China Cooking Oil Prices 2-year Slide

With plentiful supplies of soybeans worldwide and weak demand, China's cooking oil prices have been falling for the last two years.

A Hangzhou newspaper reports that a five-liter bottle of soybean oil is under 30 yuan (about $4.90). A supermarket procurement officer estimates that retail prices in his store this December are down 40-percent from a year ago.

Cooking oil companies have been running frequent promotions with bright stickers on shelves and posters. They give away a small bottle taped to a large five-liter bottle. Early in 2014 the free bottles were 300 ml, but now companies are giving away 700 ml bottles. The supermarket procurement manager says the two biggest cooking oil companies have had two price cuts this year--one in April and the second in October--each about 10-percent.

The supermarket manager says the decline in prices is linked to declines in soybean prices on the Chicago Board of Trade. According to the National Grain and Oils Information Center, the average unit value of soybean imports fell from 3417 yuan/metric ton in September to 3268 yuan/mt in October, a 4.4-percent decline in one month.

National average prices from China's National Bureau of Statistics show that the decline in retail soybean oil prices has been more pronounced than declines in rapeseed and peanut oil prices over the past two years.

Source: Dim sums blog analysis of data from National Bureau of Statistics.

According to the Hangzhou newspaper, the unit price of imported rapeseed oil is down 28 percent from a year ago, due to a good harvest of canola in Canada. Imported rapeseed oil costs 6200 yuan/mt, much lower than the price of domestic rapeseed oil in Hubei Province of about 8250 yuan/mt. The Hubei price is down 1000 yuan from last year. The newspaper comments that the supply of vegetable oil exceeds the actual demand in the market. 

Supermarket procurement officers told the Hangzhou newspaper that prices of high-end oils like corn and olive oil have not fallen as much. Most of the sales volume is in mid-to-low-end soybean oil, mixed oil, peanut and sunflower oil. 

The National Grain and Oils Information Center reports that volume of soybean imports for January-October totaled 56.8 million metric tons, up 13.75 percent from the same period in 2013.

Chinese Swine Industry's "New Normal"

A swine industry meeting held by Shuanghui Group (the company that acquired Smithfield Foods in 2013) this month discussed the "new normal" for China's swine production. The era of massive expansion and big profits is over; now the industry needs to consolidate, cut costs, adopt new concepts of environmental protection and biosecurity, and develop a self-sustaining supply of breeding stock.

"New normal" is a reference to President Xi Jinping's declaration of an era of slower but higher-quality GDP growth. An official from the Luohe City animal husbandry bureau said the "new normal" for the swine industry means thin profit margins and slower growth. The industry should not expect a return to big profits. Instead, the industry will need to restructure and producers should focus on controlling costs, develop environmental protection concepts, promote farmer cooperatives, and stick together "for warmth" to increase their say over prices.

Panel discussion at conference on the "new normal" for China's swine industry.

The chairman of Shuanghui's livestock-farming subsidiary company sounded a similar theme. He described 2014 as the Chinese swine industry's worst in the last 15 years. With downturns and volatility likely to remain common, he said feed cost-control, search for alternative raw materials, improved productivity, and reductions of other expenses are the "prescriptions to get the industry through the winter." He suggested Chinese farms will increasingly integrate their operations by producing pigs from farrow to finish and sell their own pigs (instead of selling to itinerant brokers and traders).

The speeches sounded a theme of improving quality and controlling cost. A professor raised concerns about the spread of disease and their increased complexity over the past 15 years. One speaker admonished the industry to get beyond putting inspectors and stations in place--presumably for disease control--to adopting a scientific approach to controlling disease. Another speaker said disease control lacks a scientific foundation and criticized farmers for going through the motions of disinfecting facilities and vaccinating pigs on schedule. Instead, farmers should get beyond formalism to think about what they are doing, choose proper disinfectants, and adapt methods to the actual situation on-farm.

Breeding was another common theme. Ironically, while China produces half the world's pigs and was the earliest site of domesticated pigs, the industry today relies on imported breeds. A Shuanghui official said the industry needs to break the cycle of importing genetic stock, propagating, selling pigs, degraded quality, and then starting over again with more imports of genetic stock. The Shuanghui official said his company has a plan to bring in foreign breeding stock to develop native Chinese "brands" (breeds) of pigs. (In February, Shuanghui imported 550 breeding pigs valued at 8 million yuan from Denmark.)

Shuanghui's Wandong breeding farm in Henan Province.

The meeting was held in Luohe City, the location of Shuanghui's headquarters, with about 200 attendees from swine production companies, pharmaceutical manufacturers and municipal animal husbandry and veterinary officials. It was not a nationally prominent meeting, but the discussion reflects an important turning point for China's swine industry. Like the broader Chinese economy, the swine industry is no longer growing at a breakneck pace, and overnight riches are a thing of the past. Now the industry is settling down to figure out how to manage effectively and become efficient.

Aussie FTA and Chinese Dairy Imports

The China-Australia free trade agreement will gradually reduce tariffs to zero on Chinese dairy imports from Australia. This follows a 2008 China-New Zealand FTA that contributed to a New Zealand dairy-export boom. A November article in a Chinese publication, Economic and Nation Weekly, asked whether the competition from imports would pressure the Chinese dairy industry.

China's current tariffs on dairy products are mostly 10-to-15-percent, so the tariff reductions in theory could increase imports that would reduce the market share of Chinese companies. The low price of imports is expected to put downward pressure on domestic prices for Chinese companies.

Source: China customs data analyzed by dimsums.blogspot.com

In fact, China's dairy imports from New Zealand began their explosive growth immediately after its FTA with New Zealand took effect in October 2008. Interestingly, the FTA coincided with China's melamine adulteration crisis (test results showing infant formula was adulterated were released by Chinese authorities in September 2008). Dairy imports from other countries have also risen since 2008, but the dramatic growth of imports from New Zealand suggest that the FTA was a driving factor.

Industry experts point out that Australia still has a small share of China's dairy imports--about 10 percent for milk powder. They also point out that there are a diversity of products. European countries tend to sell finished products like cheese to China, while New Zealand mostly sells milk powder used to manufacture dairy products in China. One industry expert asserts that prices of final products in the Chinese dairy markets are still set by a few large domestic companies.

Could Chinese investment lead to growth in Australia's share of China's dairy imports? After the Australian FTA's announcement, China's New Hope Group announced plans to invest AU$ 500 million in Australia's food and agriculture with initial plans including a large dairy farming project. A New Zealand trade office representative told Economic and Nation Weekly that Chinese companies have been investing in New Zealand dairy for five years. In November, China's largest dairy company, Yili Industrial Group, announced a RMB 2 billion (NZ$ 400 million) investment in New Zealand, said to be the largest China-NZ investment ever and the world's largest integrated dairy production base.

