Calls for Reform of Grain Price Policy

China's agricultural policies are getting a lot of criticism for corruption and their role in rendering Chinese commodities internationally uncompetitive.  A reporter recently interviewed some farmers and summarized the response as, "While the minimum procurement price policy is not bad, the price is generally low and farmers' income is not high."

The National Development and Reform Commission recently bragged that it had raised the minimum price for rice 92 percent and the minimum wheat price 57 percent since 2008, and linked these price increases to the increase in grain output over the past six years. However, the NDRC also indicated last week that it plans to seek improvements in price support and subsidy policies to enlarge the role of the market mechanism, increase returns to farmers, and promote stable increases in grain output.

A Xinhua News Agency analyst named Ma Wenfeng said the minimum price policy doesn't benefit grain producers that much--the benefits accrue to middlemen who buy from farmers and sell to grain depots. A number of grain industry experts have pointed out that China is now importing about 10 percent of the grain it uses, which Ma says is directly related to the minimum price policy. The policy has raised prices above international prices, attracting imports.

The minimum price policy is also receiving criticism for corruption. The lightning rod for this critique was a suspicious fire at a Heilongjiang grain depot in May that occurred after an investigation team came to look into allegations of financial irregularities at the granary. The policy is also viewed as wasteful since the government spends 86 yuan on "management costs" for each metric ton of grain stockpiled grain held by depots.

State Council Development Research Center economist Cheng Guoqiang said at a grain industry conference last week that China has reached a critical point where the minimum price policy must be reformed. Cheng criticized the minimum price policy for distorting markets, warning that the government could end up stockpiling commodities at premium prices at high cost while imports pour in to the market. He called for adjustments in the policy that increase the role of the market and remove distortions such as a deficiency payment or revenue insurance approach.

Government propaganda linking the increase in rice and wheat

price supports to increases in grain production.

Grow Your Own Food or Eat "Lemons"

More Chinese people are growing their own food without pesticides and chemical fertilizer because that's the only way to avoid eating unwanted chemicals.

Many rural families have a small garden plot where they grow vegetables for their own family's consumption using no chemical pesticides and applying only manure as fertilizer. One grandmother in Jilin grows greens, potatoes, onions, fruit trees and keeps chickens that eat only rice bran, corn meal, wild grass and insects. She explains that the garden plot is her family's "protection area" where she can grow food for her six-year-old grandson and other family members that they know is free of toxic chemicals. She knows that neighboring farmers make heavy use of dangerous pesticides and there is no guarantee that food bought in the market is safe to eat.

Another farmer explains that vegetables grown with chemical fertilizer have no taste. Chickens raised on commercial feed lack their traditional flavor.

Even many urban people are raising their own vegetables and chickens, using open spaces around their apartment buildings or renting a garden plot in the countryside.

The news media are calling this the "new private plot" phenomenon (“新自留地”现象). Similar to the situation under collective agriculture, today's Chinese farmers use different techniques on their private plots and the commercial fields.

When China's farmland was put under collective ownership in the 1950s, rural families were allowed to retain a small private garden plot (自留地) they could use to grow their own food and fodder for their livestock. Big fields where grain and other commercial crops were grown were managed as collective land. Of course, farmers gave the most attention to their private plots and slacked off on the big collective fields.

After economic reforms in 1978, the large fields were divided up and contracted out to families to grow grain or other crops on a commercial basis--these commercial fields are known as their contracted land (承包地). The private plot era faded away with the demise of collective agriculture, but food safety concerns have resurrected the dual management phenomenon.

Small fenced family vegetable plots in the foreground; 

contracted land (rice fields) are in the background.

The private plot-commercial field duality has reappeared as food safety and health concerns have become more acute. Farmers withhold chemicals from their private plots which are reserved for their own family's food, but they use chemicals freely on their commercial fields since this produce will be eaten by someone else. A farmer in Shandong explains that he has to use chemicals on his commercial crops; otherwise the produce will be eaten by insects or fail to grow.

China's market for food is becoming a classic "market for lemons" as described in Economist George Akerlof's classic 1970 article. When buyers have incomplete information about the quality of products they are buying, good quality products tend to disappear from the market. The market becomes dominated by "lemons" (i.e. used cars that sellers know are apt to break down but buyers are unable to discern). There is no means of reliably verifying the safety of food sold in China's market, so "lemons" with toxic chemicals dominate while good quality food is produced at home and never enters the market.

Farmers can grow organic food without toxic chemicals and sell it at a premium to consumers who want to avoid the toxins. However, "cheating" is so rampant and certifications so unreliable that consumers can't trust food labeled as "organic" in the market. If they want organic food they have to grow it themselves or get it from a friend or family member they can trust.

