban or limit the number of hogs in parts of Jiaxing's South Lake district. The plan cited 13 different regulatory and guidance documents, including documents from ten years earlier aimed at addressing pollution created by pigs. One of the principles in the document is "protecting the legal interests and rights of the public and the ecological environment." The plan called for banning pig production in tourism areas, and within 100 to 300 meters of various types of canals and highways. The Jiaxing five-year plan calls for reducing the number of pigs in the prefecture from 7.5 million to 2 million.

Bamboo village is in the area where pigs are to be banned, but pigs are the main source of income in the village. According to the document, farms are supposed to close or move by the end of 2013. One farmer interviewed by a reporter said he had not considered reducing the size of his operation. He acknowledged that the high density of pigs affects the environment, but he has built a lot of barns for pigs and if he doesn't raise them he makes no money.

Propping Up Corn Prices in Northeast

With sluggish demand, high moisture content in corn, and high costs of transporting grain, corn prices in the northeast have been weak. Sinograin--China's grain reserve management corporation--has been purchasing corn in northeastern provinces to prop up prices.

Sinograin's Heilongjiang branch has bought 5.5 million metric tons of corn to support prices so far this season. In Jilin Province Sinograin had set up a research group that was making assessments of grain quality, market prices, farmers' selling expectations and processors' inclination to purchase corn.  In Inner Mongolia they have bought 1.78 mmt and opened additional depots to buy grain at support prices.

Officials are worried that high moisture levels of the corn will cause the corn to get moldy. They are urging farmers to dry their corn themselves and making sure granaries don't end up holding rotten grain.

In Heilongjiang, the Sinograin depots are offering special services to large grain farmers (粮食大户), coming to the farm to buy and arranging discount prices for grain that doesn't meet purchasing standards.

"Down, and down again," was one article's description of the bearish corn market in northeastern China in the first week of March. Feed demand is off for several reasons. First, the months after the Chinese new year holiday are a seasonal low period for meat consumption. Hog prices are down and many farms are experiencing losses. Farmers are hesitant to build up animal numbers since prices are down. Moreover, the scare about drug use on chicken farms crimped chicken production. According to one report pigs have been catching cold (supposedly this was the main cause of death of pigs floating in the Shanghai river), further discouraging farmers.

According to one farmer's online posting, hog producers have two main strategies to cut costs during periods of low prices. One is to strengthen overall farm management, reduce disease, and delay farrowings. A more immediate impact on costs can be achieved by switching to cheaper, low-quality feed. He warns high-end feed mills to expect a decline in demand.

Increased transportation cost is affecting demand for northeastern corn. After the Chinese new year, rail rates for transporting grain to the south were increased 10-to-20 yuan.

Corn buyers are focusing on north China plain regions--Henan, Hebei, and Anhui--where the corn crop was quite good last fall.

Sunday, March 17, 2013

China's Complicated "Family Farm" Campaign

There is a lot of discussion of how to consolidate Chinese farms, and many view "family farms" as the main model for the future. Chinese officials have been including this term in a lot of their strategy statements--including this year's "Number 1 Document"--but there is no definition of what a "family farm" is.

Like many things in China, confusion abounds since there are conceptual and legal ambiguities regarding the "family farm." The concept in China is similar to the American concept but has to be understood in context of China's existing system. Moreover, a commercially-oriented "family farm" business is in a legal gray area since it does not fit into China's communist administrative structure that has separate lines of authority for peasants and industrial enterprises.

The usual Chinese word for "farm" is nonghu (农户) but this actually means "rural household." "Nong" (农) can mean either "rural" or "agricultural" (since the two were traditionally synonymous). "Hu" (户) means household or family. These households (农户) are composed of "nong min" (农民), literally "agricultural people," usually translated as "farmer."

"Family farm" refers to a farm operated mainly with the labor of adult family members, typically a husband and wife. It is a literal translation of jiating nongchang (家庭农场). "Jiating" (家庭), like "hu" (农), means "family." "Nongchang" (农场) means "farm" but has the connotation of an agricultural business operation larger than a household ("nongchang" traditionally was usually a state-operated farm, but an American "farm" is also called a "nongchang"). The important distinction is that a "family farm" is a larger-scale operation but there isn't any specified threshold size.

Equating "households" (nonghu) to "farms" arises from the "household responsibility system" that divided up all collectively-owned rural village land among village households (nonghu). Thus these households with tiny allocations of land became the main farming units in China in the 1980s. Initially, "nongmin" was often translated "peasant" but in the 1990s the translation was increasingly switched to "farmer." Now that many rural residents have abandoned farming as their main activity, "farmer" is no longer an accurate translation of "nongmin" ("peasant' is arguably more accurate) and "farm" is no longer an accurate translation of "nonghu".

To make things more confusing, there are also other types of large farms: specialized large households (专业大户) and large grain-planting households (种粮大户). The distinction from a family farm seems to be that these operations rely on hired workers instead of just family labor.

Even more confusing, the third type of farm operation, "farmer cooperatives"  (农民合作社), is a complicated concept that takes several different forms which is not quite what people in other countries think of as a cooperative.

There are also agricultural enterprises (农业企业). These are usually farms operated by companies, but many individual farmers have registered their hog farms, for example, as enterprises in recent years.

