Tuesday, April 30, 2013

Cotton Imports vs. Reserve Auctions

China is still stuck with a huge stockpile of domestic cotton bought at support prices. The government has grudgingly issued more import quotas but most quotas are given to companies who agree to export their final products or buy expensive cotton from state reserves.

According to Chinese textile industry reports, China's National Development and Reform Commission (NDRC) will soon announce an additional cotton import quota of 400,000 metric tons.  This will bring the total quota issued for the market year to 2.8 million metric tons. According to one factory manager, new quota has already been issued to some textile mills. The quota is reportedly for purchases of cotton already in bonded warehouses at Chinese ports. Traders estimate 700,000-to-800,000 metric tons of cotton in these warehouses, but the supply of cotton in the market is tight.

On April 10, the NDRC announced its temporary reserve policy for the 2013/14 market year (about a month later than in the last two years). The minimum reserve purchase price for next fall's cotton harvest will be held steady at 20,400 yuan/mt. According to a futures market analysis, the support price is below the market's expectations and cotton prices are weak. However, the price is still far above the price of imported cotton.

Government reserve purchases amounted to 87 percent of the 2012/13 Chinese cotton crop. The supply of cotton in China now consists of auctions from the reserve and a limited amount of cheaper imported cotton. NDRC says they hope to auction off 4.5 million metric tons of reserve cotton by the end of July. According to the futures analysis, this may be difficult to achieve with monthly cotton consumption about 650,000 mt per month. According to this April 10 analysis, the government "controlled" the distribution of tariff rate quotas to prevent "low-price" imported cotton from pressuring the domestic market. Although there had been a slight uptick in auction sales, the proportion sold is still low.

Imported cotton is estimated to be priced 4000 yuan/mt less than domestic cotton. China's cotton imports during March 2013 totaled 528,800 metric tons. That brings the cumulative total imports for the 2012/13 market year to over 3 million metric tons (mmt). According to the futures market analysis, "everyone" expects China's cotton imports to exceed USDA's estimate of 3.6 mmt.

Upon WTO accession, China agreed to a tariff rate quota for cotton of 894,000 mt annually, but additional "sliding scale" quota is announced nearly every year. According to a March 2013 report, NDRC had issued more quota but the amount was not announced. Most of the additional quota was reportedly for "processing trade" for which a textile firm must have a contract to export finished products before it can receive a cotton import quota. It is also rumored that quota awards are linked to purchases of auctioned domestic cotton at a 3:1 ratio.

An April 12 report from Dezhou, Shandong Province, confirms this, saying that textile mills in that district received 15,700 mt of "processing trade" quota and only 1,500 mt of "general trade" cotton import quota. The article also notes that NDRC "adjusted" the quota distribution system this year, awarding 1 ton of import quota for every 3 tons of state reserves purchased. The Dezhou NDRC was described as energetically guiding companies to participate in cotton auctions. The report implies that seven companies were added to the import quota distribution list because they bought reserve cotton at the auctions.

Sunday, April 28, 2013

Rising Rents Restrain Family Farm Trend

An article this month described difficulties restraining land transfer and formation of family farms in Taizhou, a prosperous district of coastal Zhejiang Province that has been on the leading edge of China's land rental, large farm and village cooperative arrangements for a number of years. Local officials say about 40 percent of the farmland has been transferred here, higher than the national average of about 25 percent. However, farmers in Taizhou are discovering the age-old tendency for land rents to rise and eat up farm profits.

Yang Dengcong, chairman of a machinery services cooperative, rents 650 mu (107 acres) of land where he plants early-season rice followed by broccoli. He now pays 1310 yuan per mu in rent (about $1260 per acre), and rent was increased this year by 100-to-200 yuan per mu (an increase of about 100-to-200 dollars per acre). However, the broccoli market collapsed this year due to oversupply and farmers are now losing money on broccoli. Yet he has to pay even higher rent.

Farmers pay higher rents for higher-value crops. In Huangyan district of Taizhou, the general land rent is 800 yuan/mu but farmers planting melons pay as much as 1950 yuan/mu. Farmers compete for flat, fertile land, driving rents higher. No one wants land on hillsides because there are wild animals who eat the crops and machinery can't be used on hillsides or terraced fields.

Zhejiang and a number of other localities in China have subsidies or "awards" to large farmers to help offset the cost of renting land. One farmer describes his 30 yuan/mu "award" as a "drop in the bucket", considering that his rent increased by 300 yuan/mu this year.

In Taizhou, family land-holdings average 1 mu (6 mu = 1 acre), so you have to rent from large numbers of families to form a reasonably-sized farming operation. Plots of land are scattered and fragmented, adding to the complexity and transaction costs.

Land rental contracts are nearly always short-term. One reason is the worry that rent will rise next year.

According to Taizhou officials, another reason for short-term rentals is that farmers want the flexibility to abandon their enterprise when it goes into a downturn and they start losing money.

Chinese entrepreneurs--farmers included--have a go-go make-money-today-or-move-on-to-the-next-thing mentality which clashes with agriculture's fundamental character as a long-term investment requiring patience.
The system discourages investments in land and good stewardship, undermining any hope of sustained improvement in agricultural productivity--and food security.