Both New Hope Group and Yili Group say they have strategies to invest in a global supply network to meet Chinese consumers' growing demand for dairy products. An official from another Chinese dairy company, Flying Crane, said Chinese companies are preparing for the future by developing partnerships with foreign companies to gain access to technology, develop international brands, and cut costs.

The expansion is not limited to Oceania. Also in November, Yili announced a plan to invest in a US$ 100-million dairy processing facility in Kansas in partnership with Dairy Farmers of America, Inc.

An official from the Chinese dairy industry association worries about China's exposure to global price fluctuations. He calls for establishing a national milk powder reserve that he thinks could be used to stabilize Chinese prices.

Chicken Plant Blocked by Water Quality Concerns

Local environmental authorities have blocked construction of an industrialized chicken complex planned for a rural county in China's Shaanxi Province. Since when do environmental bureaus in rural counties block big-money projects backed by the county chief? Is this China's "new normal"? Or has the company put the project on hold until the poultry industry recovers?

According to a December 2, 2014 report from China's Daily Business News, the country's largest feed manufacturer, New Hope-Liuhe Group, planned to invest 860 million yuan (about $40 million) to build a feed-chicken industrial complex in Fufeng County in Shaanxi Province, about midway between Xi'an and Baoji city. According to the county government's description, the project was to include a feed mill producing 300,000 metric tons of feed annually, a hatchery to supply chicks to farmers, a model commercial chicken-farming base, a slaughter plant that could process 36 million chickens each year, a company to guarantee loans for farmers, and a processing plant to make health supplements. This was the biggest investment attracted by the county government, the head of the county's communist party committee strongly endorsed it and promised policy support and guidance.

Daily Business News reported that the site selected for the slaughter plant was rejected by the county environmental protection bureau because of its potential effect on water quality in the Wei River. The exact reason is not entirely clear. The site was too close to water-monitoring equipment in the river. If I understand correctly, the treated effluent from the plant would not be diluted enough for the water to meet quality standards. A spokesperson for the feed company gave a conflicting explanation, saying the site was turned down because it was too close to the highway on one side, and too close to a village on the other side.

Since the rejection 20 months ago, the environmental protection bureau has not received a new application from the company for a site approval. Company officials say they are still looking for an alternate site, but none has been found. They say they are no longer promoting the project. The slaughter plant was central to the project. The feed mill has already been built, but with no slaughter plant the feed will have to be sold elsewhere.

This news that a county environmental protection bureau blocked a projected backed by the county chief is remarkable. China's environmental protection authorities are known for going along with authorities on investment projects. Normally a work-around can be found, such as moving the water quality monitoring station upstream.

Or, maybe the project is no longer feasible. Chicken demand went south after two avian influenza scares the last two year and feed prices are sky-high, so maybe environmental regulations are an excuse to cancel an unprofitable project...

The story brings into focus the conflicting priorities of the current Chinese leadership. On one hand, they are saying that they will transition from single-minded pursuit of GDP growth to a better quality of life for citizens, including attention to environmental protection. On the other hand, the authorities are beating the drum for "modern agriculture" and "agricultural industrialization" and concern about food safety is pushing poultry production toward such company-controlled fully-integrated projects like this.

If such a project can't be built in China's Shaanxi outback where officials are still eager for investment, where can it be built?

Chinese Rice Mills and Underground Finance

A Jiangxi Province newspaper recently told the cautionary tale of a rice mill owner who disappeared after his side business as an underground lender got him deep into debt to family and friends. The story appears to be a warning about the dangers of underground lending, but it illustrates how China's Ponzi-style economy is unraveling.

"Mr. Li" got into the rice-milling business in 2009 when he invested several hundred thousand yuan to buy some milling equipment. He was "instantly transformed from farmer to factory boss."

In 2011, he built a mill using a 2-million-yuan loan that was secured by his inventory of unprocessed rice. The debt kept spiraling. During 2012-13, he borrowed 10 million yuan from several banks, but rice-milling business started running into trouble as the Chinese economy slowed.

The rice mill wasn't generating enough cash to cover his daily expenses, so Mr. Li became an underground lender in 2013. He lent 8 million yuan to a businessman from Zhejiang Province at an interest rate of 5-percent per month. He raised the money largely by borrowing from family and friends.

For four months, the Zhejiang businessman paid the interest promptly, but he disappeared when he got into financial trouble and still owed Mr. Li the 8-million-yuan principal. Mr. Li still owed his family and friends, and he himself was effectively bankrupt. If he sold his factory and equipment, he thought he could only raise about 2 million yuan. His grain inventory was already pledged as collateral for bank loans. He was 10-million-yuan in debt. This year, the court seized his factory and warehouse to pay his creditors.

Mr. Li himself went into hiding. He couldn't go home because he owed so much money to family and friends. The Jiangxi newspaper says there are dozens of such rice mill bosses who have disappeared because their cash chain broke down. Because rice-milling generates low returns, many bosses got into underground lending. The Jiangxi newspaper chastises these rice bosses for using their rice-milling business to borrow money for underground finance--"using money to make money."

A bank worker confirmed that many rice mills borrow money secured by inventories of rice and guaranteed by a third party company. The Jiangxi newspaper explains that the third party guarantor is responsible for the loan if the rice mill can't repay. If the guarantor doesn't come up with the money, the bank is stuck with the loan.

Another journalist visited a Jiangxi county in August and found that 42 of the county's 105 rice mills  had shut down since 2012. With little cash and low profit margins, small and medium mills had no money to pay workers or buy unprocessed rice. Many were using family labor to mill small quantities held in inventory to keep supplying their loyal customers. The journalist gave an example of a mill that invested 20 million yuan to expand, but was only generating a few hundred thousand yuan in profit.

It's beginning to look like China's booming economy was largely a giant Ponzi scheme propelled by reckless bank-lending ordered by the government to recover from the 2009 recession. Chains of debt were sustained by one-way bets on real estate, commodities, and the exchange rate. The system is breaking down now that the one-way bets have disappeared.

Chinese Farmers in Russia Hit by Ruble Crash

Chinese farmers growing crops over the border in Russia have been hit by the fall of the Russian currency. This year Chinese farmers are bringing most of their Russia-grown crops back to China instead of selling them in Russia.

There are said to be 70 Sino-Russian cropping, livestock, and agricultural processing projects covering 400,000 hectares in Russia. Over the past decade, there has been a growing stream of Chinese farmers crossing the border to grow crops in Russia. Heilongjiang, Jilin and other provinces have reportedly invested US$ 200 million in Russian farms.