The collapse of trust in China is undermining the fundamentals that are needed for an economy to function.

China Corporate Debt is the Problem

A commentary in the No. 1 Financial Daily newspaper says that international investors' concerns about China's government and "shadow banking" debt are misplaced. The real problem, says the paper, is corporate debt which totaled 6.5 trillion yuan at the end of 2012. The paper said corporate debt is the largest, fastest-growing, and most-risky segment of debt in China. Corporate debt is equal to 122-127 percent of China's GDP, a ratio that is double the 50-70 percent ratio in OECD countries. The paper called it a much more serious "hidden danger" than government or shadow banking debt.

The run-up in debt since 2008 results from heavy investment in fixed assets with low net returns. The debt is concentrated in real estate and construction sectors. The debt-asset ratio for companies listed as A-shares on China's stock exchange rose from 53 percent in 2008 to 60 percent now.

The debt of the largest companies has risen the fastest, more than 300 percent from January 2008 to June 2012. Large companies' earnings have also grown slower than earnings of smaller companies.

Vigorous investment created excess capacity that compounds the problem by reducing profitability and returns. Excess capacity is most serious in upstream heavy industries including steel, construction equipment, aluminum, coal, solar energy, and ship-building. According to the paper, corporate profits during 2012 were the lowest in several years and returns on investment have been less than borrowing rates over the past four quarters.

The article says the risk of a corporate debt crisis will increase for the foreseeable future. Much of the debt will mature in the next three years, but the article says pressure to make interest payments is greater than principal repayment.

Alfalfa and Dairy in China

Just like people, animals need a healthy diet to grow muscles, give milk or whatever. China's dairy industry neglected this basic fact when it began expanding by 15-20 percent annually during the early 2000s decade, and the result was undernourished and often diseased cattle that gave low quality milk. Milk was watered down and laced with melamine to fool protein tests and babies died, undermining confidence in the product that still hasn't been restored.

Now Chinese dairy farms and officials are paying more attention to the quality of feed for dairy cows. In 2012, the Ministry of Agriculture launched a program to boost production of alfalfa, a clover-like plant that is used primarily as a feed for dairy cattle. Compared with other types of hay/forage crops, it produces high yield and has rich nutritional content. On June 7, China's Ministry of Agriculture held an alfalfa development promotion activity in Jinzhou, Liaoning Province, to draw attention to the campaign.

At the promotion activity, vice minister of agriculture Gao Jibin observed that, "China's dairy industry is in a new stage of development, rising like a phoenix from the ashes" after the 2008 melamine crisis. He noted that the herd of dairy cattle has risen 17 percent since 2008 (but he also said milk output has increased only 2.5 percent), and he expects urbanization and population growth to lead to a doubling of dairy consumption in China by 2020.

Vice Minister Gao inspects alfalfa plants in Jinzhou (source: MOA).

Gao called the Chinese government's support of the alfalfa campaign since 2012 a major breakthrough in the dairy industry's recovery. Gao said alfalfa production in 12 key districts now was 23.6 million mu (1.6 million hectares) in 2012, an increase of 1.5 million mu from the year before. China's alfalfa production, said Gao, is now 500,000 metric tons, and he said output increased by 300,000 mt this year alone.

Gao said alfalfa raises milk output per cow, improves the protein and fat content of milk, reduces bacteria counts, and improves the health of animals by reducing acidosis and other metabolic diseases. Gao claimed that higher cow productivity from consuming alfalfa boosts farmers' gross income by 1,300 yuan per year and reduces veterinary expenses by 200 yuan. He the dairy industry's transition from small-scale scattered cow-raisers to "standardized" dairy farms is increasing the demand for alfalfa, and support for production of alfalfa aids the industry's "transformation."

The government is spending 525 million yuan (about US$ 85 million) annually on the alfalfa campaign. The government packages subsidies for seed and machinery purchases to encourage alfalfa production and probably includes other spending for infrastructure, company loans, and other expenses. The program has developed 500,000 mu (82,000 acres) of alfalfa "demonstration districts" and plans to expand it to 2 million mu by 2015.

Machines (presumably subsidized) harvest alfalfa (source: MOA).

An article on the alfalfa campaign in Shandong Province explains that the program is motivated by rising prices of imported alfalfa. An alfalfa dealer in Shandong says that the price of imported alfalfa was 3000 yuan/mt by the time it reached Binzhou in Shandong during 2011. (By comparison, corn was about 2000 yuan/mt at the time.) He said that domestic alfalfa was 1600-1800 yuan/mt. He also said he sold 520 mt of imported and 1360 mt of domestic alfalfa to 6 or 7 large dairy farms in Shandong and Jiangsu Provinces, and demand exceeds supply. The company grows alfalfa on its own 580 acres and also procures it from some local farmers. According to the article, many farmers in eastern Shandong have switched from growing cotton to alfalfa since expenses are lower and returns are better.