Friday, April 26, 2013

Declining Soil Fertility: "Hidden Loss of Land"

The Peoples Daily called attention to China's problem of declining soil fertility, calling it a "hidden loss of land." China's massive increases in agricultural output essentially strip the nutrients and organic matter from the soil without replacing them. In other words, producing crops in China is essentially an exploitative mining activity that sucks resources out of the ground.

A villager in eastern Henan Province picked up a handful of soil and remarked, “This land can’t compare with what it used to be!” The farmer elaborated: In the past, the soil was moist and whatever you planted in it would grow. Now it's dried out and you can't grow anything without chemical fertilizer.

Peoples Daily explained that soil fertility is based on its morphology and physical properties, presence of organic matter, available phosphorus, potassium and other chemical properties. Relying on chemical fertilizer for production and continuous intensive cultivate broke the land’s ecological structure, reducing its productivity.

According to the vice director of an agricultural resource planning institute at the Chinese Academy of Agricultural Sciences, soil infertility is one of the chief constraints on agricultural production potential. He says that Chinese producers rely heavily on chemical fertilizer and water input for output growth. Land "eats water, eats fertilizer, eats labor." Soil fertility is depleted by chemical fertilizer use, prompting even higher fertilizer application and creating to a vicious circle.

Chemical fertilizer use is high compared to other countries. The article says nitrogen fertilizer application per hectare on rice in China is 2-to-3 times that of Japan and South Korea. China has also shifted to fertilizer-demanding crops like corn and vegetables while low-input crops like soybeans (with accordingly low yields) are abandoned.

Chemical fertilizer is not used efficiently. The mix of nutrients is not properly formulated and large portions of chemicals are not absorbed by the land, instead washing into waterways and causing pollution.

Since 2005, the Ministry of Agriculture has been subsidizing soil fertility testing in the hope that farmers will add a more efficient mix of fertilizers. The fertility tests are not widely used and statistics show fertilizer use climbing steadily.

The article hails a scheme to forge relationships between fertilizer companies and farmers in Henan Province. The "four party, three integration" program aims to link fertilizer companies with agricultural departments, news media, and farmers to improve the efficiency of fertilizer application.

The article doesn't mention that people who use an asset that doesn't belong to them are inclined to use it up as fast as they can. If you drive a leased automobile, you don't have a strong incentive to maintain it. If you don't own a piece of land and you know it might be expropriated or rented out to a company next year, you don't have much incentive to invest in improving its fertility. Since nobody really owns China's farmland, nobody invests in it maintaining it and improving it. That's the government's job and the government is too busy building subways, airports and skyscrapers to make sure there are earthworms in the dirt.

Monday, April 22, 2013

Sichuan Links Subsidy to Grain Planting

Xinhua News Service announced that Sichuan Province will link grain subsidies to the amount of grain planted. The policy adjustment couples subsidies to production, "smashing the big rice bowl." Now "whoever plants gets a subsidy," and "whoever doesn't plant doesn't get a subsidy."

In Sichuan large numbers of rural people leave their villages to work and rent out their land to neighbors. Under the old subsidy practice, the subsidy went to the land "owner," not to the farmer who rented the land and grew the crops. The new practice will pay subsidies to the farmer who grows the crops. The article cites the example of a village where 800 of the 1500 residents spend most of their time working elsewhere. One villager who rents his neighbors' land plants 7 mu (a little more than 1 acre) of rice and is considered a "big farmer" used to get no subsidies for his rented land. Now he will get about 500 yuan, "lightening his burden."

The Sichuan adjustment is described as experimental and will be implemented in 12 major grain-producing counties. Actually there are already quite a few provinces distributing subsidies based on land planted or grain sold. In 2009, the National Development and Reform Commission issued a document urging local authorities to link the "general input subsidy" to actual production. This announcement appears to be a propaganda signal implementing the "Number one document's" call for linking subsidies to actual production. It uses the same rhetoric of concentrating subsidies and no longer "sprinkling subsidies like sesame salt." The article reports that local officials say the changing structure of farming requires a change in subsidy methods.

The article doesn't report how local officials will record and verify how much land is actually planted in grain and how they will handle disputes over who gets the money.

More Corn Planting Despite Lower Price in 2013

China's National Bureau of Statistics first-quarter macroeconomic report says the bureau's survey of 90,000 farmers' planting intentions indicate a continuation of recent year's trends: more corn, less soybeans and cotton. Corn area is expected to go up another 4.1 percent, while soybean area is expected to plunge again by 8.5 percent. Cotton area is also expected to fall 6.2 percent.

China farmer planting intentions, 2013
Crop Percent change
Rice 1.0
Corn 4.1
Soybeans -8.5
Cotton -6.2
Source: National Bureau of Statistics survey.