Most of the farmers are from the state farm system in Heilongjiang Province where land is scarce and the increase in mechanization has reduced the need for workers. Across the border in Russia's far east they can rent land much cheaper, the soil is good, and they can farm huge farms with large machinery.

The Hulin Eastern Star Farm has a 20,000-hectare farm in Russia where they grow 20,000 metric tons of soybeans and 80,000 tons of corn. The farm manager says the price in Russia will be 400-500 yuan less than the Chinese price this year, so they will send 95 percent of their produce back to China to avoid losing money.

Bringing the crops back to China is costly. It involves a long journey by truck, tariff, taxes, and inspection. Chinese border authorities require the grain to be packed in bags, adding more cost.The Chinese soybean price is nearly double the price in Russia, so farmers say it's profitable to send the crops back to China even with the high costs.

The head of the Heilongjiang soybean industry association estimates the province's soybean output to be about 5.8 million metric tons this year. The Chinese production of soybeans in Russia is estimated in the range of 20-to-30-thousand metric tons, so he's not worried that the influx of beans will put pressure on Chinese prices.

At the Suifenhe border crossing, a transit area for grain from Russia is busy. The most popular crop is soybeans. People in Heilongjiang estimate that 90 percent of the soybeans grown on Chinese farms in Russia will be brought back to China this year.

China's "Farm Diplomacy"

Chinese President Xi Jinping always makes time for rural visits during his trips abroad. Premier Li Keqiang has been featuring agricultural investment and opening trade with new partners in his trips abroad. This is part of China's "farm diplomacy" which elevates agriculture to an important role in foreign policy.

A propaganda piece from the official Xinhua news agency reviewing Xi Jinping's Latin American visit during July 2014 introduced the "farm diplomacy" strategy. Chairman Xi has visited an Argentine ranch, brought seeds along on a visit to Fidel Castro's family hacienda, had coffee at a rural home in Costa Rice, visited a cattle farm in Australia, inspected a farm in Ireland, attended a tulip exhibition in the Netherlands, and drove a tractor in the United States. When he visited the United States as vice president he insisted on holding a meeting on agriculture in Iowa where he got reacquainted with a farm family he had previously visited in the 1980s.

Xinhua dubs this "farm diplomacy" (农庄外交) and asks, "With such a busy schedule, why does Xi Jinping always make room in his schedule for visits to the countryside?" 

First, Xinhua explains that Chairman Xi has a deep appreciation for the common people and the countryside as a result of his years in northern Shaanxi Province as a  young man. Second, Xi is "preoccupied" with how to improve the lives of rural people and develop the countryside. Says Xinhua, Xi has made agriculture a priority in each leadership position during his postings as municipal and provincial leader and now as China's new leader.

Xi has made agriculture an important part of China's foreign relations. Xinhua says all the countries Xi visits ask him to taste their food, hoping that China will import it. Agreements on agriculture are an important part of China's relations with other countries, says Xinhua. Since agriculture is a topic that all people can relate to, Xi's countryside visits build rapport with foreign hosts.

Xinhua lays it on thick with language that sounds like Mao-era propaganda:

"Land is the mother of all things, the source of hope, the root of friendship. Global thinking and love for the land is the commonality of many peoples, love of the land reflects our great national identity."

"The magical land brings forth the golden friendship between China and the world. The profound meaning of Xi Jinping’s 'farm diplomacy' is becoming a brilliant chapter in China’s diplomacy."

An August propaganda article endorsed outbound investment in agriculture by Chinese companies and reiterated Xi's agricultural priority in diplomacy. According to Farmers Daily Xi Jinping said, "Pushing forward ‘agricultural going out’ is beneficial for preserving national food security and it can serve the nation's diplomatic strategy.”

Establishing a more open economy was one of the general principles espoused in the 2013 "third plenum." The communist party's 2014 "number one document" on rural policies called for raising "the level and the quality of external openness in agriculture." Xi Jinping also endorsed a "new" food security strategy as top priority during 2014. The strategy acknowledges the inevitability of imports playing a significant role in China's food supply, and it advocates taking the initiative and gaining as much control over the flow of imports as possible. Auxiliary objectives are to increase the number of countries supplying imports (giving China more bargaining power) and for Chinese companies to control the entire supply chain for food imports (ensuring more profits flow to China and that Chinese companies dictate prices).

The Chinese strategy is to intertwine agricultural trade, Chinese investment, and diplomacy. China has a long history of using agricultural projects--mostly rice demonstration farms--as a diplomatic tool in Africa and Southeast Asia. Now China is dangling promises of agricultural trade and investment to achieve its food security goals and win new friends.

The strategy has been evident in outreach to Eastern Europe where Premier Li  has included agriculture alongside infrastructure and energy as targets for Chinese investment. In December 2013, Li struck an agreement to import cattle and pigs from Romania and signed an agreement for bilateral agricultural cooperation. A similar deal was reached with Serbia. China is holding an annual agricultural trade forum with central and eastern European countries.

This mixture of commercial and diplomatic objectives makes it hard to figure out just what China is up to. Many of these deals don't seem to have much potential impact on agricultural trade. For example, Romania is a net importer of pork, yet it is expected to supply China with 3 million pigs. One of China's objectives is to expand the number of suppliers for corn and other commodities. Peru was added to the short list of countries eligible to export corn to China, but its exports are inconsequential. According to customs statistics, China hasn't gotten that much corn from Ukraine and Bulgaria this year. Ukraine may default on 20 percent of its promised corn shipments to China this year. So, it seems likely that diplomatic objectives are behind many of these deals.

The "farm diplomacy" game may divide potential allies that might challenge Chinese agricultural support or protection policies. Agricultural trade baubles may influence free trade agreements or undermine coalitions that might challenge China at the WTO. The prominent role of investment may tie trade opportunities to a country's willingness to welcome Chinese agricultural investors. Entering the EU through the Bulgarian back door may open up other opportunities.

Xi does seem to have a genuine personal interest in agriculture. His dissertation for his doctorate in Marxist education at Tsinghua University was on agricultural marketing. (Whether he actually wrote it or not, he probably chose the topic.) His dissertation also featured an ambivalent approach to markets: use markets to distribute farm products but make sure the government has a firm grip on those markets. As President, Xi seems to be exercising a similar approach. While last year's "third plenum" called for the market to have a "decisive role," agricultural trade will increasingly be decided around government conference tables.

China Needs to Test Domestic Corn for GMOs

For more than a year, Chinese border officials have been rejecting shipments of corn containing any trace of unapproved genetically-modified strains. No GMO corn has been approved for planting inside China, but there are indications that production of unapproved GMO corn has quietly spread despite crackdowns over the past four years. If Chinese officials were really serious about keeping unapproved GMOs out of their food system, they would test domestic corn as well.

