Tuesday, September 24, 2013

"Milk Famine": China Dairies Raise Prices

Chongqing City's Commerce News reports that Chinese dairy companies have been raising prices of milk products to cover higher costs due to tight milk supplies--another example of the sticker shock associated with "modern" agriculture in a crowded country.

Last week, Chongqing resident Li Jiehong told a reporter he had noticed the price for a 950-ml carton of Tianyou brand milk had risen from 10 yuan to 12 yuan. He observed that prices had risen on quite a few milk products offered by different companies. The Chongqing Commerce News reporter visited several supermarkets and found that prices on many pure milk products had been increased from 3-to-20 percent.

These simultaneous price increases by China's biggest domestic dairy companies come about six weeks after Chinese officials slapped fines on multinational dairy companies for raising prices. According to the New York Times, China's regulators were alarmed that prices for foreign-brand infant formula had risen 30 percent since 2008--an average of 6 percent a year.

The domestic company price increases for liquid milk this month are about 10-percent on average. The two biggest domestic companies--Yili and Mengniu--were the first to announce price increases.

Chinese dairy company managers say this month's increases are passing on higher costs of raw milk supplies. A Tianyou company manager said their company has taken steps to gain direct control over milk supplies and costs have risen. A Mengniu company official also said their price increases reflected higher milk costs.

A dairy industry analyst attributed the milk price increases to a "milk famine" this year. He estimates that the annual demand for raw milk is 43.5 million metric tons, but China has a 4-mmt deficit.

Over the last several years there has been little or no increase in raw milk prices while producers have been under pressure to adopt costly measures to guarantee safety and accommodate closer supervision. Consequently, small farmers have been dropping out of the industry. Companies have been setting up their own farms, but not enough to offset the lost supply from the exiting farmers.

A Mengniu spokesman said his company's raw milk cost had risen 12 percent this year. Ministry of Agriculture data shows that the average raw milk price for January-August 2013 was 6.4 percent higher than last year. The price in August was up 1.4 percent from July and 10.1 percent higher than a year earlier.

Dairy cattle need to eat grass--a lot of it--and China doesn't have many wide open spaces. Hillsides where cattle would graze in North America or Europe are planted in grain in China. The second lesson is that food safety is a costly good. Raising cattle in barns with professional managers, storing their milk in temperature-controlled tanks and daily testing is more expensive than keeping them in sheds in a thousand backyards and milking them into buckets.

Wheat Deficit in Gansu

China's arid northwestern province of Gansu is having trouble restocking its wheat reserves in 2013 due to a combination of bad weather and structural adjustment of agriculture. There was little rain in the spring, but heavy rains came during the summer wheat harvest, causing a decline in wheat quality.

With local grain supplies tight, grain officials were instructed to go door to door, set up buying points and other measures to procure grain. They also went to other provinces like Henan, Anhui, Shandong, and Xinjiang to buy wheat to fill their deficit.

Gansu's summer grain (mainly wheat) production fell 13.4 percent, or 255,700 tonnes (see table below). Overall procurement was down 36,000 tonnes. Since production fell more than procurement, that suggests that less grain was kept on farms for consumption or storage. State-owned companies formulated procurement plans, disinfected storage bins, and mobilized trucks, scales, conveyer belts, testing and drying equipment for the grain-stocking campaign.

Purchases by state-owned grain companies went up by 38,500 tonnes. State-owned companies accounted for one-third of purchases. In the seven prefectures where there was not much grain to purchase, officials bought 144,000 tonnes of grain from outside the province in order to restock provincial, municipal and county grain reserves and meet local consumption needs.

Gansu Province summer grain production and procurement, 2013
Item Amount Change Percent change
Summer grain output 1000 tonnes 2,163.9 -255.7 -13.4

Grain procured 1000 tonnes 1,600.0 -36.0 -2.2
--by state-owned companies 1000 tonnes 542.5 38.5 7.7

Wheat production fell in regions west of the Yellow River because land was shifted to "special agriculture." Wheat production was concentrated in three counties where farmers mainly grew wheat for their own consumption. Areas in Gansu that used to have surplus wheat to ship to other regions now are in deficit.

Thursday, September 19, 2013

Institutional Reform to Avoid Systemic Crisis

At a conference this week, Economist Wu Jinglian warned that China could face a systemic crisis if leaders fail to move forward with institutional reforms at this fall's key "third plenum" meeting on economic matters. He calls for leaders to remove institutional barriers by clarifying property rights for land and curbing the power of government in resource allocation.