Corn area's increase comes despite a decline in corn prices in the first quarter of 2013. Most prices were up from a year ago, but corn prices during the first quarter of 2013 were down 2.1 percent from 2012. Rice prices were up 7.1 percent and rice was up 5.5 percent. Hog prices were also down this year from their high level in early 2012. Other livestock prices were also up sharply. Pork output was up 2.8 percent from last year.

In China's investment-driven economy there's not much investment in agriculture, so agriculture's share of the  economy is shrinking fast. Agricultural (primary industry) GDP (at constant prices) was up 3.4 percent during the first quarter of 2013, less than half the rate of overall GDP growth of 7.7 percent.  Fixed asset investment was up 20.9 percent, but the agricultural sector accounted for just 1.6 percent of it (this doesn't include investment by rural households but they generally don't invest much in agriculture). Output of "above scale" industrial firms was up 9.5 percent, almost three times the growth rate for agriculture.

China agricultural price changes, first quarter, 2013
Commodity Percent change from last year

Wheat  7.1
Rice  5.5
Corn -2.1
Oilseeds  3.5
Sugar -1.2
Vegetables  4.1
Fruit  2.8
Tea leaf -0.5
Hogs -3.1
Cattle  16.3
Sheep   9.0
Poultry   7.5
Eggs  10.8
Source: National Bureau of Statistics.

Friday, April 19, 2013

Fake Soymeal and Infertile Pigs

China's tolerance of fakes and counterfeits is coming back to bite the country where it hurts. Most of the focus has been on fake watches, handbags, clothes, electronics, and other consumer product knockoffs. What gets less attention is the rampant counterfeiting and adulteration of farm inputs which inflicts losses on farmers and affects the country's ability to feed itself.

According to Business Reference News, pig farmer named Lei in Hezhou, a region in Guangxi Province,  noticed that his sows grew slowly, got sick, had irregular estrous cycles, or aborted, and piglets had high mortality. He consulted with neighbors who had similar problems and they determined the problem was with two brands of soymeal. Through testing they further determined that the stuff in the bags was not actually the products of these companies. It was counterfeit soymeal. Crude protein in soymeal should be 42 percent but the counterfeit soymeal had protein levels under 30 percent.

A farm buying the fake soymeal claims to have lost 75 sows last year, which they calculated to be worth 2 million yuan in losses based on the number of finished hogs they would have produced. The local industry and commerce bureau speculates that the losses are quite large since many small farmers probably bought the counterfeit feed without discovering the problem. The network of dealers who supply the fake soymeal is said to be still in operation.

The industry and commerce bureau checked farmers' receipts from soy meal purchases and found irregularities. The crude receipts didn't identify the brand or production site and they were not signed by the dealer, making it hard to trace the source of the problem.

It's hard to tell that the soymeal is fake. The counterfeiters duplicated the bags as well as the bar codes. A factory technician said even a people from the soymeal company wouldn't be able to tell it was fake.

A few other incidents of fake soymeal have been in the news from time to time. The most common problem detected by the Ministry of Agriculture's feed testing is low protein levels.

There are instructions for making fake soymeal and detecting it posted on various web sites. The ingredients include viscous white clay, wheat bran, and yellow dye.

One guy reposted it on a weibo and most responses expressed shock and disgust, but one poster replied by saying that traders buy 5000 tons daily directly from the factory, spend a lot on transportation and packaging, and it wouldn't be worth it to counterfeit such a large quantity. He said that they have not had any problem with counterfeit soymeal in his county since there are many local soybean-crushing plants and the farmers buy large volumes.

The original poster replied by saying that there are several villages in Jining, Shandong Province that specialize in counterfeit soy meal. He replied, "Older brother, go on line and you will know."

Thursday, April 18, 2013

China's Counterproductive Sow Subsidy

Chinese agricultural officials have a subsidy for every problem. During 2007, a short supply of pork and soaring prices prompted officials to introduce a subsidy for breedable sows of 50 yuan per head. The next year it was raised to 100 yuan and it has been given each year since then (except 2010).

The idea of the subsidy was to discourage farmers from killing off their sows during periods of low pork prices. This happened during 2006, exacerbating the short supply of pork during 2007 when disease epidemics further decimated the supply of hogs. By paying them a subsidy, officials thought farmers would be willing to keep their sows on hand until prices revived, thus attenuating the boom-bust cycles in production and prices.

The subsidy prompted a different--but predictable--type of response from farmers: they reported nonexistent sows to authorities in order to collect more subsidies. The chart below shows the inventory of sows reported by Jiangsu Province's agriculture bureau monthly from 2005 to 2012. The number suddenly jumped by 22 percent during July 2007--the same month the sow subsidy was announced. A year later the subsidy was doubled to 100 yuan per head and suddenly farmers increased their sow numbers by another 20 percent. Since 2004 there were no other months when sow numbers changed by more than 2.5 percent in one month. The number of sows in August 2008 had increased by 75 percent over the June 2007 number. There was no jump in hog inventories or slaughter corresponding to these massive increases in sows.
Source: dimsums using data from Jiangsu agriculture bureau.