Chinese corn prices are more than double the price in the United States, but the GMO issue is a barrier to imports from all the leading exporters--the United States, Brazil and Argentina. Consequently, Chinese traders are scouring the globe for other cheap feed ingredients.

On November 18, 2014 AQSIQ, China's agency for inspection and quarantine, posted an online Q&A where Chinese trading companies peppered an AQSIQ official with dozens of questions about importing corn, sorghum, and barley. One trader was told that he can't import corn from France, and no, he can't process it into cattle feed and import it either. Another was told that he can only import corn from Russia if a Chinese company controls the Russian farm and processes it near the border. Traders asked where they could find approved corn-exporters from Ukraine and Thailand. A number were interested in importing sorghum from India and Australia, and barley from Ukraine and Australia--both for feed and for making liquor and beer. AQSIQ said that sorghum cannot yet be imported from Argentina because the risk assessment has not been completed [the final agreement for Argentine sorghum access was signed about a week after this Q&A].

One odd question posed to the AQSIQ official alleged that GMO corn is now widely planted in parts of Liaoning Province and is rapidly displacing non-GMO varieties. According to the "questioner," investigations in a number of Liaoning counties found that seed dealers surreptitiously sell genetically modified corn seeds, even though GMO corn is banned by the government. He claims that GMO corn sells for a better price because it can meet buyers' standards. In fact, he claims that government reserve depots will only buy GMO corn. He claims that these factors are pushing non-GMO corn completely out of the market in some places.

AQSIQ's response was to contact the State Food and Drug Administration or Ministry of Agriculture.

A blog post from July 2014--probably by the same person--goes into more depth on the Liaoning complaints. The post, "The investigation that got the premier's attention," alleges that seed dealers have been selling GMO corn seeds, while industry regulators ignored the practice due to their financial interests in seed companies. He visited Tai'an County in Liaoning where he was told seed dealers repackage GMO seeds as approved varieties. Some GMO seeds are sold surreptitiously directly to farmers. He names a number of varieties. Most are insect-resistant bt strains. The blogger worried that planting of GMO corn was on the verge of explosive growth.

The writer claimed that the vice governor of Liaoning received a report claiming that 70 percent of Liaoning's corn was GMO, yet the vice governor asserted this year that "Liaoning does not have a single grain of GMO corn."

"Why did the governor lie?" asked the blogger. He said dealers were secretly warned ahead of time of a crackdown. Nevertheless, three dealers were caught, but they were let off with small fines. The blogger dared officials to punish him for "telling the truth."

According to the blogger, when he visited Tai'an County no one would talk to him until his identity was confirmed and he agreed not to take photos. The frequent crackdowns announced by authorities suggest that GMO corn may in fact be widespread in China.

This month, a district of Liaoning Province was identified as a "model" for agricultural quality and safety which stipulates that officials crack down on fake, counterfeit, and genetically modified seeds. Crackdowns on GMO seed have been announced in a number of other localities in northeastern China.

During 2010, the Ministry of Agriculture banned four corn seed varieties from prominent seed companies and institutes that were illegally commercialized GMO strains. The strains had been declared as non-GMO when submitted for evaluation, and at that time MOA didn't require checking for GMO content if they were declared non-GMO.

The 2010 crackdown did not wipe out GMO corn seeds. In March 2014, a crackdown in Hainan found seven companies and institutes illegally growing GMOs, and six other suspected violators were still undergoing testing. Twelve of 15 GMO-positive samples were strains of corn (3 were cotton). Another article said 11 seed companies were growing GMO corn illegally in Hainan, including three from Henan Province, one from Liaoning, and one "well-known state-owned company." This was significant because Hainan is a center for seed breeding and propagation due to its sub-tropical climate.

Meanwhile, rumors and pseudo-science about GMOs spread among the Chinese public. There have been outlandish stories about GMO corn causing pigs to miscarry and killing rats in Shanxi Province, and causing men to become sterile in Guangxi Province. The Liaoning blogger said common people joke that they will stop eating meat next year since all the feed is GMO now. Many Chinese people think Americans don't consume GMOs; they export them to weaken the people of other countries. The cynical use of GMOs as a trade barrier on purported food safety concerns and the ambiguous approach to domestic use reinforces these fears.

If Chinese officials are so concerned about the hazards of consuming GMOs, they should test domestic corn for illegal strains with the same stringency used for imported corn. They will never do this, since they are also giving domestic corn a pass on known hazards like mycotoxins from moldy corn.

China's Corn Price Support Problem

On November 25 Chinese authorities announced the beginning of "temporary reserve" purchases from the 2014 corn crop. As expected, the temporary reserve prices were held at the same level as last year. With China experiencing a corn glut for the third year in a row, the government is expected to purchase a large volume of corn again this year. With grain bins already full, the temporary reserve announcement included an exhortation to prevent "hidden threats" of mold and fire from destroying millions of tons of corn stored in thousands of rudimentary bins scattered across northeastern China.

China began the "temporary reserve" policy in 2008 to place a floor under market prices. Since then, authorities announced minimum prices for each of four northeastern provinces each year and promised to buy grain for government stockpiles when the market price falls below the minimum. The grain is stored until the price rebounds. Then it is sold back into the market. That's the theory, anyway. But the wheels came off this policy when supply increased more than officials thought possible and "rigid" growth in demand flat-lined after Xi Jinping's anti-corruption drive shut down official banqueting that pumped up Chinese meat and liquor consumption.

This year's reserve prices are:

Province	Yuan/ metric ton	$/bushel
Liaoning	2,260	9.40
Inner Mongolia	2,260	9.40
Jilin	2,240	9.33
Heilongjiang	2,220	9.24

Authorities began the 2014/15 temporary reserve purchase program November 25, and it will continue through April 30, 2015. The program operates only in the four northeastern provinces listed above. Grain can be purchased by depots operated by Sinograin, the government's grain reserve management corporation, or by depots commissioned by Sinograin. Purchases by two other state-owned enterprises were limited to 5 mmt for COFCO, and 1 mmt by Chinatex (less than previously rumored).

Desperate to maintain production incentives and rural income growth in a period of rapidly rising wages and costs, officials raised the corn support price each year from 2011 to 2013. The price in Jilin Province was raised from 1500 yuan/mt to 2240 yuan/mt from 2009 to 2013 and remains at that level this year. During 2011 and 2012 the market price exceeded the support price, and little corn was purchased by authorities. However, when market prices stopped rising government corn purchases ballooned to nearly 30 mmt during 2012/13 and 69 mmt during 2013/14. Some analysts predict that another 40-to-50-mmt will be purchased this year.