The discussion of "family farms" is propelled by the rising tide of rural-urban migration. With large numbers of rural people now working in cities, it makes sense to consolidate their land into a larger-scale farming operation.

In a March 10, 2013 interview, Chen Xiwen--China's senior advisor on rural policy--surmised that family farms would be the main unit of agricultural operations in China's future. Chen noted that academics and policymakers were still in the process of defining what a family farm is, but he said the main idea is that production is carried out by family members with large amounts of hired labor only used during peak periods like the harvest.

Chen noted that the idea of consolidating land is not new. He recalls that back in the 1980s policy officials were trying to find strategies to concentrate land in the hands of the most capable farmers. As migrants began leaving villages, the sub-leasing and consolidation of land began in the 1990s.

In his endorsement of family farms, Chen noted that the pipeline of rural laborers is drying up. Moreover, he contrasted the nature of farming with factories. Farming is seasonal and generally doesn't employ laborers year-round. Hired workers come and go and have no vested interest in the farm operation, creating principal-agent problems. Chen worries that the shirking of effort that was widespread on agricultural communes in the past will reappear on company-operated farms that rely on hired workers. The farm operator is at risk of low productivity, quality or safety problems or regulatory violations if hired workers don't follow procedures.

Another high-profile endorsement of family farms was given by Liu Yonghao, head of China's biggest animal feed company. Liu claimed that he found in many places 10%-to-20% of land is left idle because so many migrants have left the countryside and couldn't find anyone to sub-contract their land-holding. Liu thinks that forming family farms can solve the problem. He says farmers who contract with his company to raise 300 pigs a year earn 30,000 yuan annually, earnings high enough to compete with off-farm jobs and keep them on the land. He called on the government to set up a standardized system for trading land rights to promote formation of "family farms."

Liu observed that a number of provinces have already been experimenting with family farms but there is no standardized policy. Chen Xiwen noted that production conditions, weather, etc vary from place to place and there is no one-size-fits-all solution. Like everything in China, developing family farms is more complicated than one would imagine.

An article publicizing family farms reveals that there are widely-varying types and sizes of family farms. Jiaozhou, Shandong--an area designated to experiment with land transfer and family farms--has a "model" family farm of 5030 mu (830 acres) operated by 48-year-old Wang Xingqian who raises corn and potatoes. He rents land from 2000 families in 12 villages. He began in 2007 by renting 500 mu from a neighboring village, paying the rent in wheat. He has 30 pieces of advanced machinery. He also raises some pigs and chickens. Last year he earned RMB1.5 million ($238,000) and expects to earn 2 million this year.

While Wang Xingqian's farm is identified as a "family farm" it seems to violate Chen Xiwen's concept. The article reveals that Wang has 20 hired workers. Indeed, it seems impossible that a single family could cultivate 5030 mu located in 12 different villages. How does Mr. Wang ensure that all parts of his far-flung operation are being managed efficiently?
Combine harvesting corn on Mr. Wang's farm.

In Songjiang, an outlying satellite district of Shanghai, most of the land is held in more modest-sized family farms averaging 114 mu (19 acres). They claim to earn RMB100,000 per farm annually. In Songjiang only about 500 farmers are needed to grow all the rice. Some people say these modest-sized family farms are the wave of the future, but one local official says they calculated that two people could operate as much as 600 mu by themselves (about 100 acres). An Academy of Social Sciences researcher surmises that family farms could be 300 mu in areas with flat land and 30 mu for growing vegetables.

The director of the Jiaozhou agriculture bureau says Mr. Wang's megafarm was made possible because most of the land-holders had quit farming years ago to work in the local hat-manufacturing industry. He says "family farms" wouldn't be possible in Shouguang, a Shandong district where farmers want to hold on to their land because they earn high profits from growing vegetables.

While local officials have been ordered to promote family farms, specialized big farmers, and cooperatives, "family farms" have unclear legal status, and ambiguous land rights leave renters at risk of land disputes.

Mr. Wang says that his success making money from farming has attracted some of the land-holders to return to their village and demand their land back so they can take up farming again. Most of the land rental arrangements are short-term, so making long-term land improvements is risky.

Farm households are governed by their village, but a farm business--including a family farm and a farmer cooperative--must be registered as a legal business entity to get bank loans, issue receipts and conduct other formal business transactions. Family farms are in a legal gray area--they are not just rural households and not really business enterprises. Officials have started registering some family farms with local industrial and commercial bureaus. However, registration makes them subject to business taxes. If they process their products they are liable for value added taxes. Farm households and cooperatives are exempt from these taxes but not family farms.

Policy officials are trying to figure these things out. There is a campaign to legally register family farms with industrial-commercial bureaus, clarify the standards and criteria for family farms, and set financial, tax, insurance, land and subsidy support policies for them.

Friday, March 15, 2013

Small Business "Famine", Grain Industry Behemoths

A Chinese news site paired these two news items side by side:

"Small and Medium Businesses Face "Five-Famine, Double-High, One-Low" Difficulty describes how small and medium businesses are often frozen out of access to essential resources for doing business. Chen Zemin, the chairman of a frozen food company, identifies five "famines" facing small and medium businesses in China. First, they have a hard time finding enough workers. Second, a money famine--they have a hard time getting financial capital and have to borrow at high rates. Third, land is hard to get and small companies are often left out of big projects. The fourth and fifth famines are electricity and water which are controlled or given out at favorable rates to some businesses.