One reporter conducting interviews in Laiwu, Shandong Province, found that some farmers don't like the sow subsidy. A villager Tang, disgruntled by losses of 200-yuan-per-head currently, described the subsidy as an opportunity for some people to take advantage of. Some farmers routinely inflate their sow numbers to get more subsidies: "ten sows become twenty." One village's sow numbers were inflated from 572 to 1,572. Because of the rampant practice of inflating sow numbers, local officials have been ordered to go out and "see pigs, see people, see barns" to verify the numbers. 

Large hog farmers in Laiwu say they don't want the subsidy. They don't want township livestock officials to count their pigs since the officials might have germs on their clothing that would transmit disease. 

The subsidy program, therefore, potentially has a perverse effect. The task of collecting statistics and verifying sow numbers means that livestock officials have to take time away from disease prevention and  other functions that actually support production. Moreover, officials wandering from farm to farm pose a serious threat for spreading disease. 

One article appearing on an industry news site points out that the effects of the sow subsidy are not as advertised. The author says the amount of the subsidy varies from region to region and farmers don't get any subsidy in some places. The author calculates that the 100-yuan-per-sow subsidy amounts to 7 yuan ($1.13) per finished hog if a sow produces 16 piglets that grow to slaughter weight. This doesn't provide a very strong production incentive. 

The article suggests that the subsidy did induce some small-scale producers to expand, causing more fluctuations in price. This seems to contradict the point about weak incentives, but the author then says that the effect of the subsidy has faded over time. 

The article then notes that the subsidy demands that livestock officials expend large amounts of time, human resources and expense in collecting and verifying data for implementation of the sow subsidy. 

Monday, April 15, 2013

Industrializing Chicken Farming in China

The chairman of YUM! Brands China operations said that Kentucky Fried Chicken hopes to source at least 60 percent of its chicken from vertically integrated supply chains by the end of 2014. Following its "chicken gate" incident in 2012 (when the company was pilloried in the press for drug abuse by some chicken suppliers) the company promised to eliminate 1000 chicken houses from its supply chain.

As China faces food safety and disease problems, companies are moving away from the traditional small-farmer "production base" model to a mechanized, industrialized mode imported from developed countries. This trend may signal China's transition to a "middle income trap" as capital-intensive production with imported technologies are employed in a country that is still pretty much a developing country.

The YUM! executive explains that they are moving toward a more tightly-controlled integrated production model because the traditional "company + farmer" model has too many vulnerabilities that the company can't control. For example, he explains that there are two kinds of chicken pharmaceuticals on the market--an imported brand that leaves no residue in the meat but is expensive and a domestic brand that is cheaper. Of course, small farmers are inclined to use the cheaper drugs and the company has little control over them. The company is adopting a fully integrated model which controls each aspect of the chain from feed and chicks to production, processing, and sales.
Inside a mechanized poultry slaughter plant in China.

One analyst noted that the dairy industry sped up development of its own farms after the melamine incident and the poultry industry should follow the same road.

A related article describing the company that supplies much of KFC's chicken says the broiler industry is in an "upgrade" period. Vertical integration (a "long dragon" resembling the dragon in a dragon dance) is now one of the leading industry models.

The reporter visited a chicken farm with 16 chicken houses, each holding 30,000 birds that take 45 days to reach slaughter weight. He had to wear protective clothing, hat, gloves, and rain boots. The chicken houses were warm, temperature controlled, with feed and water piped in, all part of an automated system overseen by a single worker. Workers are not permitted to leave the farm during the 45-day growing cycle. The slaughterhouse looks like just another factory from the outside. Inside, the large factory floor is completely mechanized with a dozen or so workers in pink protective clothing busy on the production line.

This company pioneered the vertically integrated model that links up the whole process, from breeding and multiplier farms to grow-out, slaughter, processing, packaging, and sales. They plan to invest 5 billion yuan (over $800 million) in an integrated complex that will produce 250 million birds annually. He claims the integrated model can reduce unit cost and better manage price risk.

A Daily Business News article highlights the breakdown of the small farmer-plus-company contracting model that vertical integration is displacing. Chengde county, a mountainous area north of Beijing, has 3500 farmers raising 67 million chickens annually, scattered over 178 villages. Most of them raise chickens under contract for one company that is dominant in the county, but several other large companies are also active in Chengde. The reporter suggests that farmers have grown disenchanted with chicken-farming due to the inflexibility of company contracts.

According to county officials, farmers earn 20,000 yuan ($3,225) on average from chicken-farming, but local farmers are skeptical of this number. One leader of a chicken farm cooperative told the reporter: “About 50-60 percent are losing money and just about everyone is in debt.” One farmer said he lost 20,000 yuan on his last batch of chickens.

Company contracts specify that farmers use chicks, feed, and medicines specified by the company. They set a purchase price that is supposed to cover costs plus a profit. However, farmers say their margins have been shrinking due to rising costs of feed, labor coal (for heating) and electricity. They complain that they have no negotiating power and have less information than the company.

Six years ago, Mr. Song decided to quit truck-driving and return to his village to raise chickens. He was enticed by government and company advertising that said he could earn 10,000 yuan from each batch of chickens. Other farmers say the local government gave out subsidies and townships and villages had targets for recruiting chicken farmers. At its peak around 2008, one farmer said chicken houses "fell like rain."