The practice of raising support prices every year was introduced in 2008 and repeated as received dogma in official meetings and speeches until 2013. At first it was applied to rice and wheat "minimum prices," but the practice was adopted for lower-priority commodities like corn too.

Chinese authorities were shaken up by the global grain price spike during 2007-08 and became convinced that commodity prices would rise forever. A book on food security published by the State Council's Development Research Center (DRC) think tank in November 2013 pronounced "we are in an era of high food prices," and chanted the mantra of raising prices annually. Officials became especially concerned about tight supplies of corn, an assessment reflected prominently in the "new" food security strategy put forward last year.

Chinese officials don't seem to have anticipated the possibility that corn prices might drop. In July 2013, the National Development and Reform Commission announced a 5-percent increase in the corn reserve price--four months earlier than usual. There was also some discussion of raising the priority of the corn price support from "temporary reserve" to "minimum price" so it would be equal in priority to rice and wheat.

The increase in the 2013 Chinese support price was announced when it was already obvious that corn prices would be under strong downward pressure. It was already clear that the U.S. and China would both have record harvests, and U.S. futures prices were already dropping. Indeed, the surge of output last fall put downward pressure on prices in both countries. Chinese authorities stockpiled corn in their "temporary reserve" to prevent Chinese prices from falling.

Chinese and U.S. prices diverged in 2013 and the gap widened after another big  harvest in 2014, creating one of the biggest price distortions ever. While this year's temporary reserve prices are unchanged from 2013/14, they are more than double the current U.S. gulf fob price of about $4.56 per bushel. Chinese authorities began rejecting the first of 1.25-mmt of U.S. corn shipments the same week the 2013/14 temporary reserve purchase program was begun.

By June of 2014, authorities in Beijing were worried that grain reserves were at a record-high level--they said 100 million tons--and there was no space to store the 2014 harvest--another big one. That month, the director of the Jilin Province Grain Bureau said 70 percent of the province's reserves were stored in temporary bins or sheds, and he expected that more makeshift bins would be needed to hold the 2014 harvest. The situation was probably worse in Heilongjiang. In May, authorities began frantically holding weekly auctions of corn to clear out space for this fall's harvest. Much of the corn offered failed to sell, however.

Much of China's "temporary reserve" of corn is stored in temporary bins made of thatched straw on a circular base of stones. Thatched mats are wound around to make the sides of a cylinder. The grain is poured in, and a thatched roof is added. The Jilin grain bureau director estimated that his province would need 70,000 temporary storage structures.

A fire at a granary in Heilongjiang in June 2013 destroyed nearly 20,000 tons of corn and got a lot of public attention. This comic skewers the explanation for the fire given by the managers of the grain depot. The man in a traditional mandarin's costume tells the "inspection team's" camera that the granary fire was caused by "high temperatures and wind."

This corn in a Heilongjiang farmer's courtyard in January 2014 was covered by snow and was too moldy to sell to the government reserve. Nevertheless, large volumes of corn in the reserve granaries was also moldy. Large volumes of corn from Heilongjiang offered for auction this summer failed to sell. This year's government document on the temporary reserve emphasizes that grain must be dried and meet standards before it can be sold to the reserve.

In addition to all these problems, China's practice of raising price supports every year was bound to  violate its WTO commitment to limit domestic support to 8.5 percent of the value of production. WTO practice is to measure the value of price-support by calculating the difference between the support price and a fixed historical reference price--in China's case the reference is the average from 1996-98. So, if you raise the price support every year, the difference between the support and reference prices will automatically grow. The price support is now more than double the WTO reference price, or about 1200 yuan per metric ton (see first chart above). This works out to about 17 percent of the value of production using a conservative assumption that the 69-mmt purchased for the temporary reserve during 2013/14 is considered "eligible" for the program. That's double the 8.5-percent ceiling on domestic support.

Like many of China's policies, this one works well when all prices are going in the same direction. But the wheels come off when prices start falling. The decline in corn prices seems to have caught the Beijing policy makers off guard. The Development Research Center was alarmed to find that China had fallen below 90 percent self-sufficiency in 2012 and that corn imports had surged. They began to fret about an inevitable increase in corn imports. A new 400-page book by DRC policy wonks (China: Food Security and Agricultural Going Out Strategy Research) spends most of its 400 pages talking about China's need to import corn. It was released in September--two months ago, when it was clear that China had what is probably the biggest corn glut in history.

Officials in China recognize that the price support has hit a ceiling. In October 2013, a National Development and Reform official again chanted the mantra, "Agricultural commodity prices must keep rising to compensate farmers for rising costs and to increase their income," but he went on to note that "...the domestic grain price is now higher than the international market price, so there is little room for prices to rise further." Since then, the soybean, cotton, rapeseed, wheat, and corn prices have all been held at their previous year's level and this year they are experimenting with target price subsidies for soybeans and cotton.

Authorities would like to transition to a target price subsidy for corn, but it looks like the temporary reserve policy for corn will be in place for at least a year and probably two. How long can the corn price remain stuck between the floor and the ceiling?

China Cotton Still in Excess Supply

The good news is that China's elimination of price supports has reduced the incentive for its farmers to produce large volumes of poor quality cotton. The bad news is that the world still has too much cotton.

According to China Cotton Association data reported by a textile industry analysis, the country has 12 million metric tons (mmt) of cotton in storage. This year, Chinese production is expected to add another 6.6 mmt to the supply. Its import quota has been chopped to 890,000 metric tons (imports have been running over 4 mmt in recent  years). Adding up inventories, production and imports, China will have 19.7 mmt of cotton available. That's nearly three times estimated annual consumption of 6.8 mmt.

The Chinese textile business is not what it once was. Factory bosses complain that they pay 3,000 yuan more than the international price for every ton of cotton they use. They are also paying higher wages and sometimes encountering labor shortages.

The Chinese cotton price is 14,821 yuan/mt. The New York cotton price for December is 63 cents/lb, translating to 11,912 yuan/mt at Chinese ports, 2909 yuan/mt lower than the domestic market price.
Chinese textile factory bosses complain that orders have been down since the 2008 financial crisis. With high costs and insufficient innovation, they can't compete with southeast Asian producers on an equal footing. Some are going bankrupt or going on the lam to escape unpaid debts.

In a market where supply and demand determine prices, a decline in price sends a signal to producers that they should produce less cotton. China introduced a support price in 2011 to prevent cotton prices from falling. Chinese farmers kept turning out cotton and the government bought it up.