Professor Wu voiced frustration that China has backtracked on market-oriented reforms during the last decade. At the "third plenum" of the 14th party congress in 1993, the leadership made an important push forward on market reforms and there was a lot of progress during the 1996-2000 five-year plan--presumably he's referring to the dismantling of many state-owned enterprises, privatizing urban real estate, and decontrolling prices and marketing.

Wu Jinglian thinks reforms stalled during 2001-05. He says the government has actually gained more power over resource allocation while the role of the market has weakened. As Wu describes it, "Each level of government is like a company, the party secretary is like the CEO, and the mayor is like the general manager." The local government decides what industry will be developed, what technology will be used, and what economic activity will be pursued.

Wu criticizes government leaders for their single-minded obsession with GDP growth. They spend with abandon and exploit resources to maximize GDP growth. Problems are now being manifest in a growing debt-asset ratio that threatens to explode into a systemic crisis. He warns that external and internal pressures could produce a meltdown. A crisis in one locality could quickly spread to other regions, says Wu.

Another manifestation of crisis, says Wu, is the abuse of the most basic resources that are fundamental to survival: land, water, and air. In the pursuit of GDP there has been no conservation or environmental protection.

The third plenum of the 18th party congress--expected to take place in November--will be a key meeting where leaders will set the road map for reform. Wu Jinglian hopes for institutional reforms that will put China back on track toward market-directed resource allocation.

Unfortunately for Wu--and for China--the force of inertia and years of sloganeering is strong. Another economist quoted at the meeting, Yu Yongding of the Chinese Academy of Social Sciences, recited the tired mantra of "technology" that has gotten China up this alley. Yu emphasizes scientific technology, product upgrading, "innovation," service industries, and utilizing communications technology to raise efficiency. Yu even calls for shifting "surplus rural labor" to urban employment to raise productivity. This is exactly the prescription China has been following for the last decade and it has carried the country as far as it can.

Tuesday, September 17, 2013

Curb on Banqueting Dents Food Industry Profits

In 2013, Chinese officials have been ordered to curb their eating and drinking at the public's expense. The impact on the food industry reveals the significant role of government consumption on an important service sector as the leaders try to install a consumer-driven service-oriented economy.

The new leadership of China has responded to the Chinese public's irritation over officials' expenditure of public funds on eating and drinking, travel, and use of public automobiles, known as "three public consumptions" (三公消费). In 2010, 61 central government departments reported a total of 9.47 billion yuan (about $1.5 billion) for expenses on cars (6.2 billion), foreign trips (1.8 billion yuan) and official banquets (1.5 billion yuan). The National Bureau of Statistics estimated the per capita "three public" expenses at over 5000 yuan, slightly higher than per capita rural income that year. Beijing's municipal government found it owned over 60,000 cars. This is probably just a fraction of the public consumption since banquets and gifts are often hidden in accounts as "office supplies."
Expenses reported for cars, overseas travel, and hospitality in 2010.

In December 2012, new Communist Party Secretary Xi Jinping chaired a politburo meeting where "eight regulations" were issued exhorting officials to get in touch with the common people, speak in plain language, stop abusing their use of automobiles and stop holding flashy banquets and ceremonies. As one saying goes, officials "spend the day at the meeting table and evening at the dinner table."

In June, an essay commenting on the curb on public consumption was published by a Beijing University professor who studies communist party administration.  The professor remarked that many restaurants that used to be crowded are now dark and silent, some struggling to stay open. With its patronage by officials dwindling, the Quanjude chain, famous for Beijing Duck, has opened a duck buffet. A high-end hotel and a Hunan-Hubei-themed restaurant chain have begun offering steamed dumplings and hot pot to make up for the lost business from the curb on banqueting. The Maotai Group, which sells Chinese liquor that is a staple at official banquets, revised its sales targets downward and is marketing its products to the general public.
General Secretary Xi Jinping's "Eight Regulations"

The National Bureau of Statistics reported a slowdown in food service industry growth in the first quarter of 2013, which their spokesman attributed to the crackdown on eating at public expense. Earnings by food industry companies in the first half of the year were off 10 percent. COFCO's earnings were adjusted down from 500 million to 300 million yuan, attributed to the cut-back in "three public" consumptions. COFCO's red wine business (also a common component of banquets in Beijing) was hit by both the curb on official consumption and competition from imported wine.

Gift-giving is so common and wasteful that shops for "gift recycling" are common in Chinese cities. These mostly deal in cigarettes and liquor, but high-end foods, fruit and tea are also commonly given as gifts by officials. This market has been "devastated," according to the Beijing professor. A Henan tea dealer said teas that used to sell for 3000-5000 yuan per 500g are now offered at 1500-2000 yuan and are not selling.