Many farmers now say they lose money raising the birds, but they are tied to the company by a five-year contract. Many others have quit and empty chicken houses are evident. The director of one town's rural credit cooperative said 60-to-70 percent of farmers had quit raising chickens in his area. One company that had previously signed up 800 farmers now has 400-to-500 left.

Mr. Meng, a village party secretary and chicken farmer, said each 5000-bird cycle of chickens eats up 24-to-25 metric tons of feed at a cost of 120,000 yuan. After deducting his advance payment, he earns nothing from selling the chickens.

Companies require that farmers use the inputs supplied by the company to maintain uniform products and prevent problems from low-grade feed or toxic pharmaceuticals. The intent was to gain the type of control over the product that KFC is looking for in its vertical-integration model. However, now the Chengde company is facing hard times and farmer-suppliers say the company is shifting losses on to them. A farmer complains that he is required to use the feed supplied by the company. If he uses too little company feed (which implies he uses an unapproved type), he is penalized. Last year, the company was substituting wheat for corn in the feed which slows down the growth of the chickens. A farmer complains that the quality of chicks has declined.

Feed prices went up from 3200 yuan per metric ton in 2010 to 4200 yuan now, but chicken prices didn't go up much.

These developments seem to signal the end of the small-farm backyard-livestock era in Chinese agriculture. The "backyard" mode was appropriate for a labor-abundant countryside and farmers were eager to sign up. Now that wages are rising this activity is no longer attractive. Consumers are "fed up" with the uncertainty over food safety and companies are taking more control over production to assure consumers that products are safe.

"Modern agriculture" is an inherently capital-intensive activity. Does it make sense to adopt capital-intensive production methods in a labor-abundant country? Companies will have to offer high wages to workers who can't leave the chicken farm for 45 days at a time. Will the company have any more control over its wage employees than it does over farmer-suppliers? Processing plants will have to use huge amounts of water and spend a lot treating it or create even worse pollution problems. While it may be possible to have low unit costs with an integrated high-input production system, other companies are also building massive-scale production capacity. Competition will keep downward pressure on prices, prevent production capacity from being fully utilized, keep unit costs high, and lead to losses. Instead of importing a high-cost production system that employs a dozen workers, why not import cheap poultry from the U.S. or Brazil?

By pretending to be a developed country, China may be pushing its costs upward and inadvertently falling into the much-dreaded "middle income trap." There is also an absence of innovation--the "white feather" broiler breeding stock (twice as efficient as native "yellow feather" chickens) must be constantly replenished by imports.

Sunday, April 14, 2013

China's Poultry Industry Rocked by H7N9

China's poultry industry is experiencing severe economic impacts from the effects of the H7N9 influenza outbreak.

The spread of the H7N9 virus is still not clearly understood, but it seems to be associated with the sale and butchering of poultry. In response to the H7N9 threat, Shanghai and surrounding provinces are closing live poultry markets and shutting down unlicensed sale of live poultry in the municipality. On April 6, Hangzhou authorities shut down a facility where H7N9 was detected and disposed of all the chickens. On April 8, Nanjing municipal authorities also stopped trade of live poultry and all markets will be cleaned up and disinfected. Some provincial authorities are restricting the interprovincial trade of poultry.

The Southern Daily estimates that 80 percent of poultry markets in Guangzhou are "dormant." It estimates that daily losses in the provincial industry are 500 million yuan ($80 million).

Chinese news media say the closure of markets and consumer worries about catching H7N9 from poultry are having severe impacts on farms, slaughter, traders and wholesalers of poultry.  A Xinhua article quotes a Mr. Li, a farm "boss" who says he's losing money on all the chickens, ducks, geese, and pigs he raises on his farm. Mr. Li says his broiler chickens now get a price of 4 yuan per 500g, down from the usual price of 6-to-7 yuan. According to Mr. Li, he has trouble finding anyone to buy his chickens at all--no one wants them. He says he loses 2-to-3 yuan per 500g on chickens and 150-to-200 yuan on every pig he raises. Prices of ducks and geese have also been hit by the crisis.

Farmers were already being squeezed by rising costs of feed. Mr. Li says a 40-kg bag of feed costs 140-160 yuan ($22-to-$25), up from 90-to-100 yuan in 2009. Raising chickens no one wants is just a waste of feed, says Mr. Li.

Chicken traders and wholesalers are in a similar predicament as the effects of H7N9 reverberate through the industry. A trader named Deng said he is afraid to buy any chickens since he can't find anyone who wants them. He has closed up his stall but still has to pay several hundred yuan in rent daily.

Another chicken trader in Hunan Province drove a truckload of chickens to Guangzhou but the wholesaler he usually deals with refused to take them. He tried several others but found no takers, and finally drove the chickens back to Hunan. He thinks he lost 40-to-50,000 yuan on the trip, including gas, costs of feeding the chickens and death losses.