"Two highs" faced by small and medium businesses are high costs and high taxes, which lead to the "one low", low profits. Transportation, raw materials, energy, and labor costs are continually rising. High taxes includes many irregular fees and penalties assessed at the whim of officials. Mr. Chen said the biggest problem facing small businesses is getting started in the first place. 

"COFCO Takes Over China Grain to Create Grain Business 'Super Aircraft Carrier'" describes how COFCO, China's state-owned flagship agribusiness is taking over China Grain Logistics Group, another state-owned grain behemoth. China Grain has a string of grain warehouses, port and bulk-handling facilities around the country, grain distribution infrastructure that is key to the government's food security strategy of transporting grain around the country. COFCO is being engineered to become a company with a "complete industry chain" and has rice, flour, and feed mills, farming assets. It has 3 million metric tons of grain storage but wants more and has had its eye on China Grain since 2009. 

Neither China Grain nor COFCO suffer from the "five famines." China Grain has built-in business delivered by the government's policy of encouraging north-south grain trade, loading and unloading import and export shipments orchestrated by state reserve corporations and other "policy-type" business. It benefits from tax exemptions and has rail cars set aside for its use. It was handed a $1.6-billion loan from the World Bank at its founding. China Grain owns land and real estate assets and exemptions from urban land use taxes and business taxes. It had a new set of highly-paid executives installed last year just to prepare it to be taken over. No "famine" here, yet it still managed to lose billions of dollars and within a few years after its founding it was taken over by the State Council's State Asset Supervision Commission, a warehouse for decomposing government companies. 

COFCO is not starved of resources either. Last month the company was given a $4.7-billion line of credit by the China Development Bank. COFCO has real estate, a chain of hotels and financial services (including a pig trust).

COFCO has been competing with Sinograin--yet another state-owned grain giant-in-the-making--for China Grain Logistics. The resource allocation decision of who gets the company was made by the State Council. 

Behind this is a notion that a big company is a competitive company. Chinese economic planners look around and see multinational companies encircling their market and they want to create their own big multinational grain company. By assembling the pieces--even if some of the pieces come from the morgue, like the brain of Frankenstein's monster--and building a big enough company they think they can engineer another ABCD company.  

By the same logic, small companies--no matter how well-managed--are inherently uncompetitive, backward, "chaotic", hard to control and need to be flattened like old hutongs or absorbed into bigger companies. 

The article concludes by explaining that combining COFCO and China Grain Logistics will raise the competitiveness of Chinese grain business, give China more say over prices and influence, factors favorable to maintaining food security. Professor Li Guoxiang of the Chinese Academy Social Sciences remarks that China doesn't lack grain enterprises, but it does lack "big strong" companies (implying big=strong). If this merger succeeds, he anticipates that there will be more mergers and acquisitions in the future (all orchestrated by government officials, no doubt).

The two stories illustrate China's military-style resource allocation and perhaps signal the resurgence of Jiang Zemin's Shanghai-style big business + government-sponsor economic model that Yasheng Huang criticized for its lack of innovation and sustainable growth in his book Capitalism with Chinese Characteristics: Entrepreneurship and the State. Behind the veil of the Chinese economy are extractive institutions that Acemoglu and Robinson's Why Nations Fail cited for stifling growth. 

While China looks like a free market economy, officials retain control over the key factors of production: financial capital, land, water, electricity, fuel and other factors of production. They are rationed by officials to engineer growth and build an empire. Officials extract resources by imposing fees and penalties. Government officials order banks to lend and decide who gets access to equity markets in an ongoing effort to engineer the creation of big, competitive companies. Only companies with access to funds can meet the government's standards for water or electricity-efficiency, pollution control or food safety controls. The private entrepreneur with a good idea but lacking a government sponsor is starved of capital and left to wither on the vine, while the anointed state-owned enterprises are like pigs at a trough, continually needing to be engorged with more capital (and with much of it going out the back end).

Wednesday, March 13, 2013

China Ag Official Gives GMO Views

In a press conference this week, one of China's vice ministers of agriculture articulated the Ministry's nuanced approach to agricultural genetically-modified organisms. While agricultural officials are generally in favor of GMOs as a way of feeding the population, they approach them with caution. There are also strong anti-GMO opinions spreading in China and there's a strong sense of nationalism in much of the rhetoric.

Vice Minister Chen Xiaohua called for developing GMO varieties as fast as possible while keeping tight control through careful safety monitoring and assessment.

Chen said, "We must strengthen research, developing advanced varieties through national GMO projects as soon as possible."

He added, at the same time China must "...pay a lot of attention to biosafety issues, setting clear regulations and procedures to guarantee the safety of genetically modifications."

China's approach to GMOs has global implications since China is the largest producer and consumer of agricultural commodities.

Chen gave a nod toward the global scene when he remarked, "Realistically speaking, we are now in a leading position in the world in our current regulatory procedures, assessment system and grasp of standards.”

China's agricultural establishment is pro-GMO but there are strong reservations about biotech foods among Chinese consumers and industry.

Chen was presumably addressing these anti-GMO attitudes when he added, "Genetic modification is ultimately a scientific issue. [we] need to gradually shape public opinion by strengthening dissemination and explanations of scientific knowledge.”

