China's support price program for rapeseed is duplicating the bizarre phenomenon that its cotton market has been experiencing over the past two years: the government pays companies to buy up the crop at a minimum price that exceeds the price of imported commodities. No one wants to buy the domestic commodity, so most of the domestic harvest gets put into a "temporary" reserve and stored while imports soar.
Rapeseed is traditionally the main type of raw material used for cooking oil in provinces of central China, mostly along the Yangzi River (in North America we know it mainly by the name of its Canadian variety, "canola"). It is estimated that domestic rapeseed oil now constitutes about 19-20% of China's edible oil consumption, while soybean oil accounts for 40% and palm oil 20%.
The support price program for rapeseed was put in place in 2008 to encourage farmers to keep planting rapeseed by ensuring that the price won't fall below a specified minimum. But each year the minimum has been raised. The support price was 3900 yuan per metric ton in 2010 and was raised to 5000 yuan in 2012. In May 2013 the support price was announced at 5100 yuan/mt. The government intends to stockpile 5 million metric tons of rapeseed--about half of the crop.
In many places, rapeseed competes with wheat for land. Wheat also has a support price and a much larger subsidy than rapeseed. The bigger attraction is that wheat only requires 2-3 days of labor per mu compared with 6-7 days for rapeseed. People in the industry say the support price has indeed prevented rapeseed planted area from falling, but the result has been a simultaneous stockpiling of domestic crop while imports of rapeseed and oil made from rapeseed soar.
Imported rapeseed oil is cheaper than oil made with Chinese rapeseed. According to one oilseed analyst, the price of Chinese rapeseed oil is 10,100-10,500 yuan/mt, but imported oil is 9800-10,000/mt. Imported rapeseed is better quality and has a higher oil-extraction rate. The government pays companies to process the domestic rapeseed into oil, bottle it and store it in warehouses. A CCTV 13 news segment displays oil processing enterprises and shows bottles of oil in storage.
Imports of rapeseed and rapeseed oil have been increasing since 2009. That year over 3 million metric tons of rapeseed was imported despite new inspection requirements and discovery of a "black leg fungus" on Canadian rapeseed intended to slow down imports. Imports of rapeseed totaled 2.93 mmt in 2012, up from 1.26 mmt in 2011. Imports of rapeseed oil also doubled in 2012, reaching 1.18 mmt. Imports for January-April of 2013 are up from the same period in 2012.
While imports soar, much of the domestic rapeseed crop is stored in warehouses after being processed into oil. According to a National Grain and Oils Information Center estimate, the stockpile includes about 300,000 mt from the 2009-2010 crop years and nearly 3 million metric tons from 2011 and 2012. Anticipating purchase of even more rapeseed starting this month, the government has been holding auctions of the stockpiled oil to clear out space for the new crop. But there has been little or no interest in buying the stockpiled oil since its price is high.
China's rapeseed-crushing industry has extreme excess capacity. There are over 500 "above-scale" enterprises with a total capacity of as much as 50 mmt. China produces about 10 mmt of rapeseed and imports about 3 mmt, so capacity utilization is roughly 25 percent. Large companies only operate 3-5 months of the year and small ones only for a brief period.
This situation is identical to that of the cotton market. The government has stockpiled large volumes of domestic cotton at support prices over the past two years while imports have soared. The government can't sell the stockpiled cotton and high prices are undermining the competitiveness of China's cotton industry.
There is also incentive to use the price support program to rip off the government. Some companies purportedly mix in cheaper imported rapeseed oil with domestic oil to sell to the state reserve. Regulations for this year's program expressly forbid selling the state reserve oil already in inventory, mixing in imported oil or cottonseed or palm oil.
Chinese officials are on a slippery slope with their price support programs. They may be counting on world commodity prices to bounce back and make Chinese commodities price-competitive again. If that happens--and they can sell off their stockpiles--they will look like geniuses. However, if global prices follow their historical pattern of falling as often as they rise, Chinese officials will face a choice of stockpiling commodities forever, erecting import barriers, or abandoning the price supports.