Even Wen's Group, a poultry giant based in Guangdong Province, is reportedly losing 20 million yuan per day. Securities analysts report that poultry-related company equities have been falling to their limit and warn investors to steer clear of poultry stocks.

Some local governments are giving aid to the poultry industry. Shanghai agricultural authorities announced a set of measures to aid slaughterhouses, and they arranged for them to sign agreements to buy chickens from farmers at fixed prices. Hangzhou is giving aid to chicken farms and ordered markets to cut daily stall rents for poultry vendors. The Hangzhou commerce bureau is studying additional policies. Nanjing has started giving out a subsidy to chicken farms and additional policies are being considered.

The Southern Daily article leads off with a plaintive cry, "Save our poultry industry!" It calls for the government to support the industry by calming the panic over eating poultry. It cites the emergency measures issued by the agriculture bureau in Foshan, Guangdong Province, which urged government departments, institutes, and schools to "take the lead in poultry consumption to help companies weather the storm."

The Southern Daily says the government needs to issue special subsidies, support and tax breaks to revive the poultry industry. It says losses threaten bankruptcy for several big companies in the province that have led the development of the poultry industry. Southern Daily warns that, if losses continue, farmers might loosen up on disease control measures, worsening the epidemic.

An agricultural securities analyst in Shandong Province warned that it's not easy to rebuild consumer confidence in the poultry industry. He warns that we may have just seen the beginning of disease problems, and it's hard to predict how serious the problems could become.

A set of recommended biosecurity measures for farms posted on a poultry industry site include:

  1. Purchase only legal vaccines; be aware that there are many sub-types of avian influenza and vaccines do not protect against all of them. Monitor antibodies and adjust vaccination based on the disease situation in the surrounding area.
  2. Disinfect production areas and chicken housing. All entrances should have disinfecting pools, a disinfection room and equipment. Dead poultry should be tested and disposed of properly.
  3. Keep facilities clean to prevent breeding of bacteria. Keep feed and drinking water clean. Dry and ferment manure; treat waste water. Clear out weeds around housing at regular intervals to prevent vermin from spreading disease.
  4. Prevent outsiders from entering production areas. Regularly exterminate rats and flies. Prevent wild birds from building nests. Install nets to keep out migratory birds. 
  5. Farm personnel should wear face masks, protective clothing, and gloves. All should be disinfected and cleaned to prevent cross-contamination.
Implementation of these measures on Chinese farms is spotty at best. They are a reminder of the many vulnerabilities to the spread of disease on farms in China. If safe food and drinking water are a problem for humans in China, imagine how bad these problems are for animals. 

Saturday, April 6, 2013

Seed Industry: Weak Foundation for Chinese Growth

China's "seed industry crisis" is both a sign of weakness and a metaphor for the broader shortcomings of China's economic growth model. Seeds are the core of agricultural productivity and Chinese industry and government officials are grinding their teeth over the growing popularity of seeds sold by multinational companies. The dominance of foreign companies in one sector after another is portrayed as unfair competition, monopoly, plots against China, blah, blah, but at its core, the competitive position of Chinese companies reflects a systemic problem in the Chinese economy--the country has not figured out how to innovate and create.

In March the Peoples Daily network posted an article, "Multinational Seed Companies Have Full Access; Native Seed Companies Face Enormous Challenge," which appears to be part of a campaign to promote the Chinese seed industry (and part of the broader nationalistic campaign against foreign companies like Apple, foreign fast food brands, Wal-Mart, etc.) The article refers to the domestic seed industry with the adjective "min zu," a word that means "race" or "ethnicity."

The article warns that all of the world's top ten seed companies have invested in joint ventures or their own operations in China and are becoming dominant in some segments of the country's seed market. Multinationals are said to have 95-percent market share in sugar beet seeds, half of sunflower seeds, and they dominate markets for high-end vegetables. The multinationals' share of corn seeds is said to have grown from 0.1% in 2003 to 11% in 2011.

The Peoples Daily warns that domestic seed companies are losing breeding personnel. It cites sugar beets as an example, warning that the industry is losing seed breeders since there is no market for Chinese seed companies. "If there are no people to improve the seeds, how can [our companies] compete with the multinationals? The domestic (min zu) seed industry is really in crisis!" wrote Peoples Daily.

The article identified the Chinese seed industry's first shortcoming as "scale and strength." Multinational companies, Peoples Daily said, are like an aircraft carrier; Chinese companies are like little sailboats.

Han Jun, one of the top agricultural policy advisors to the state council, said the Chinese seed market is characterized by small, fragmented companies and chaotic competition. Han pointed out that China has 6,296 seed companies and the top 10 percent have only 15 percent of the market. In contrast, Monsanto alone has 19 percent of the global seed market, said Han.

Chinese seed companies are mainly engaged in licensing and marketing seeds developed by research institutes. According to Han, no more than 100 of the more than 6000 Chinese seed companies have their own R&D capabilities. He said the top 10 Chinese seed companies spend less than 2 billion yuan ($315 million) on R&D while Monsanto alone spends $1 billion.