Chen's views reflect those of agricutural technicians. Last December, at a gathering of high-profile academics giving opinions on GMOs, another vice minister and head of the Chinese Academy of Agricultural Sciences, Li Jiayang, argued that China must pursue biotech research and industrialization to break through bottlenecks in order to feed the country's growing population. 

Chen Junshi, an academician of the academy of engineering said, a little more bluntly, “People who don’t want to eat GMOs don’t understand genetic modification technology.”

There is a strong nationalistic aspect of China's GMO strategy, based on a conspiracy theory foundation. A second reason Li Jiayang gave for the urgency of pursuing biotech research was concern about developed countries' "science and technology threat." 

The conspiracy theory was articulated on a Chinese blog post this month entitled,  "America’s GMO strategy is really to control the world!!!" The post criticizes people for only considering the effects of GMOs on human health and not seeing them as America's strategy for world domination. This blogger complains that American companies apply for patent protection as soon as they develop a genetically modified variety, don't let farmers plant it and don't let research institutes use it without paying. He criticizes Guangxi Province's agriculture department for collaborating with Monsanto to propagate a genetically modified corn seed which he says is grown on 8 million mu (1300 acres) and is spreading to major grain-producing areas in the north and northeast. He warns that traditional varieties will be eliminated, farmers and government will be slowly "strangled." America will gain control of agriculture and food, and the "whole world will grovel at America's knees and America will be emperor of the world!" warns this blogger.

Similar opinions are common in the Chinese blog sphere and this is probably what Vice Minister Chen had in mind when he called for shaping public opinion. 

A Chinese military official voiced a different conspiracy theory about genetically modified organisms. Luo Yuanshao, party secretary of a military science institute and representative to the Chinese Peoples Political Consultative Conference, gave an interview on March 3 where he issued a warning about GMOs in vaccines. Yuan said the country should be on the alert against the disorderly spread of GMOs, foreign countries' meddling in the vaccine process, and enemy countries using GMOs and vaccines as weapons to launch an attack against the Chinese people. 

China's agricultural establishment embraces a milder conspiracy theory. Officials want to prevent a flood of imported genetically-modified crops and they want to prevent domestic seed companies from getting swamped by multinationals. hence the cautious approach and big emphasis on clear regulations and strict assessments of biosecurity.

Tuesday, March 12, 2013

Pigs Froze to Death in the Rain

The news that thousands of dead pigs are floating in Shanghai's Huangpu River is being carefully managed by Chinese officials.

The news apparently was kept bottled up while the "two meetings" were being held in Beijing. The news was first reported in the newspaper of Jiaxing on March 4, but it did not hit major news media until March 11.

The first message was that the water is still safe to drink. Now attention has turned to quelling any rumors of a pig disease epidemic.

Vice Minister of Agriculture Chen Xiao emerged from the big meetings in Beijing to give answers on the dead pigs at a press conference. He explained that it's normal for pigs to die and the best you can do is keep the mortality rate to a minimum. Chen said statistics reported to the Ministry show that the animal disease situation has been stable with only three outbreaks of foot and mouth disease. Of course, he acknowledged that some small, backward farms don't use good practices and are vulnerable to disease.

A livestock official with the Zhejiang Province Agriculture Department--the source of the dead pigs--insisted that swine fever did NOT the cause the pigs to die. He said they were mostly piglets of 10 to 20 pounds who froze to death. Their resistance was low and it was exacerbated by wet conditions.

Pigs froze to death in Zhejiang Province? A check of a weather site for Pinghu (a district of Jiaxing), which seems to be the main source of the dead pigs, the temperature was down to 7 degrees centigrade--cold but not freezing--and doesn't seem to be cold enough to cause a mass kill-off of thousands of pigs.

The Zhejiang official said the number of dead pigs in the river was consistent with normal mortality rates. He said Jiaxing has 7 million pigs. Good farms have a mortality rate of 10 percent and it can be as high as 20 percent on others.

Does that mean it's normal for thousands of dead pigs to show up in the river at once?

Or has the government's crackdown on selling meat from dead pigs pushed them from butcher shops into the rivers?

Yesterday this blog reported news from Bamboo village in Jiaxing where a local person read off numbers showing 10,000 pigs died in January and 8,300 in February. A reporter contacted the propaganda office of the Nanhu District of Jiaxing and the official there said those numbers were from inaccurate data.

Monday, March 11, 2013

Shanghai's Tide of Dead Pigs

Large numbers of dead pigs have been seen floating in Shanghai's Huangpu River since March 5. As of the afternoon of March 11, over 3,000 dead pigs had been collected from the river, raising concerns about the safety of drinking water among Shanghai residents. Workers promise to work from morning to night to clean the carcasses out of the river, and the water bureau is testing the water for E coli and other pathogens every four hours.
Dead pigs in Shanghai River

Dead pigs in waterways are not an uncommon occurrence in China. In 2010, a similar incident occurred in Hangzhou but less than 600 pigs were pulled out of the river.

One Shanghai resident reported on a microblog, “This kind of thing has happened for many years; walking along the shore at low tide you can see many more dead pigs."