The curbs have not completely stopped the banqueting. The Beijing professor observes that banqueting has moved from restaurants into private dining halls. Officials still serve prawns and sea cucumber in their private dining rooms. They remove the labels from liquor bottles and serve their booze in mineral water bottles to hide their extravagance. This highlights the vast network of cafeterias and restaurants in government offices which also form a significant component of food consumption. These cafeterias are usually subsidized and divided by class--one for the common workers and a private dining room with high-end food for the senior officials. There are even special farms to produce food for high-level officials.

The professor criticizes the "amazing extravagance and waste" of China's public consumption, and he excoriates the different cafeterias for different ranks as a feature of feudal society. He praises officials in foreign countries who buy lunch with their own money and have no special requirements for food. He remarks that even the president in some countries lines up to buy lunch at a fast food restaurant.

He also connects the public eating and drinking practice to "unusual prosperity" for the restaurant industry and exorbitant prices for some foods. There are many products, such as Maotai and Wuliangye liquor and Great Wall wine that owe their success entirely to public sector sales for official banqueting. The professor doesn't mention more humble examples: many farmer cooperatives rely on selling gift boxes of fruit, tea, mooncakes and other products, probably to officials. These boxes can be seen stacked in the lobbies of office buildings at holiday times. However, the restaurant industry is now facing a painful transformation as it weans itself off the demand created by officials spending other peoples' money.

The apparent success of many premium food products is illusory, having been engineered by government and communist party connections. China has further to go than we realized to build a consumer-driven economy.

Sunday, September 15, 2013

No Milk on the Shelf in Shanghai

China is struggling to supply its consumers with milk. Replacing small farmers with big farms has been the main strategy to address dairy industry problems, but this strategy is undermined by soaring costs. Meanwhile, the small farmers who formed the foundation of the industry are disgruntled over their weak position in the supply chain.

According to a Xinhua News Agency report, a Mr. Wang in the Xuhui District of Shanghai complains that his local supermarket was often out of milk during the summer months. The article reports that milk supplies are tight during the hot summer months when temperatures exceed 35 degrees centigrade and milk output can fall by 40 percent.

This summer's seasonal shortage draws attention to the structural shortage becoming more apparent as China's demand for milk outpaces its output. According to China Dairy Association statistics, China's dairy cow herd stayed steady at 14.4 million between 2011 and 2012 while milk output went up a modest 2.3 percent, reaching 37.4 million metric tons (mmt). Imports of dairy products were 1.14 mmt in 2006 2012, up 26 percent.

Song Liang, an analyst with a Chinese dairy promotion organization, says many farmers have quit dairy farming due to low profitability, high risks due to poor disease control, and rising labor costs. Song says many dairy companies now are building their own farms to guarantee their milk supply but these farms only account for 15 percent of their milk supply. The cost of setting up and operating such farms is soaring. With standards increasing, Song estimates that the cost of setting up a company-operated dairy farm has soared from 10 million yuan to 40-50 million yuan.

Rising costs of feed and labor are one reason for the soaring costs. Skilled veterinarians and farm managers are scarce and many farms are bidding for their services. Access to a large tract of land to build a farm depends on "local land management." The dairy analyst estimates that new company-operated farms are barely offsetting the loss of output due to departure of small farmers.

An interview with a leading dairy scientist reported in Farmers Daily acknowledged that China's dairy industry has received a lot of negative attention since the melamine incident but the scientist notes that the industry has a short history of 20 years or less and development of a strong industry "doesn't happen overnight."

The Farmers Daily interviewer observes that the interests of dairy companies and individual farmers are at odds and asks how their interests can be aligned. The scientist describes the strategy of concentrating cattle in centralized production complexes while maintaining ownership by individual farmers as a "transitional stage" in the structure of dairy farming. The scientist implies that farms of a "reasonable scale" are the future dominant form of production but notes that farms have high investment requirements.

He then lapses into discussion of need for improvement of breeds, nutrition and milk per cow. He observes that China needs to integrate researchers with local extension stations. How will this extension system be staffed? Few universities have a program oriented toward practical veterinary training and few students or knowledgeable experts would consider working for low salaries in the countryside. Plus, as noted above many companies are bidding aggressively for their services.

An opinion piece in Economic Times boldly proclaims that organizing dairy farmers to protect "the interests of 1 million dairy farmers" is the crux of the industry's problem. He argued that the industry can't sustain itself on profits in processing and retailing--farms have a weak negotiating position versus companies and are consequently the weak link in the supply chain.

