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.

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