Dead pigs in rivers are usually an indicator of a disease epidemic. Evidence of porcine circovirus type II was detected by the Shanghai animal disease prevention and control center in tests of samples from various internal organs of dead pigs. Tests for other diseases--foot and mouth disease, classical swine fever, highly-pathogenic "blue ear" disease, pseudorabies and porcine diarrhea--were all negative.

According to the Pig Site, Circovirus is present in a large percentage of pig herds worldwide. It often has no clinical symptoms until mixed with some other infection. It is not well understood how circovirus causes disease. Effects are diverse, ranging from pneumonia to a pig-wasting syndrome, an unusual skin disease. It affects mainly young pigs, but also can affect adults and sows. Representatives from unidentified Shanghai government departments held a "press conference" where someone recited the information about circovirus identical to what's on the Pig Site. They offered no details on evidence of symptoms in the carcasses. They did warn that the disease can spread when pigs are not cared for adequately, are kept in crowded conditions and when pigs from different origins and of different ages are kept together.

Where did the pigs come from? Authorities say they are investigating and provide a sketchy finding that they came from upstream in Jiaxing and Pingdu of Zhejiang Province, and parts of Jiangsu. A professor at Fudan University's Regional Pollution Control Institute expressed dismay that authorities have not yet discovered the source of such a large number of pigs several days after it occurred. He said pigs are required to have ear tags that record information about them. Such a large number must have come from an identifiable source.
Ear tag (small round thing) in dead pig.

The local newspaper in Jiaxing, one of the sources of the dead pigs, reported sightings of dead pigs in five counties on March 4. A reporter said he saw 40-to-50 pigs from a bridge in Pingdu City. Villages reportedly have stations to dispose of dead pigs but many farmers put the carcasses in bags and throw them in the weeds on creek banks. The reporter found a number of dead pigs in the weeds along a creek near the Shanghai-Hangzhou expressway, some in fertilizer bags, some lying on the ground.

One farmer said that he can usually call someone to collect dead pigs for disposal, but sometimes they are busy and no one comes. Then, he just throws them away somewhere. The farmer said traders used to come to buy the dead pigs, but they stopped coming after authorities cracked down on the sale of meat from dead pigs last year.

Another Jiaxing Daily article reported on a visit to Bamboo village, where 1400 farmers raise pigs and get 85 percent of their income from hogs. The official in charge of pollution control in the village showed the reporter records showing that over 10,000 pigs had died in January, over 8,300 in February and 800 a day in early March. He said they had been digging one pit after another to dispose of the carcasses but there wasn't enough room to bury them.

According to this worker the high density of pigs is the root of the dead pig problem. The village has 8000 mu (about 1300 acres) of land that could support 1600 pigs according to usual standards of land-per-pig. He says the village's land could support two pig farms but they had surpassed the standards long ago.

Villagers are aware of the pollution problems. They collect 10 yuan per hog from villagers to fund pollution control. The village spends 1 or 2 million yuan per year but the environment is still not good. Some villagers worry about what the environment will be like in the future.

When asked about limiting the number of hogs to address the problem, village officials say that's impossible. In addition to the farmers who rely on pigs for income there are brokers, feed and veterinary drug dealers, truck drivers...what would they do?

Actually, local authorities had banned pig-raising in this area last year. During the last two years local authorities banned pig-raising in designated districts adjacent to the South Lake in order to address the pollution problem. Bamboo village was in the pig-ban area but it's not clear what will happen. Pig-raising is still going strong, at least until the dead pig phenomenon appeared. The Jiaxing Daily said they would be watching this situation and invited citizens to contact them with suggestions. The paper also recommended setting up dead pig surveillance committees made up of either retired village officials or schoolchildren who have received good moral education. It said pollution is a problem of public morality that can't just be left to the government to solve.

Friday, March 8, 2013

China: Agricultural Importer and Victim

One of China's top agricultural policy advisors acknowledged that China' big agricultural imports have become a permanent state of affairs, but he also portrayed China as a victim of an unfair global trade system.

According to a brief Futures Daily report, Cheng Guoqiang, a senior agricultural economist with the Development Research Center, said earlier this week, "Eight years ago I predicted that China would become a net importer of agricultural products and eight years later my prediction unfortunately has come true. The agricultural trade deficit has increased faster than expected, from $4.64 in 2004 to $50 billion in 2012" [dimsums translation]. The Futures Daily notes that China became the world's largest importer of agricultural products in 2012.

Cheng went on to surmise that the agricultural trade deficit is likely to persist. He cites the changing structure of demand and resource endowments but he also depicts China as a victim of globalization. Making reference to WTO accession (11 years ago), Cheng cites increasing competitive pressure from foreign modernized agriculture on China's small, fragmented traditional farming sector. Second, he cites an unjust global agricultural trade environment due to high subsidies and protectionism of developed countries.

Wednesday, March 6, 2013

China's 2012 Agricultural Production Statistics

According to a December report from China's National Bureau of Statistics and the Bureau's Statistical Communique released in February, China produced more of every major commodity last year (except maybe soybeans). All the statistics are in the table below.

Grain production was up 3.2 percent, the ninth consecutive increase. NBS says that expanded area planted in grain contributed 3.58 million tons and yield increases contributed 14.78 million tons to the increase in grain output.