A 2008 article from China Agriculture University's grassland research center reveals that alfalfa production was crowded out by an expansion of grain output over the past decade. In explaining why alfalfa supplies were tight in 2008, the article reported that many farmers converted alfalfa fields to grain production after Chinese officials began urging farmers to plant more grain and started giving grain subsidies in 2004. The article said that alfalfa production plunged by nearly half during 2004-07. The decline in alfalfa occurred at the same time milk prices were soaring in 2007-08, prompting milk companies to expand production and sales as fast as they could. By implication, the campaign to boost grain output reduced feed available for dairy, and contributed to the melamine adulteration crisis in 2008.

From the perspective of sustainability of China's agriculture, growing alfalfa is a positive step. Like other legumes (including soybeans), alfalfa can take nitrogen out of the atmosphere instead of sucking it out of the soil. Mono-cropped corn, the crop that has crowded out legumes on large tracts of Chinese farmland, requires application of large amounts of nitrogen fertilizer.

The alfalfa campaign was probably prompted by the surge of alfalfa imports. In 2012, China customs statistics reported that over 450,000 metric tons of alfalfa was imported, a 58-percent increase from 2011. The 500,000-ton domestic production figure reported above by Mr. Gao slightly exceeds last year's imports. That's probably no coincidence--Chinese officials always get antsy when imports of any commodity surge rapidly, especially when imports exceed domestic production. (Officials launched an antidumping investigation when imports of distillers dried grains first exceeded domestic output several  years ago.)

In 2012, border quarantine officials in Jiangsu Province said they discovered a fungus called verticillium albo-atrum on a shipment of U.S. alfalfa which they claim is a threat to Chinese alfalfa, potatoes and vegetable crops. Chinese officials have demanded that the company that supplied the infected shipment no longer export to China and they have strengthened inspection of alfalfa shipments.

A Chinese seed supplier reports that some seed companies have had difficulties importing seed in 2013 due to a "policy reform" carried out by agricultural and forestry departments. According to the article, this has affected the supply of seeds during the April-June planting period in 2013 and the only imported seeds available are leftover inventory from 2012. The company claims to have more supplies soon to arrive at ports.

Watch out, Chinese officials. China's boom in alfalfa imports has come during a time of unusually high hay prices caused by severe drought in the United States over the last few years that has hit hay-producing areas especially hard. Some Americans have criticized U.S. export of alfalfa to China because it is, in effect, an export of scarce water from California.

In China, imported alfalfa is now about 1000 yuan more expensive than Chinese alfalfa now, yet Chinese dairy farms are clamoring for U.S. alfalfa. When rain finally comes to U.S. hay fields and prices fall, China's alfalfa imports will accelerate even more. At some point, competition from cheaper, better-quality imported alfalfa could undermine China's domestic alfalfa production campaign.

Removing Dead Pigs From the Food Supply

Chinese authorities are trying to removed diseased and dead pigs from the food supply. This blog has reported on a number of local crackdowns on illegal butchers over the last few years and the problem is getting more attention following the appearance of dead pigs in Shanghai's Huangpu River earlier this year.

In Zhangzhou, a small city in Fujian Province, authorities discovered a dead-pig-selling operation operated by two village ladies who were in charge of the "sanitary" disposal of dead pigs in their villages. According to allegations in a news media article, last August a lady named Lin began butchering and selling pork from the dead pigs she collected for disposal. In January of 2013 she joined up with another lady to sell dead pigs and they hired three migrants from Henan Province to work for them. They paid 0.2  to 1.6 yuan per kg for the pigs, butchered them, packed the pork in 20-kg boxes and stored it in a frozen meat locker. They quickly filled the 6,000-kg unit and looked for more storage. They sent the pork by truck to Guangdong, Jiangxi, Hunan and other places for final sale. Authorities accuse the ladies of selling 20-30 metric tons of pork before they were arrested in March.

Chinese agricultural authorities have estimated that the mortality rate for pigs is 3 to 5 percent. An executive with Wens Group--one of China's largest poultry and pork-producers--estimated that their farmers' pig mortality rate was 5 percent and exceeded 6 percent in the first quarter of 2012. One small-scale farmer raising about 150 pigs said that about 90 out of 100 of his swine reach the market--the other ten succumb to disease. The mortality rate is highest for young pigs at the weaning and nursery stages. During the pig diarrhea epidemic in 2011, the mortality rate was as high as 50 percent for young pigs.