This year the support price--known as a "temporary reserve" policy--has been canceled. Farmers are to sell their cotton on the open market. The market will set a price. The government will calculate the difference between the market price and a "target price", then pay farmers the difference as a cash subsidy. That's the theory.

In practice, the market is not actually having the "decisive" role promised. The government's Agricultural Development Bank is flooding the countryside with cash to ensure farmers aren't turned away or paid with IOUs. The bank has allocated 60 billion yuan (nearly US$ 10 billion) to fund cotton purchases. A single cotton company in Xinjiang autonomous Region said it got a 1-billion-yuan line of credit. It is said that commercial banks have pulled out of the cotton-financing business due to the high risk (of prices falling?). Once again the Agricultural Development Bank is lending money to purchase commodities that are falling in value.

Peoples Daily introduces a Xinjiang farmer who says his seed cotton is selling for 6.3 yuan per kg this year, down from 9.8 yuan in 2013. He says farmers can't make any money at this price--they have to depend on the subsidy for their profit this year.

The target price is set at 19,800 yuan/mt for cotton that has been ginned. A 6-yuan/kg seed-cotton price translates to a lint cotton price of 14,000 yuan. thus, the subsidy is 5800 yuan/mt--over 40 percent of the purchase price.

According to Peoples Daily, the new policy will improve quality. The temporary reserve policy encouraged farmers to grow the maximum volume of cotton without regard for quality. This year, farmers have incentive to plant good quality cotton varieties (everyone gets the same subsidy per kilogram--that gives farmers incentive to sell at a higher price). The poorly calibrated mechanized equipment in Xinjiang also degrades quality by damaging fibers and introducing impurities. Foreign fibers are also mixed in [intentionally?] with hand-picked cotton. A Xinjiang cotton enterprise manager thinks the quality improvement will be the most important impact of the new subsidy.

China's Bulgarian Corn Connection

On November 11, China received its first cargo of imported Bulgarian corn. This corn represents China's new approach to agricultural trade in which Chinese entities control the commodity from its source. This corn was grown by a Chinese company on soil that happens to be in Bulgaria.


The 36,700-ton cargo--identified prominently in news media as "non-GMO"--was received at the Shenzhen port, where it was promptly inspected and testing with expedited "green channel" procedures for agricultural cargoes. This treatment stands in contrast to other cargoes which are turned away or languish in their berths for weeks waiting for port officials to approve the shipment.

A representatitve of the importer--Tianjin Nongken Longchen Jiayi International Company--notes that the corn was grown in Bulgaria to be sold back to China. The company plans to import 175,000 metric tons of corn in 2014 and hopes to import 300,000-500,000 tons next year.

The corn shipment is the first tangible result of an agricultural investment strategy targeting Bulgaria. Several years ago commercial officers at China's Bulgarian embassy recommended Bulgaria as a potential site for Chinese companies to launch agricultural investments on the European continent as part of the Chinese "go global" strategy to grow crops overseas for the Chinese markets. A number of companies have been exploring possibilities, but the Tianjin company's investment in grain and oilseed production is the flagship project.

The investor in Bulgarian farming is a company created by the State farm system in China's Tianjin municipality ("Nongken" is an abbreviation of "agricultural reclamation", part of a national network of state-owned farms that operate swathes of land converted to farms on the forest or desert frontier, reclaimed coastal lands--like Tianjin--or tropical plantations.)

Tianjin Nongken has political support. In May 2014, a member of China's Politburo and Party Secretary of Tianjin Municipality visited Bulgaria at the invitation of the head of Bulgaria's Socialist Party. The Chinese official conveyed greetings from the Chinese premier and was briefed on the agricultural investment project. The agreement allowing Bulgarian corn to be imported to China was signed 3 months later. Diplomats said an earlier agreement to establish import protocol for Bulgarian corn was signed to facilitate the Tianjin Nongken project.

Also in May--perhaps by coincidence, perhaps not--Minister of Agriculture Han Changfu urged State farms to form shareholding companies and conglomerates and endorsed them as main players in China's agricultural "go global" strategy.

In 2011, Tianjin Nongken set up a company in Bulgaria with investment of 30 million Euros, renting 30,000 mu (2000 hectares) of land in northwestern Bulgaria to grow corn and other crops using local labor.

According to the Politburo official's briefing during May, Tianjin Nongken planted crops on 127,000 mu in Bulgaria during 2014. They expect to produce 25,000 metric tons of corn, 10,000 tons of wheat, 4,500 tons of sunflower seeds and rapeseeds, and 3,500 tons of other oilseeds. An online posting by Tianjin Nongken's trading company offers corn, alfalfa, wood products, sunflower oil, Bulgarian wine, distillers dried grains, and other grain products. The company has warehouses near the Varna port and has acquired a Bulgarian flour mill and a sunflower seed processor.

Chinese overseas agricultural investors encounter a lot of problems. Tianjin Nongken planted their first Bulgarian crop in 2012 but production was disappointing (they were hoodwinked by Bulgarian partners?). The land was fragmented into numerous parcels and much of the land was not usable for farming. Transportation was poor and the level of economic development was low. The Tianjin Nongken company packed up and moved their operation to another part of Bulgaria. They signed another agreement to buy and rent 130,000 mu (8,700 ha) with investment of 270 million Chinese yuan (about US$ 44 million).

According to the diplomats' report, a Beijing company has rented 500 hectares of land in Bulgaria to grow vegetables in greenhouses. They are just getting started but expressed frustrations over lack of labor and poor English skills of workers. They plan to bring in more Chinese companies to help them.
Chinese investors complain that buying land in Bulgaria is risky due to frequent disputes over ownership "for historical reasons." The legal environment is poor, efficiency is low, it's hard to consolidate land parcels (sound familiar?) and organized crime and "interest groups" are a problem.
The diplomats say the China-Bulgaria agricultural relationship is constrained by differences in language, customs, culture, and ideas. Bulgarian workers have poor English, communication is difficult, and misunderstandings are common.

Returning to the 36,700-ton Bulgarian shipment--this single shipment exceeds the Tianjin Nongken's entire production in Bulgaria this year. The trading company's plan to bring in 175,000 tons means that the company is getting corn mainly through traditional purchasing channels. This illustrates the impossibility of completely controlling grain supplies from production to port.

China Corn Support Price Unchanged

According to information learned by Futures Daily, China's support price purchase program for 2014/15 is expected to begin by November 20 with the support price level unchanged from 2013/14. The support level is higher than current purchase prices and is expected to boost Chinese prices and add to the nation's corn stockpile. Temporary reserve purchases are expected to take place from November 20, 2014 through April 30, 2015.