Corn production expanded 8 percent and became the leading crop produced in China. Corn's increase in planted area of 1.4 million hectares was mirrored by declines in soybeans (-712,000 hectares), cotton (-340,000 hectares) and wheat (-131,000 hectares). NBS doesn't mention it, but corn's expansion of area (4 percent) outpaced its increase in yield (3.5 percent). Thus, corn's output growth came mainly from expanding area.

Meat production was up 5.4 percent. Most of that growth came from pork (up 5.6 percent) and poultry meat (up 6.7 percent). These two species are the main consumers of animal feed and their growth corresponds to the major expansion of corn output. Note that corn output grew 8 percent, faster than growth in meat output. In contrast, growth in production of ruminant animals that eat mainly grass--beef, mutton, and dairy--increased at a relatively slow 2-to-2.5-percent rate. This reflects the general lack of forage resources in China, the long production cycle for cattle, and a campaign to restructure production of grazing and dairy animals.

China Preliminary Agricultural Production Statistics for 2012
Crop Area planted, 2012 Change from 2011
1,000 hectares 1,000 hectares
Grain 111,270 690
  Rice 30,297 240
  Corn 34,949 1,407
  Wheat 24,139 -131
  Soybeans 7,177 -712
Cotton 4,700 -340
Oilseeds 13,980 120
Sugar crops 2,030 90
Grain yields Yield, 2012 Change from 2011
mt/ha mt/ha
Grain 5,299 133
  Rice 6,743 55
  Corn 5,955 207
  Wheat 4,995 158
Crop output Output, 2012 Change
1,000 metric tons Percent
Grain 589,570 3.2
  Summer grain 129,950 2.8
  Early season rice 33,290 1.6
  Fall grain 426,330 3.5
major grain crops:
  Rice 204,290 1.6
  Wheat 120,580 2.7
  Corn 208,120 8.0
Cotton 6,840 3.8
Oilseed crops 34,760 5.1
Sugar crops 134,960 7.8
Tobacco 3,200 11.5
Tea 1,800 11.2
Output of livestock products Output, 2012 Change
1,000 metric tons Percent
Meat output 83,840 5.4
  Pork 53,350 5.6
  Beef 6,620 2.3
  Mutton 4,010 2.0
  Poultry meat 18,230 6.7
Eggs 28,610 1.8
Milk 37,440 2.3
1,000 head Percent
Hog inventory (end of year) 474,920 1.6
Hogs slaughtered 696,280 5.2
Source: China National Bureau of Statistics.

Tuesday, March 5, 2013

Corn Prices Down in Northeast China

We're used to hearing about soaring prices in China, but last week the Futures Daily noted with surprise that corn prices have dropped below 1 yuan per 500g in the northeastern region. Corn demand has been sluggish, high moisture has created quality problems, and increases in rail and fuel costs have created some transport bottlenecks. Sinograin is carrying out "temporary reserve" purchases to prevent prices from going down too much.

The Futures Daily reported that Jilin Tonghua was paying .86-.88 yuan/500g for third grade corn with 30% moisture 30% and 1.06-1.09 yuan/500g for 14% moisture. In north china and other regions the corn market purchase price is still increasing slightly. In Henan it was nearly 1.19 yuan/500g and higher in Shandong.

Farmers have been hesitant to sell their corn since last fall's harvest since prices haven't met their expectations. According to Sinograin estimates, as of February 25 farmers in the northeast and north China plain still had 60 million metric tons of corn they had yet to sell--that's 45% of the year's expected sales volume in the northeast and 56% in north China. Sinograin estimates that farmers have about 20 percent more corn on hand this year than they did last year at this time.

Analysts say demand is sluggish due to macroeconomic factors and the slow post-holiday season, and buyers are cautious. Many processors had plenty of corn inventory prior to the spring festival and are not eager to buy. Corn inventories at southern ports are estimated at 600,000 mt. A trader in Henan Province said most of his colleagues are buying local corn and canceling plans to visit the northeast.

There was a lot of rain and snow after the harvest, so corn in the northeast has higher moisture than normally. A lot is stored on the ground and mold is likely to become more of a problem as the weather warms up. Farmers are more eager to sell to generate cash for repaying loans and spring planting.

In the northeast, good quality corn is in short supply. Price differentials for quality and between producing areas and ports are relatively large. With the surge in wheat prices since August, the substitution of wheat for corn in feed is being reversed. Feed demand is expected to increase. Sow inventories are high and the government recently decided to subsidize half of insurance for fattening hogs in central and western provinces.

Sinograin says they have purchased 12.6 mmt of corn in eight provinces as of February 25. The National Development and Reform Commission is worried about the corn situation and held two meetings in the northeast last month. They urged Sinograin to do a good job implementing the temporary reserve program to stabilize corn prices, make sure corn gets dried, prevent depots from downgrading or refusing corn, increase farmers income and give them confidence in selling grain.

Talkin' Food Security Blues

There has been a lot of discussion of food security issues in China in recent months.

In a January speech, Development Research Center vice director Han Jun noted that China's grain supply had become tighter despite nine consecutive increases in grain output and China's self-sufficiency rate had fallen to under 90 percent in 2012. "Grain" imports were 77 million metric tons last year. Soybeans accounted for most of the imports, totaling 58 mmt. Han pointed out that China was an exporter of soybeans until 1996 but it now imports 80 percent of the soybeans it consumes.