In Qingdao, a reporter estimated that the surrounding region's 4-million-head annual production of hogs implies 120,000-200,000 dead pigs per year. He reports that farmers usually bury small pigs under 25 kilograms when they die, but they have a strong incentive to sell larger pigs over 50 kg to be butchered. The government subsidy for sanitary disposal is a flat 80 yuan per pig. Dead pigs can be sold for 1 or 2 yuan per kg, so the proceeds from selling a large pig often exceeds the subsidy. Diseased pigs that are still alive get a price slightly below the market price.

Farmers in the Qingdao area say fewer and fewer people are coming to buy the dead pigs and the reporter's interviews with ten pig dealers found only one who admitted buying dead pigs. However, burying the pigs is a costly headache. Regulations require them to be buried two meters deep, but few farmers want to go to that much trouble. The pit has to be lined with concrete to prevent the residue from leaking into the groundwater. There is also risk that rain will wash them away or they will be dug up by animals. Consequently, many dead pigs are thrown away or fed to dogs.

In Jiangxi Province, authorities have budgeted 67 million yuan (about $11 million) to subsidize disposal of sick and diseased hogs, but the subsidy is paid to slaughter facilities to dispose of dead hogs. Jiangxi reported slaughtering a record 10 million hogs in 2012 in 618 slaughter facilities.

Why Grain Statistics Are Inaccurate

The head of China's statistics bureau ordered statisticians to stop using methods that introduce innaccuracies in grain statistics. In doing so, he reveals some of the problems that plague China's statistical system.

On June 9, 2013, Ma Jiantang--commuist party chief and director of China's National Bureau of Statistics--was inspecting the summer grain crop in Anhui Province when he called for local statistical survey personnel to ensure the correctness and truthfulness of statistics on grain output. His comments implicitly reveal some of the problems with the statistics.

Actually, China's grain statistics are among the few agricultural data items that are estimated with statistically sound survey methods. Most agricultural data is still reported up from level to level using administrative methods. But for grain crops, the statistics bureau selects a national sample of villages and plots of land and sends out survey teams to collect cuttings from fields in order to estimate yields. Area planted is based on surveys of farmers' reported plantings in the sample villages which are benchmarked to total crop area measured in decennial agricultural censuses.

The main problem seems to be that the survey teams fail to strictly follow procedures and the National Bureau has no means of knowing how the survey teams actually collect the data. The survey teams are composed of provincial and local statisticians, town and village officials. Based on Mr. Ma's orders, it sounds like local survey teams adopt varying methods, either out of laziness or intent to bias the statistics.

Mr. Ma ordered sample survey teams to strictly implement scientific sampling and estimation methods in a unified and standardized manner. In other words, "Do it the way we told you to do it!"

Ma ordered the statisticians to take actual cuttings from actually measured sample fields without expanding or shrinking the number. In other words, "Don't just make up numbers because it's too much trouble to go out to the village and actually take samples. Record what the number actually was, not what you think it should be! Measure the field with a tape measure, not a bamboo rod!"

Ma said not to miss any grain on the stalks and carefully measure every grain; thresh the grain carefully; and don't take grain from another field to measure output from a sample field. In other words, "Don't be lazy about measuring the grain, and if all the stalks in a field were killed by bugs put down a zero--don't go looking for a 'better' field as a substitute!"

Ma told them to carefully dry the grain, accurately measure the moisture and weight, and make reasonable estimates of losses based on local practices in harvesting and storing grain. In other words, "Don't record an overestimate of the weight of wet grain and don't forget to deduct the grain that falls on the ground and gets eaten by rats when it's shoveled into bags!"

Mr. Ma said to follow strict regulations in auditing and reporting data up to the next level. In other words, "Don't pad the numbers to make the local officials look good or to qualify for subsidies!"

Ma Jiantang's orders are a reminder that procedures are rarely carried out as they are written. While the leaders may have devised "scientific" methods learned from western "experts," they rarely have any control over how procedures are implemented on the ground by people who have a grade school education or who have an interest in manipulating the data. China's "scientific" approach to development is rarely scientific in actuality since one of the foundations of science is strict standardized procedures. Standardization is antithetical to Chinese society which is based on the "hills are high and emperor is far away" maxim that has always conferred flexibility on local officials in implementing the "emperor's" orders.

The implicit acknowledgement of the statistics' lack of accuracy and truthfulness will come as a surprise to Mr. Chen Xiwen, the Chinese communist party's top rural policy advisor. In 2008, Mr. Chen felt compelled to assure the world that China's grain statistics are true and reliable because they are based on scientific survey methods.