Monday, December 30, 2013

Reserves Get 32% of China's Grain

According to a news report, Sinograin--China's State-owned grain reserve corporation--purchased 100 million metric tons of grains and vegetable oils during the first 11 months of 2013. That total was reported to be equal to 32.6 percent of grain purchased by all enterprises, the highest proportion in recent years (the percentage excludes grain used on farms). The report attributed the high proportion purchased by the reserve corporation to an effort to support farmers income and maintain production incentives. Authorities have stockpiled grains and oils to support prices this year following a big domestic harvest, with soft demand and global prices plunging for most grains and oilseeds.

The purchases include the following:

  • 36.36 mmt in policy-style purchases under minimum price and temporary reserve programs to "stabilize market supply"
  • 12.7 mmt in interprovincial transfers of grain (mainly from the northeast to southern provinces), reported to be the largest amount ever
  • 4.12 mmt of imports to replenish reserves
Sinograin's purchases also include grain and oils purchased to rotate reserves, but the amount was not reported. The figures were announced in a speech at an annual meeting on grain reserves held in Beijing, December 24-25.

While Sinograin was lauded for its role in carrying out the government's market intervention, the company also has been prodded to clean up its act. Most of the meeting focused on reforms to reduce waste and address corruption issues. This has been a general theme of the Chinese government's work this year, but Sinograin is a rectification target due to incidents of abuse and corruption at provincial and local grain depots under Sinograin's management. The article mentions that perpetrators of a suspicious fire at a grain depot in Lindian, Heilongjiang Province last May "have been severely dealt with." Subsidiary companies gaming the system and failing to implement State policy will be "resolutely investigated and violations resolved." The number of independent grain depots has been consolidated and supervision has been strengthened. The chairman of Sinograin promises that strict corporate governance will be a priority in 2014.

Sinograin ran out of storage space for grain this year. The government ordered 2 mmt of new storage space and it was built in three months. Standards for warehouse construction were raised this year, specifically to resist fire hazards (probably a reaction to the Heilongjiang fire). 

While China's new leadership purportedly is launching a new market-oriented era where prices play a deciding role, the government's grain reserve system is increasing its role in the grain market. The reason is because authorities only want grain prices to decide resource allocation when prices are high. While the new leadership is encouraging growth of the private sector, state-owned companies are still viewed as vital tools to carry out the communist party's policies and strategies.

This year's stockpiling and associated corruption also echoes a similar phenomenon in the 1990s when grain stocks became so huge that the government subsidized exports and the creation of ethanol and other industries to use it up. Other countries' grain exports to China dried up during that period.

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