The Economic Times pundit praised the example of a union of dairy farmers organized in Shanxi Province. The leader of the alliance negotiated with the two largest dairy companies, gaining a significant boost in the purchase price for the farmers in the alliance. Reportedly, this story drew enthusiastic applause at a national meeting of dairy cooperatives and numerous dairy leaders have come to learn about his alliance and negotiation strategy.

The writer argued that subsidies don't address the fundamental problems in the industry. The main problem is to align the interests of producers and dairy companies while raising milk yields and achieving a suitable scale of production--a tall order.

Tuesday, September 10, 2013

Agricultural Transformation: Tripping Over the Grassroots

A steady stream of reports from the grassroots level indicate that China's transition from small-scale subsistence farming to commercial agriculture is not going well.

Officials from the Ministry of Agriculture's Office of Industry Policy and Law recently made a field trip to a major wheat-producing area of Henan Province and found that the new generation of commercial-scale farms face rising rents and other costs, cash flow difficulties, and don't get subsidies. Local officials say they're strapped for revenues and multiple programs for promoting investment in agriculture are uncoordinated and fail to reach the new-style commercial farm operations.

Local officials in Henan say they are under pressure to maintain grain output and increase the incomes of farmers, but these two objectives conflict, giving them headaches. In Wei County--the province's leading grain-producing county--a number of townships have launched programs to encourage production of horticultural crops that bring high returns to promote income growth. One township in Wei county, ranked as one of the top 100 in Henan, launched a melon-growing strategy in 2009 that reportedly brings net returns ten times higher than returns from grain production. Hundreds of farmers have built new houses and bought cars with melon profits. Surrounding areas took note and are also planting melons. However, melons are taking thousands of acres of land from grain production.

Officials in Wei County made grain production a "political task" and included it as a criterion for township officials' job evaluations. Officials in the county complain that they expend quite a lot of money, manpower, and materials in maintaining grain output, but don't get much financial support for it. They get financial transfers from the central government as a major-grain-producing county and a "poverty county", but their annual financial revenues of 500 million yuan are not enough to cover a year of school teachers' salaries.

The appearance of commercial farm operators in the countryside also threatens grain production since these farms are usually engaged in producing commodities with high net returns. For example, in 2009 a real estate tycoon rented 500 mu of land in Yangjin County to grow organic vegetables with plans to expand it to 5000 mu by 2015. Officials say the displacement of "traditional" subsistence farmers and income-growth programs make it harder to maintain Henan's grain output unless there are "tough measures."

The Ag Ministry's investigation in Henan suggested that the agricultural support system is not set up to serve new-style commercial farm operators. Local officials say there is rapid consolidation of farmland with 20 percent of land rented or transferred now. These commercial-scale farms have to pay rents of 1000 yuan per mu (about $1000 per acre) for land to bid it away from small farmers and nonfarm users. These rents are said to be higher than in more developed coastal provinces. The farm subsidy system is set up to distribute cash to villagers, and those who farm rented land say they generally don't get subsidies from the government. In Wei County, "large" farms and family farms get 50 kg of wheat as aid and a small subsidy for wheat irrigation, pest treatments and free spraying equipment, but they get no direct payment, general input subsidy or seed subsidies. The commercial scale farmers want subsidies, not higher prices. They worry that if grain prices are raised the villagers will want their land back.

These new commercial farms have much higher cash requirements than traditional small-scale farms that pay no rent and use their own labor. One farmer pays 800,000 yuan in rent annually, paying half before the wheat harvest and half after the harvest. They also have big cash outlays for chemicals and hired workers. The local rural credit cooperative--the main rural lender--organizes groups of borrowers who guarantee each other's loans but the credit co-op can only lend out 100,000 yuan at the most, not nearly enough to cover expenses.

Credit cooperatives only make short-term loans for production credit. For fixed asset investments Chinese agriculture relies heavily on government investment "projects" (项目). The Ag Ministry heard complaints that projects administered by different ministries are uncoordinated and waste money.
  • The Development and Reform Commission sponsors a 50-million-ton grain production capacity project 
  • The Ministry of Finance funds "comprehensive agricultural development" 
  • The Ministry of Land Resources has a land remediation program 
  • The water ministry has small-scale water management projects 
  • Agricultural departments have high-standard field construction projects 
It sounds like a lot of investment is going on, but a county official said these numerous programs are actually not very effective, describing them as "money to add soy sauce that can't buy vinegar" and "sprinkling black pepper." Each program has different specifications, requirements and criteria, and the county has difficulty coordinating them.

These investment programs have not adapted to the changing character of the countryside. They are implemented as village-wide programs coordinated by officials. But most of the villagers now view agriculture as a sideline activity to do in their spare time, so they don't have much interest in the programs, nor in maintaining the infrastructure after it is built. Meanwhile, the new-style commercial farmers who rent land are usually excluded from these investment projects although they are the ones who could benefit most from them.