Han attributed the increase in imports to rapid dietary change, limits on natural resources and lower prices overseas. He recalled reading a report that said China had experienced an unprecedented dietary change. Over 20 years, fresh water fish production increased five-fold, poultry meat four-fold and pork output doubled. With this kind of upgrade continuing into the future, Han thought that China would need to utilize both domestic and foreign markets to satisfy demand.  Han also called attention to the challenge of preventing atrophy of agriculture as the country urbanizes, citing worries about bankrupt farmers and emptying out of villages as people migrate to cities.

National Development and Reform Commission researcher Jiang Changyun is more optimistic. He defines away the problem by changing the "food" definition from the traditional Chinese definition of "grain" that includes cereal grains plus soybeans to just "cereal grains" to conform with the Food and Agriculture Organization definition. He points out that China was self-sufficient in rice, wheat and corn until the last few years and in 2012 imports were still less than 2 percent of consumption for rice, 4.4 percent for wheat and 3.6% for corn.
Charts showing proportion of rice, wheat and corn imported last year.

This week Liu Hanyuan, the chairman of one of China's largest feed companies, discussed food security while in Beijing for the Peoples Consultative Committee meeting. Liu expressed concern about pressure from the rising imports of grain and foreign dependence. Liu worried about the geographic reliance on imports from North and South America, asserting that grain trade is more concentrated than petroleum trade. This reliance, said Liu, makes China vulnerable to security risks if there are changes in the international political and military environment. Liu amplifies Han's recommendation by calling for more concentrated, commercial-scale farming and a steady increase in grain prices to give farmers production incentives.

Jiang Changyun provides the conventional justification for why China needs to be self-sufficient. He thinks that a big country like China must remain self-sufficient in grains because "whatever China buys becomes expensive, and whatever China sells becomes cheap." He implies that China's grain imports in 2012 were not problematic since they were a small share of world trade, but he asserts that the world wouldn't have enough grain to supply large Chinese imports. He points out that all the biggest countries--the United States, Canada, Brazil, Russia--are self-sufficient or nearly self-sufficient. Only Africa is below 90 percent self-sufficiency.

Well, if the rest of the world--maybe including Africa--could count on China being a regular customer they could ramp up production a lot more than Mr. Jiang realizes. Consider the example of soybeans. In 1991 when China's massive soybean import program was just a gleam in Deng Xiaoping's eye, world trade in soybeans was 28 million metric tons. Who would have thought the world would ever be able to supply China with nearly 60 mmt of imports--twice what total exports were in 1991? More surprisingly, China's imports haven't reduced imports by the rest of the world. Imports by the rest of the world are expected to be 33 mmt in 2012/13.

Saturday, March 2, 2013

China's Grain Reserves Increase Food Waste

Chinese officialdom has been on a crusade against food waste over the past couple of months. There has been a campaign to upgrade grain storage facilities and logistics which translates to handing loans to state-owned companies and other operators who have the right connections. However, one of the chief perpetrators of the food waste problem is China's practice of holding massive inventories of grain in thousands of warehouses.

A Xinhua News Agency article last month was part of the publicity campaign against food waste. Xinhua's reporter learned from the director of the State Administration of Grain that an alarming 35 million metric tons of grain is lost to waste after harvest--an annual loss that exceeds the volume of grain produced by Heilongjiang Province.

The biggest source of losses identified by Xinhua is the half of grain that is held by farm households where an estimated 8 percent (20 mmt) is lost to insects and rats.  A second source of waste is the transportation and logistics segment where grain is shoveled into and out of countless bags, thrown onto trucks, trains and boats, and stored in old, rundown warehouses, losing another 7.5 mmt. The implied solution is pry this grain loose from households and small business operators and put it in the hands of the State Administration of Grain, COFCO, Sinograin and the new generation of "large farms," giving them billions of dollars to build expensive modern warehouses to store it. Food waste is also a big crusade of the U.N.'s Food and Agriculture Organization, so they will surely be cheering on this crusade.

Meanwhile, these same state-owned grain business operators are carrying on China's massive program of holding inventories of grain and vegetable oils for an imagined food security problem, another crusade that friends at the FAO are cheering on. In a long essay on food security issues, a Beijing grain analyst briefly discussed the waste problem associated with the grain reserve. The analyst, Ma Wenfeng, often includes detailed information on grain policies and reserves in his newsletters, so his information seems to be reliable.

Mr. Ma wrote that China's large grain reserves not only consume large government subsidies but they also result in waste as the grain deteriorates while held in storage. According to Ma, state reserves of wheat, corn, and rice are 121 million metric tons (mmt) or more annually, which he says is equal to 25 percent of grain production. The waste is particularly problematic for rice and corn, said Ma, which can only be held for 2-to-3 years. He says 52.3 mmt of corn is held in reserves, of which 40 mmt is old grain which presumably has degraded in quality. The 15.5 mmt of rice held in reserves includes 10 mmt of old grain. He also says reserves include 10 mmt of poor quality wheat from 2009 and 2010.

That's a total of 60 mmt of poor quality grain now held in storage--half of the total. The other half will deteriorate as well, the longer it is held in storage.Some of the low quality wheat is currently being sold off to medium-size flour mills to keep them from going under as they face pressure from high wheat prices. It will be replaced by new grain which will also deteriorate.