Futures Daily learned from sources that the support price for corn will be the same as last year. This is a break from the practice of raising the support price annually over the last six years.

Current prices are 100-200 yuan below the support levels. Traders will be inclined to sell the corn they buy to the state reserves, thus boosting market prices.

Province	Support price	Current prices
	yuan/mt	yuan/mt
Heilongjiang	2220	1960-2080
Jilin	2240	2070-2130
Inner Mongolia (Tongliao)	2260	2160-2180
Liaoning	2260	2140-2150

The information is reportedly confirmed but is awaiting final approval by certain government departments. An official announcement is expected by November 20, 2014.

This year, corn can be purchased for the temporary reserve by Sinograin--the Government's reserve management corporation--as well as two other state-owned companies: COFCO and Chinatex.

Purchases for the temporary reserve will no longer be open-ended. This year there is expected to be a 40-mmt limit on the total volume of corn purchased. The limit is due to the large inventories already on hand from last year. Reportedly, COFCO will be allowed to purchase up to 12 mmt and Chinatex up to 2 mmt. Presumably, Sinograin will be limited to the remaining 26 mmt.

Purchasers will get a subsidy for their operational costs of 50 yuan/mt, down from last year.

According to other calculations, following auctions and transfers since April, authorities may have over 60 mmt of the last two years' temporary reserve-purchased corn in storage, most of it from 2013/14.

With market prices below the support prices, it looks like more corn will be added to the stockpile over the next few months. Another round of auctions to dispose of the stockpile will likely be held again next April.

It is also rumored that the subsidy for transporting corn from northeastern provinces to other parts of China will not be offered this year. Last year, it led to a perverse pattern in which prices in northeastern provinces were higher than in north China provinces like Shandong and Hebei.

Transfers Keep Rural Counties Afloat in China

When Chinese officials describe their grain subsidy programs, they say the policies motivate local (officials) and farmers, in that order. This rhetoric reflects the importance of transfer payments sent to rural counties to encourage local officials to support grain production, an activity that generates minimal GDP and virtually no tax revenue.

With private financing and services for farmers mostly nonexistent, China relies on local officials to provide needed investment and services for farm production. Yet officials are not inclined to give attention to farm production since it yields little GDP and virtually no tax revenue. China's major grain-producing counties have a very narrow tax base, with local tax revenues often just 15%-to-20% of financial expenditures. Thus, rural governments are financed with massive transfers from higher levels of government.


An October 2013 article in Economic Reference News, "Vicious Circle: The More Grain Produced, the More Backward the Economy," raised concern that "the rice bag can't compare with the money bag," and "central government supports agriculture, local government has little regard."

A recent article in the Government-run magazine Liaowang (Outlook) with a similar theme highlighted the problem of poor finances in grain-producing counties. It illustrated the problem with Jilin's Lishu County, the fifth-largest grain-producing county in China. The local government there collects essentially no tax revenue from grain production. Farmers were exempted from the "agricultural tax" about ten years ago. Sales and initial processing of grain and most other farm products is exempt from value-added tax. In 2013, Lishu County's tax revenue totaled 556 million yuan, but its financial expenditures were 2.94 billion yuan--more than five times tax collections.

In contrast, city governments raise vast sums of money by converting agricultural land to other uses, conjuring instant wealth out of thin air. Rural grain counties are pressured to protect cropland from development, thus denying local officials the road to riches traveled by their city-based comrades. Rural county officials say potential investors are scared off by rhetoric about "seizing grain" since it implies few development opportunities.

The financial shortfalls of rural counties prompted China's central government to start up a transfer payment "award" program for hundreds of major grain-producing counties in 2005. The counties are ranked based on a formula that weights grain production, area planted in grain, and the amount sold outside the county. Initially, the transfer awards were just to fill holes in rural county budgets and there were no strings attached to the funds. A "super grain county" gives additional cash to the best-performing counties. Oilseed counties and pork counties now get similar payments. These newer transfers must be used to support subisides, loans, and services to farmers.

The plan for raising production capacity 50 mmt during 2009-2020 identified 800 core grain-production counties (about a third of all counties in China).

Authorities have been distributing 2014 award funds in October and November.

Jiangxi Province received 1.1 billion yuan in award funds for 46 grain counties (about 25 million yuan each), plus the province got 200 million yuan for being a commercial grain-supplying province.

Jiangsu Province got 1.66 billion yuan for grain county awards. This included 1.18 billion yuan for regular grain county awards, 153 million yuan for "super grain county" awards, 78 million yuan for oilseed county awards, and 252 million yuan for being a grain-supplying province. The "super grain," oilseed, and grain-supply province funds are earmarked for activities to support production, especially a campaign to refurbish or build grain storage facilities.

Guangxi Province has installed an evaluation system for counties receiving grain county awards. The funds fill holes in county budgets and should be used for improving fields, building storage and processing facilities. The funds should not be used for buying cars, office buildings, "training centers," or "image projects."

Sihong County in northern Jiangsu Province got 34.6 million yuan in grain county award funds, plus 15.3 million yuan for being a super grain county. Sihong has protected farmland, introduced new varieties, improved fields, built water projects, and supported new-style large farms and cooperatives.

Minquan County in Henan Province got 39 million yuan for its grain county award in 2013, over ten times the amount received in 2005. Officials there say they have paid a lot of attention to grain production in recent years and have made progress in implementing the award fund assessment.

Jilin's Lishu county used to collect about 58 million yuan from farmers for the agricultural tax before it was eliminated in 2004. Its "award" for being a major grain county now is 124 million yuan. It also got 350 million yuan (about $130 per acre) to distribute to farmers as grain subsidies. The county spends about 20 million yuan on roads, 8 milloin yuan on agricultural insurance, and nearly 100 million yuan on water and irrigation projects.

To the extent that local governments devote personnel and material resources to grain production, the cost of producing grain exceeds costs reported by farmers. Thus, local officials complain that the price of grain sold to urban areas doesn't reflect the full cost of the grain.

The Liaowang article calls for setting up a system for transferring funds from wealthy grain-consuming localities to rural counties that supply grain. This idea has been pushed for a number of years but doesn't seem to have progressesd.

Regulating Dog Meat Trade in China

Consuming dog meat is a deeply embedded part of food culture in certain regions and ethnic groups of China. However, the growing number of dog lovers has generated fierce opposition to the practice of killing dogs and eating them. Dog meat trade is legal, but regulating the production and marketing of dogs for human consumption presents a challenge for authorities.