China has what appears to be a massive crop insurance program, but the Ag Ministry's investigations in Henan found that crop insurance is not functioning well. The maximum indemnity if the wheat crop is a complete loss is 311 yuan per mu, but this doesn't even cover the farmers' expenditure on fertilizer and pesticide. Usually there is only a partial loss, so the payout is much less. Farmers think the potential payout is not worth the premium, so they don't want to buy the insurance. Insurance company personnel have little knowledge of farming, so they are unable to make accurate estimates of risks or losses. They have no good means of distributing funds to farmers scattered over the countryside.

While Beijing routinely reports massive spending on agricultural programs, the Henan investigation reveals the extensive problems at the grassroots that keep Chinese agriculture handcuffed. The institutional peculiarities--insecure property rights, virtually no formal banking system for farmers, reliance on government-led projects, and little vertical or horizontal coordination in government--prevent the sector from transforming itself into a modern industry. Instead, anachronistic arrangements designed for a medieval peasant-farming society are causing atrophy and waste in a country that desperately needs to feed its 21st-century cities.

Friday, September 6, 2013

Restaurant Profits Squeezed in China

According to China's Commerce Ministry, restaurants just barely made a profit in 2012. The profit margin was the worst for restaurants since 1991 (except for the unusual year in 2003 when everything closed during the SARS epidemic). Costs are up, sales growth is slowing and experts say China's food service industry is transitioning into a new, more competitive stage of development as the industry matures.

Restaurant sales were up 13.6 percent last year, but the growth has been slowing for three years in a row. The growth rate was 3.3 percentage points slower than in 2011. Growth also slowed during the preceding two years but the slowdown was less than 1 percentage point during those years. Expenses grew 14.2 percent. A Ministry of Commerce spokesperson described it as an "unprecedented" grim situation.

The slowdown is hitting both upscale and downscale eating places. A ramen noodle chain's sales grew just 3.7 percent during the first half of the year. Profits are down throughout the industry. Industry analysts say restaurant companies are focusing on improving operational efficiency at their stores, improving service and brand recognition. They are dialing back on the breakneck growth strategies pursued in earlier years.

High end restaurants are being hit by a severe crisis. Many are seeing double-digit decreases in profits. They are adjusting product structure, looking into adding hot pot and fast food, and considering mergers and acquisitions.

Restaurants are being hit from all sides. The slow economy and orders to scale back on official banqueting are curbing sales growth. Wages for unskilled workers are rising fast, as are rents, utilities and the cost of food items. Enforcement of food safety regulations boosts costs as it becomes more risky to cut corners by procuring "gutter oil" or meat from cheap, unsanitary underground butchers. Bans on selling waste to pig farms and gutter oil processors also eat into profits.

Tuesday, September 3, 2013

Grain Imports Fill Warehouses, Not Stomachs

In a speech/essay in August 2013, the head of one of China's leading commodity analysis groups argued that China's grain self-sufficiency status is not as grim as it seems because big imports in 2012 mostly went into warehouses to build up inventories. China doesn't "need" to import grain, said Shang Qiangmin, director of the China National Grain and Oils Information Center.

Mr. Shang acknowledges that imports of "grain" by China's official definition--cereals, soybeans and potatoes--hit 80 million metric tons during 2012, including 14 mmt of cereals and 58 mmt of soybeans. This brings China's "grain" self-sufficiency rate down to 87.7 percent, well below the 95-percent threshold the Chinese government proclaimed as the minimum for "food security."

Mr. Shang implies that this ratio is misleading because it is the ratio of imports to consumption that is important. Although there are no statistics on grain consumption, Mr. Shang insists that domestic production of cereal grains is still close to being in balance with consumption. (Soybeans are another matter--just 18 percent self-sufficiency.) Despite the surge in imports, he claims that China is still 100 percent self-sufficient in rice, wheat and corn. He says the cereal grains imported during 2012 were added to grain reserves. Mr. Shang presumably knows this because his organization is affiliated with the National Administration of Grain which has numbers on grain reserves.

These grain reserve numbers are a "state secret" and are not released to the rest of us. Thus, the rest of us cannot know the true state of the Chinese grain market. We must pay a subscription to buy Mr. Shang's reports so we can see the change in grain inventories shown in the balance sheets in their reports on the presumption that Mr. Shang's analysts have inside information on grain reserves. Actually, the detailed statistics on grain reserves presumably provided to Mr. Shang's analysts probably are no better than ours since the grain depots who report their inventories routinely hide or double-count grain. (See the recent news on widespread corruption in the grain reserve system.)