Ma doesn't mention that much of the rice reserve consists of early-season rice which most people don't like to eat, farmers don't like to grow, and has been called a "policy crop" by other analysts. Agriculture officials are in the fields again now prodding farmers to plant another early season rice crop.

China's wasteful grain reserve is becoming the world's problem. As Chinese grain prices move steadily upward, China's grain reserve managers are beginning to restock their reserves by importing instead of buying from Chinese farms. Grain imports consist of huge purchases by state-owned companies, This strategy seems calculated to fill China's grain deficit by channeling imports into warehouses instead of the general market.

Ma asserts that 90 percent or more of China's 5 mmt of corn imported in 2012 was purchased by state-owned enterprises. The corn ended up in state reserves or was used as raw material by state-owned or multinational industrial processors. State-owned enterprises have access to tariff rate quotas which allow them to import at a duty of just 1%. Their access to low-priced raw materials gives them an advantage over privately-owned enterprises who may get a tiny quota allocation or--if they are a small mill with no experience importing--no chance of getting a quota at all.

As the gap between Chinese and world corn prices widens, massive grain purchases by state-owned companies will become the normal pattern for grain trade. The state reserves will be stocked with this corn where it will deteriorate and feed rats, insects and microorganisms instead of pigs, cows, and people.

Ma cites the example of rice imports which rose to 2 mmt (he says) in 2012. These imports pressured margins for mills and producers in southern China. Says Ma, pressure on rice prices from imports caused some processors who aren't qualified to import rice to shut down. The corollary is that the right to import rice--held disproportionately by state-owned companies--is a license to print money. Most of the imported rice was low-priced rice from Vietnam and Pakistan that competes against early-season indica rice. The Grain Bureau says they bought over 5 mmt of early-season rice under the price support program in 2012. The support price for early season rice was raised more than any other type of rice this year. It's not hard to imagine China adopting a strategy of importing rice to restock reserves (they are probably doing this already).

The Xinhua article emphasizes the urgency of addressing the food waste problem by noting that China still has 100 million rural people in poverty and tens of millions of low-income people in cities. Ironically, China's solution is to hand billions of dollars to state-owned agribusinesses to waste grain grown all over the world. The Chinese government's friends in the United Nations and the multinational grain companies that make the massive grain sales will all cheer them on in their alleged fight for food security.

Friday, March 1, 2013

China Throwing Money at Agribusiness

In another move that typifies China's economic model of throwing vast amounts of money at state-owned companies, the China Development Bank has committed 30 billion yuan ($4.7 billion) to COFCO--China's flagship state-owned agribusiness company. The funding will span five years and will be used to pursue business in grain and oilseed industries, preserve national food security, and aid rural development.

Back in 2011, the Agricultural Development Bank announced an identical-sounding 30-billion-yuan line of credit for COFCO. It's not clear whether COFCO already burned through the Ag Development Bank money and why it needs another massive line of credit from a different bank less than two years later.

China Development Bank is a state-owned policy bank that makes loans for massive infrastructure projects and overseas investments for Chinese companies. COFCO started out as China's government entity for international trade in grains and oilseeds. China's 21st century economic model calls for at least one giant state-owned company in every industry since--in the communist mentality--big equals competitive. The food industry lacked state-owned behemoths from the planned economy era so COFCO was chosen to be the flagship company. It was then showered with bank loans, IPOs, Harvard MBAs and overseas junkets and tasked with preventing the ABCD multinationals from taking over the country.

The project basically aims to solve all rural problems. CDB is to use its financial advantages in investment, lending, bond-issuance, and securities to support COFCO's improved capacity in grain, oilseeds, and food processing, distribution and logistics, preserve national supply of grains and oilseeds, food safety, and to stabilize agricultural prices. The two parties plan to develop rural financial services, improve agribusiness management, forming new agriculture-business relationships, boost agricultural production capacity, promote rural socioeconomic development and improve living standards in rural areas.

CDB is described as the state's main vehicle for mid- and long-term investment, adhering to marketization to serve the state's strategies, supporting transformation of the mode of development. In the last few years CDB has been adding to its rural portfolio. At the end of 2012 it had loans for rural projects totaling 765 billion yuan ($121 billion) outstanding. Last year it issued 135 billion yuan in loans for rural construction, 21.6 billion yuan in agricultural loans, supporting infrastructure, support of agribusinesses, rural medical services, education and modern agriculture projects.

To boil down the strategy here...

COFCO gets capital at effectively zero cost and with no shareholders to please, nor dividends to pay. They buy companies and build massive warehouses and port facilities. How can private Chinese companies compete when they have to borrow from underground lenders at 20-plus-percent interest?

In 2011, COFCO announced it was looking for overseas acquisitions to secure supplies of agricultural commodities for the Chinese market. Apparently, part of COFCO's strategy for maintaining food security is to buy wineries in France, Chile, and Australia.

According to COFCO's website, it has 1.75 million metric tons of storage capacity for state reserves. The quantity of state reserves is a "state secret", apparently to facilitate profit-making trades for COFCO.

COFCO can import massive amounts of grain at a 1 percent tariff under the large portion of the tariff rate quota reserved for state-traders, while hundreds of private companies have the remaining quota divvied up among them. This will become a valuable money-maker when wheat and corn prices drop.