Liao Xiyuan, the director of the Ministry of Agriculture's seed management bureau gets to the core problem by saying, “The shortcoming is not just in the scale--it is also in the system and the model.” Liao explains that breeding is the core of the industry, and this is now done mainly carried out by "task forces" (special research groups, or 课题组)  in small workshops. These task forces often duplicate each others' work and don't share information or results. Liao points out that plant-breeding is a low-probability event (in other words, a lot of research fails--you have to throw a lot of stuff at the wall and see what sticks.) In order to continually produce good varieties, you have to have large scale. Massive amounts of data and experiments have be sifted through and whittled down to find useful germplasm. He argues that this requires forming commercialized breeding backed by a "big system."

Liao says that breeding capabilities are concentrated in research institutes and universities where they are insulated from the market. Companies mainly "buy" seeds developed in these organizations. Han Jun points out that China does not have a leading rice seed company despite being a world leader in rice breeding.

Liao and Han admire the size and global reach of multinational seed companies which gives them to access "global resources" and markets and creates a "virtuous cycle" of high-input, high-output, and high returns. Han says the multinationals are far ahead of Chinese companies in breeding, manufacturing, sales, and service.

Chinese officials are intent on "keeping the rice bowls of 1.3 billion [people] in their own hands" by developing a strong seed industry. In April 2011, the State Council issued "document number 8"  which called for developing a "modern seed industry" with companies as main players, integration between production, scholars, and research, "integrated propagation and research," and indigenous innovation. In December 2012, the State Council issued the Ministry of Agriculture's draft 2012-2020 plan for implementing document no. 8.

Also in 2012, the National Development and Reform Commission launched a “biological seed breeding and industrialization” project, investing 336 million yuan (about $ 53 million) to support breeding and commercialization activities by 41 seed companies. The Ministry of Finance issued tax waivers for breeding and propagation projects. The Ministry of Agriculture raised the threshold for seed companies, reducing their number from over 8000 to 6,296.
Cartoon illustrates increase in threshold for seed companies. The big briefcase is labeled "strength" and the small guys are labeled "small," "fragmented," and "chaotic." The high red threshold is labeled "entry standards." The balloon says, "The threshold is high, is there no hope?--medium and small seed companies." Source: Grain Industry News.

Another measure spurred by the "number 8 document" is last month's ceremony establishing a national modern seed industry development fund. The fund has start-up investments of 500,000 yuan each from the Ministry of Finance (MOF), the Agricultural Development Bank of China (ADBC), and Sinochem--a total of 1.5 billion yuan ($238 million). The purpose appears to be to pick winners and provide them with venture capital to develop strong seed companies. The fund is described as a "platform" that consolidates support from the government (MOF), banks (ADBC), and companies (Sinochem) the jumpstart the industry and attract more investment. (In fact, all the participants are different forms of government. ADBC is a government-run policy bank and Sinochem is a state-owned enterprise.) The fund is scheduled to operate only for ten years, at which time the initial three investors will sell their stakes.

This is not the first time the government has tried to jump start the seed industry. In the 1990s, a "seed project" set up a network of seed engineering centers. For example, corn seed research centers were set up at the Jilin Academy of Agricultural Sciences and Shandong's Denghai Seed Corporation. This 1990s-era plan sounds much like the current plan. It aimed to develop improved corn varieties, combine the resources of research institutes, scholars and companies, and create a strong seed company--Denghai. These companies and institutes have turned out a series of corn varieties with purportedly high yields, including several types of "super corn," but news media say the corn seed industry, in particular, is in "crisis." Why will the new initiatives work any better than the old ones did?

One problem may be that Chinese companies tend to be run on the basis of hero-worship rather than efficient corporate structure. At least two leading seed companies are named after their "hero" founders--Yuan Longping and Li Denghai. In September 2012, the Peoples Daily ran an article describing Li Denghai--"the father of Chinese hybrid corn"--in near-mythical terms, gushing over his selfless dedication to breeding corn and his appearance as a straw-hat-wearing rustic peasant despite being a talented corn breeder. Supposedly, he was chosen by his Shandong farm brigade in 1974 to attend a technical institute. He was given 30 American corn seeds and spent years developing improved strains. With a junior middle school education he bred corn with higher and higher record yields, eventually developing a "super corn" in 2005. He was called "the Mount Everest of China's corn kingdom."
Li Denghai, seed-breeding peasant hero

Another "seed industry crisis" article last November noted with alarm that a popular corn seed variety was becoming increasingly popular in Shandong Province, literally in the backyard of Li Denghai's hometown Houdeng village, which is where his seed operation is based. Shandong is also home base for Jinhai, another seed company named after its founder, described as a "backbone company" of the seed industry. The multinational seed variety's high yield and short growing season first became dominant in northeastern provinces and is now gaining popularity among farmers in Shandong. The potential foreign dominance was described as a "warning signal" to the country's food security.