Mr. Shang claims that China is still 100 percent self-sufficient in rice, despite becoming the world's largest importer of rice this year. Imports of wheat during 2012 filled a temporary deficit in feed grains that has dissipated this year. Corn demand is weakened by the slow global economy and low sugar prices that discourage industrial processing of corn, the government's order to scale back banqueting, and this year's avian influenza outbreak. Shang is optimistic that technological improvements will boost corn yields to keep up with rising demand. He takes a jab at "organizations from exporting countries" that have worked to sell corn to China for many years with no results. He also pokes fun at people who have predicted big corn imports in China for many years but act "more like fortune tellers than scientists."

Mr. Shang also admits that China has had to sacrifice any hope of self-sufficiency in soybeans and vegetable oils to maintain self-sufficiency in cereals. He says in the 1990s no one anticipated how much soybean imports would grow.

Mr. Shang surmises that China's support-price strategy is now moving out of sync with a long cycle in the grain market. Since 2008 China has been boosting support prices to increase farmers' incomes and stimulate production. While world grain prices were on the rise, Chinese prices moved roughly parallel to world prices. But now world prices are falling while China's are still rising, and big gaps are appearing between Chinese and world prices. This is the main force attracting grain imports, acknowledges Mr. Shang.

Early Rice Output Up 2.4% in 2013

The National Bureau of Statistics announced that early-season indica rice production totaled 34.073 million metric tons in 2013. That was an increase of 783,000 mt or 2.4% from 2012.

Early rice is the rice crop that is planted early in the spring and harvested mid-summer, followed by another rice crop on the same land (called "late rice"). The early rice crop reflects the extent of double-cropping. This occurs only in a few southern provinces where it's warm enough to grow two crops of rice in the same field, one after another. Most of China's rice is single-cropped.

In recent years Chinese officials became alarmed that farmers were giving up double-cropping, either switching to a single crop of rice or leaving their fields idle. Here's a 2011 post on measures used to boost early rice production. Last year, agricultural officials launched a big campaign to revive double-cropping by setting up specialized farms to grow seedlings and transplant them.

Reflecting the importance placed on the early-season rice crop, the Statistics Bureau sent out a senior statistician to explain why the rice crop was up this year. He emphasized the role of policies. This year officials raised the support price for early rice by 12 yuan/50kg, more than for other types of rice. He emphasized a campaign by local governments to convince farmers to switch from single- to double-cropped rice, the rice-transplanting campaign, and mechanization that reduces labor costs and speeds up transplanting. In 2013 national early rice area totaled 5,791,900 hectares. NBS said that reflected an increase of 27,100 ha (.5%) from 2012. NBS estimates that the increase in area planted contributed 160,000-mt to the increase in production--not much but at least area didn't fall.

NBS estimates that most of the increase in production is due to yield increases. Rainfall was adequate, there was plenty of sunshine, warm temperatures and no major pest problems. In 2013 the early rice yield of 5882.9 kg/ha was up 108.2 kg/ha (1.9%) from 2012, contributing 620,000 mt to output growth.

Two provinces accounted for most of the growth. Hunan's output was up 418,000 mt (+5.1%), and Jiangxi's was up 278,000 mt (+3.5%). No indication of whether they can sell this rice since these provinces also are the main areas affected by cadmium contamination.

Monday, September 2, 2013

Caution on China's Rural Land Privatization

Chinese authorities are reportedly debating the possibility of privatizing rural landholdings as  part of their broader program of moving into a new phase of development characterized by urbanization and a shift to commercialized agriculture. Giving rural people full ownership of their land and freedom to use it as they see fit seems like a logical path. However, digging deeper, one finds that land privatization is not a simple matter in the context of rural China's jury-rigged legal, political and social institutional set-up which is riddled with ambiguities and potential for exploitation and dangerous outcomes.

China has many experimental initiatives underway with mechanisms for trading the rights to use land and securitize those rights to grant credit to farmers. Many of these integrate land consolidation with credit programs that extend short-term production loans to farmers secured by land use rights.Several areas in some of China's poorer regions--Ningxia, Chongqing, and Jilin--have been designated as "comprehensive reform" pilot programs that test out mortgage lending secured by the rights to earn income from rural land.  A trust company in Beijing is ramping up a business that packages use rights for large tracts of rural land and securitizes them. None of these experiments have actually privatized the ownership of rural land, but they may be seen as tentative steps in that direction.

