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.

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