Another fundamental problem is the reliance on campaigns and task forces cited by Mr. Liao, the seed bureau official. The Chinese style is to start a campaign, throw resources at a problem, and then move on to something else. There is no structure to sustain efforts or motivate people to keep attacking a problem. For example, one Chinese netizen posted a message on an electronic bulletin board asking where he might find a listing of national seed varieties that is often mentioned in articles. Another person posted a response giving him the link to the file on a government seed technology site, but the file is actually ten years old. There are references to more recent compilations of seed varieties, but none seem to be publicly available.

Here are some posts responding to the article about the domestic "seed industry crisis" from Chinese readers:

  • "The seed industry is known for its low quality, high prices, and poor service; the sooner the door is opened to this 'native' industry, the better." 
  • "Policy support alone won't change the seed industry's challenges; it needs reform of the system and management model."
  • "The Ministry of Agriculture's licensing system for seed production is most disgusting--capital requirements of at least 10 million yuan, managers have to pass professional qualification exams, you have to buy useless lab equipment." 
  • "Whether or not you can become an 'aircraft carrier' depends on what kind of connections you have."

Tuesday, April 2, 2013

A Contentious Farmland Bubble in China

Competition for farmland in China is heating up, and so are rents. The phenomenon of soaring farmland rents highlights the changing role of farmland, its scarcity, and the disputes that arise when rights are not precisely defined and enforced.

Rural land--long been viewed as a means of feeding the peasant population--is now turning into an income-generating asset. A Securities News article in March 2013 warned that farmers are being swept off the land by agriculture. "It sounds like a joke, but it's true," writes the reporter. Agriculture now attracts urban investors and they're willing to pay high rents for the land. According to the article, farmland rents in Xuchang--a region of Henan Province--rose from 300 yuan per mu annually a few years ago to 1000 yuan per mu now (about $960 per acre). The rent exceeds the net income villagers can generate from planting crops on their land, so more and more are renting it out instead of cultivating the land themselves. The article describes this as "an active choice" but also an "extrusion" of people from the land.

Most villagers have rights to cultivate 3-to-5 mu (about half an acre) of land. To operate a 100-mu (about 16 acres) farm, you have to come up with about 100,000 yuan (about $16,000) for operating expenses. Most people have to borrow from multiple parties to raise this kind of cash. The net return is 30-to-40,000 yuan--not bad for a peasant but less than you can earn growing nongrain crops or working off-farm. Since villagers generally can't raise this kind of cash, they tend to rent out their land, leaving the land concentrated in the hands of a few investors. The article reports that one farm in Xuchang cultivates 10,000 mu (1650 acres) and pays 10 million yuan in rent.

Bigger farms, however, are not necessarily more productive. Many of the investors are not knowledgeable about farming. Villagers observed that the 10,000-mu farm's fields resembled those of the old collective farms of 30 years ago. The article remarked that, "This is making the local government sweat."

One cadre worries that rents are getting out of hand, with some now up to 1200 yuan. He thinks rents should be capped at 1000 yuan. The official worries that risks are being underestimated. Prices tend to fluctuate, especially those for "economic crops" (e.g., vegetables, cotton). Contractors can lose many years of work in a single year when prices fall.

Rising land rents are also generating lots of disputes over land rental contracts. With land rents rising rapidly, many villagers want to adjust long-term contracts they signed. Several articles about land disputes have appeared in the media, apparently to apprise villagers that land rental contracts are binding and can't be changed because they're viewed as unreasonable by one party.

An article from Heilongjiang notes that in 2010 a Mr. Sun signed a four-year contract to rent 127.5 mu to Mr. Tian at 200 yuan per mu. After two years, Mr. Sun refused Tian's payment, demanding a renegotiation since rents had risen to 300-to-400 yuan per mu. They took their dispute to a court which found in favor of Mr. Tian, saying there was no reason to void the land contract.

Another case from Shandong Province was described in the Farmers Daily last week. Two villagers named Shi signed a 12-year contract with the village committee to rent 43 mu of land for a one-time payment of 30,000 yuan, which works out to 58 yuan per mu per year. (In Shandong many villages reserved a large plot of land to contract out to one or two farmers and divided up the rest among the village households.)

By 2011,  most of the villagers were irate over this "totally unreasonable" contract. Many villagers resented the seemingly sweetheart deal the Shi brothers had. Many villagers wanted to get the land for themselves and even physically attacked the Shi brothers. A new village committee tried to rescind the land contract and sign a new one with a Mr. Wang. The dispute was taken to court where many villagers and committee members testified that the contract with the Shi brothers had expired or was fake.

However, the court again found in favor of the Shi brothers, determining that the existing contract was still valid and there were no grounds to change it. The villagers would not accept the decision and demanded a retrial but the court again rejected their complaint. Perhaps we are seeing the advent of "rule of law".

The Farmers Daily followed up the Shandong case with an explanation of how stipulations in the rural land contract law support the court finding, probably as guidance to other officials handling such disputes. The role of land as an economic asset is a major adjustment for villagers and rural officials who have a long history of working things out among themselves based on consensus of what's fair.

Such disputes are common in the Chinese countryside where property rights were long ignored or abused. The vague definitions of boundaries and rights are now becoming a drag on economic exchange and creating a million festering village feuds and disputes.