An August 4 essay by a blogger calling himself Qiu Lin writes that rural land privatization is being pushed by the World Bank but its acceptance by Chinese authorities is still uncertain. He describes rural land privatization as an opportunity for farmers. He speculates that privatizing land will attract investors from cities and give farmers a chance to profit from their land's value. This will maximize the value of land and lead to its more efficient utilization. Investment will create jobs, small towns will spring up, rural people will move to urban jobs, and the gulf in development between rural and urban areas will be narrowed.

Qiu Lin acknowledges that some commentators worry that the mistakes of "old china" will be repeated by creating a new generation of landlords and penniless poor people. He argues that privatization should be viewed as part of the long-term retreat of the State's role in agriculture--the next logical step after the move from public to collective ownership in 1978. The blogger asserts that reforms are entering "deep water" where addressing rural problems is more urgent. According to him, many Chinese economists favor land privatization based on the predominance of private ownership in the U.S. and Australia--two highly productive countries. Following Deng Xiaoping's precedent, Qiu Lin argues that it doesn't matter if privatization is socialist or capitalist--the key is whether it promotes agricultural productivity which is still low by international standards.

An argument against land privatization appeared in the communist party's Red Flag journal in 2009--shortly after the above-mentioned October 2008 communist party meeting on rural land issues. Wen Tiejun, a prominent agricultural economist, argued that land privatization and property rights are an invention of European colonial powers that has never worked in developing countries. Wen insisted that a small-farm structure is indigenous to Asian agriculture. He argued that rural people must be able to move back and forth between city and countryside, earning money from both agriculture and off-farm employment. When they move to cities they must preserve their link to their land as a safety net to fall back on. He touts the wisdom of China's current land system by citing its absence of widespread poverty in contrast to the crushing poverty, slums and landless laborers in Brazil, Mexico, and India.

Wen Tiejun worries that a flood of urban capital into the countryside will marginalize the peasantry. He calls for measures to slow the flow of capital and calls for forming large scale rural cooperatives that will give farmers stronger negotiation powers over land and capital investment. He cites the post-World War II experience of Japan, South Korea and Taiwan as a model. (He implies that this is an inherently Asian model but doesn't acknowledge that all three of these places were under American administration when these systems were set up.) His call for big cooperatives and farmer associations seems to be at odds with the communist party's fear that large rural associations could become a political movement that would threaten the communist party's control. Indeed, while Wen invented the "san nong" (three rural) idea, his ideas on cooperatives are outside the mainstream of current Chinese policy makers who have kept farmer cooperatives small, focused exclusively on farming business, and politically inert. A 2013 speech by Wen Tiejun posted on several communist party sites criticized the government's current "agricultural modernization" strategy and chided authorities for pursuing an "American dream" in agriculture.

Other recent articles are critical of the push for rural land consolidation. The examples they give show that large-scale farms are not a panacea for Chinese agriculture and reveal institutional amiguities and conflict among different interest groups that are likely to undermine the privatization of land.

Some Chinese news media argue that expectations that a transition to large farms will boost agriculture are unrealistic. An August 28 article in the news weekly Minsheng Zhoukan claimed that 95 percent of large-scale farms in Bozhou--a district of Anhui Province--were losing money and facing bankruptcy. The author cites the example of an area known for its chives where the local government promised support and loans to encourage farmers, entrepreneurs and companies to consolidate hundreds of mu of land. However, the district ended up with a glut of chives they couldn't sell. Farmers were unable to pay back the money they borrowed to finance inputs for their large farms. Creditors seized one farmer's house, four vehicles and greenhouse. Some farmers fled the district to escape their loans; others went to work in factories to pay off the debts; and one former "model worker" and cooperative head allegedly tried to commit suicide.

The Bozhou farmers said that officials pushed land transfer schemes with no careful planning. Officials brought the two parties together to sign a contract, held a ceremony and then neglected the project. The only farmers doing well were those getting subsidized as "models." According to the article some officials poured money into a single farm to create a  carefully-crafted model farm like a "bonsai tree" for other farmers to see. But the majority of farmers lost money without the generous subsidies.

A February 2013 article, "Land Transfer Chaos", by a scholar in Wuhan sounded similar themes, also citing examples from Anhui Province. This author doesn't address privatization directly, but argues that giant, company-operated farms are undermined by hired workers who have little incentive to work hard and he reveals the clash of interests at the village level in land transfer schemes.

Like Wen Tiejun, the "land transfer chaos" author worries about a flood of urban capital into the countryside. The author claims nearly all the large farms are in fact commercial enterprises, mostly engaged in agricultural processing, sale of farm machinery and inputs. He cited a Xinhua News Service article reporting that companies had acquired 25 million mu of rural land by June 2012, an 84-percent increase from the previous year. According to the article, Han Jun of the State Council's Development Research Center says 20 percent of land transfers are made to companies.

The "land transfer chaos" author says operators of large farms expecting to reap huge profits have instead encountered losses and debt. He cites one farmer who rented 1100 mu (180 acres) and reasoned, "If [small] farmers earn 500 yuan from one mu, then I can earn 110,000 yuan if I can net 100 yuan per mu." However, several years later, this farmer had actually lost 1 million yuan.

According to the article, these giant farms face a principal-agent problem because they have to rely on hired workers who have no direct interest in the success of the farm. The workers' shirking results in lower yields per unit of land and high costs. The 1100-mu farmer cited above reportedly gets rice yields of 300 kg/mu compared with 500 kg/mu obtained by small-scale farms because the land is not managed as intensively. His crop failed on several hundred mu one year. One cadre told the author that village accountants calculated that the aggregate yield on 12,000 mu of land had fallen by 2.5 million kilograms after the land had been contracted out to large farms. The author presented these examples to demonstrate the superiority of the "family farm" model--farms of about 200 mu (30+ acres) that don't have to rely on hired labor.

This author revealed that there is conflict over land transfer schemes among groups with differing interests, and land rentals not always a voluntary transaction. Descriptions of land-rental always describe them as "voluntary" and "respecting the wishes of farmers." In practice, the "land transfer chaos" author discovered that village cadres go door to door convincing each family to rent out their land in a big land-consolidation scheme. Some farmers say they signed contracts to rent out their land after aggressive prodding from officials determined not to lose face. While the land transfer was "voluntary" on paper because they signed a contract, in actuality it was coerced. One farmer compared the recent mass consolidation of land in his village to the "Great Leap Forward" in 1958. Many farmers say they later had regrets and are waiting out the 7-year contracts to get their land back.

Officials present a different perspective. They are under pressure from higher-level officials to carry out land-consolidation programs and have to work morning to night trying to convince obstinate farmers to participate. Officials reveal that villagers are not a unified bloc. Many village residents have left to work elsewhere and have no interest in farming their land. Elderly people who have stayed home often cultivate the land of neighbors and relatives with no rent. By tending small plots of land and collecting remittances from relatives, these elderly people are able to live comfortably in the village. These are the ones who oppose land-consolidation programs since they are comfortable with the status quo. The migrants support the land-rental programs since they can collect rent from their land.

Both the Minsheng Zhoukan and "land transfer chaos" articles reported claims that officials never came through with promised subsidies and support for farms that consolidated land. When one indebted farmer in Bozhou asked the government for help, officials replied that the government is not a charity. Farmers in Bozhou complained that they paid crop insurance premiums but got no compensation when there were droughts and floods. The "land transfer chaos" article reported that Anhui farmers never got promised "awards" for consolidating farmland.

Experiments with land mortgages also point to the ambiguities in law that are likely to undermine the development of well-functioning real estate and credit markets. Following a 2008 communist party meeting on land policy (the third plenum of the 17th party congress), central communist party leaders were still saying that mortgaging land rights was still forbidden. However, within months land-mortgage experiments began to pop up in various places and the mayor of one Shandong prefecture endorsed mortgages of land-use rights in the news media. Less than five years later, mortgage experiments are proliferating and are praised in official news media. In short, this shows that the legal environment is uncertain and determined by the whim of Chinese leaders. What's illegal today may very likely be legal tomorrow and vice-versa. It's good to be flexible and pragmatic, but laws need to be firm and set by known processes in order to give investors and lenders confidence to make long-term contracts--critical to assets like land that yield returns to investors over 30 to 50 years or more.

These latter articles do not deal specifically with privatization, but they reveal that expectations are often unrealistic and rural China lacks a solid legal foundation to engage in smooth exchange of long-lived assets and associated long-term financing. In the "Asian model" touted by Wen Tiejun, the individual's interests are trumped by those of the wiser leader/elder. Thus, individual rights are seldom secure and transactions are often orchestrated by leaders and elders. Farmer "cooperatives" that appear to be egalitarian aggregations of small farmers are often in fact ruled by the interests of dominant village officials or agribusiness companies. As different factions form with clashing interests and grievances bubble, the reform of rural property in China looks like a dangerous game with no clear end game. Reform is complex and risky, but the longer the status quo of ambiguous "collective" ownership is maintained, the harder it is to reform it.

The bottom line is that the uncertainty created the ever-changing legal environment breeds the "get-rich-quick" mentality that pervades the Chinese economy. This is especially problematic for agriculture, an industry based on lumpy, long-term investment with returns that are recouped over decades, not months.