[warning: images in this article will be disturbing to animal lovers]

The focal point of attention is a dog meat festival held each June in the city of Yulin, Guangxi Province. During 2014, the festival prompted protests and an appeal from an animal protection group to ban the festival. With so much public opposition, the Yulin municipal government issued a statement stating that the festival is put on by private operators, and Yulin authorities disavowed any role in organizing the festival. Another dog meat festival in Zhejiang Province has been canceled due to public opposition to the killing of dogs on street corners.


A man inside a dog cage protests eating of dog meat
outside a slaughter point in Guiyang.
Consumers of dog meat respond that it's no one else's business what they eat and the government has no right to interfere. A weibo post argued that the customs of ethnic groups that consume dog meat should be respected. A 2010 article noted that legal experts were formulating a proposal for an animal protection law that would assess large fines to enforce a ban on eating dog and cat meat, but noted that such a law would affect the "dog meat economy" in certain parts of Jiangxi Province.

Buddhist protestor at Yulin dog meat festival
A more practical and immediate concern is the regulation and supervision of the production and distribution of dog meat to ensure sanitation and safety. During the 2014 Yulin dog meat festival there were accusations that dogs were kidnapped from owners to be butchered, that rabies is spread by sick dogs, and that the supply chain is mostly unregulated.

Dogs are delivered packed into small cages.

Regulating meat supplies poses a challenge on several fronts. The supply chain involves activities that are regulated by a variety of different authorities. Agricultural authorities are responsible for production of animals and feeds. Slaughter is an industrial process under technical supervision bureaus, marketing is under industrial-commercial bureaus, and restaurants are supervised by health departments. None of these officials have authority to make arrests, so police are often involved. A second problem is that production occurs in rural areas far from the cities where the meat is consumed.

News media investigations indicate that there is a dog meat supply chain much like those for other types of meat industries. Many of the dogs are raised on a small scale by farmers. Dealers come to villages to buy dogs, load them on to trucks, and transport them to wholesale markets or restaurants in various cities like Yulin. Sometimes they are butchered in slaughterhouses but many are killed by vendors at the point of sale.

There are no national standards for dog meat since this is a relatively small niche industry, but in 2013 the Ministry of Agriculture introduced a rule governing marketing of dog and cat meat. The rule requires that each dog be accompanied by three certificates--a health inspection, vaccination, and a lab test report. Producers are supposed to keep health and vaccination records for each animal. Dogs are supposed to be slaughtered in a facility designated by the government. The facility should file a report with authorities on the animals 6 hours before slaughter and again at the time of slaughter.

Dog farm
According to one estimate, the cost of transporting and acquiring all the required certificates would be 200-300 yuan per animal. The farm-level purchase price is about 9 yuan per 500g (about $1.50/lb). With such high costs, producers are not inclined to comply with the rules.

Certificates for dogs leaving a county

and disinfection of truck

China Youth Daily raised concerns that vendors at the Yulin dog meat festival either failed to display the required certificates or had a single certificate for hundreds of dogs. Many are butchered on the spot by vendors.

dog slaughtered on the street. 

A Beijing Evening News journalist investigating the Yulin dog meat industry found an extensive supplier network. Some dogs came from villages in Yunnan, Shaanxi and Hubei Provinces where dealers go door to door buying them. Truckloads of dogs are inspected by animal health officials in the municipality where they are procured, certificates are issued, the truck is photographed and disinfected and sent on its way.

The three certificates required by MOA are issued by authorities in production areas. When a truck loaded with dogs arrives in Yulin, officials there check it again and release the dogs for sale in markets or to restaurants if no problems are found. Authorities in Yulin wait by the highway (probably at the toll booth) to check trucks as they arrive. They claimed to have turned away two trucks that were not compliant. In the Yulin wholesale market, the reporter saw certificates issued by animal health bureaus in Mengzi City, Yunnan and Weinan City in Shaanxi on display.

Officials also have to supervise the marketing of dogs from the area surrounding Yulin where an estimated 400,000 dogs are raised for meat. Officials say some people steal dogs, but most are raised by villagers. In one village house, he saw 3 or 4 rooms filled with dogs. Local officials acknowledge that the Yulin area has a high incidence of rabies, and there are about 100 deaths from dog bites each year. Animal health officials say rural people don't know they should get treated after a dog bite. They say rabies is not transmitted by eating meat of infected animals.

One official in Yulin estimates that 200 dogs are consumed per day in the area, but it goes up to 2000 per day during the peak summer months when the festival is held. It's estimated that 400,000 dogs are raised for meat in the area around Yulin. With three certificates per dog--as required by MOA's rule--that would be 1.2 million certificates to keep track of.

Dogs from outside Yulin are supposed to be slaughtered in one of eight local slaughter facilities. These are said to be overseen by three groups of inspectors who go out to check them daily.

Many people in China are now revolted by the dog meat industry, but there are many parts of China where dog meat is part of daily life and a source of income. There is no law banning dog meat. If such a law were to be introduced in China, how would it be accomplished? There is no mechanism for voting on a referendum. Nor is there a mechanism of voting in or out candidates that support or oppose dog meat consumption.

Regulating the dog meat trade is a challenge. Authorities have been struggling to regulate the major meat--pork. Establishing supervision for a relatively small industry like dog meat and closing all the loop holes is daunting.

These are some of the issues China is dealing with as it tries to transition from a collection of semi-autonomous city-states to a nation ruled by law.

Shaanxi Farmers Reluctant to Rent Land

The results of a new survey show that "farmers view land like gold, and they're reluctant to give it up." Villagers' uncertainty about their rights to their land makes them reluctant to let go of it, posing a problem for the new class of large farms looking to consolidate farmland.

On October 13, the Shaanxi branch of the National Bureau of Statistics rural survey team announced the results of a survey of rural land transfer conducted in 2013. The survey found that 11.8 percent of the province's contracted land had been transferred from its original "owner" or contractor to someone else. That rate was lower than the national average of 21.7 percent, and much lower than the 40 percent share of land transferred in some eastern provinces, according to the survey report.

Of the 11.8 percent of land transferred, 64 percent of it is rented to neighbors and relatives they know, often just on a verbal agreement. About 13 percent each is transferred to companies or cooperatives, and 11 percent to "others." They seldom rent to a person or company from outside their village.

The Shaanxi study claims that villagers are supportive of land transfer but they are afraid to let go of their land since they are worried they might lose their rights to the land and/or the subsidies attached to the land. Villagers working off-farm want to have their land as a fall-back in case they lose their job and have to take up farming again. In some places on the outskirts of cities, villagers are holding on to their land hoping for a big payday from developers.

The report gives the example of a farmer who has 20 mu (3+ acres) of his own land plus 200 mu he rents to grow wheat. All the land is on a flood plain (so it's probably classified as "waste"land that is not a core part of the village's land contracted to collective members). The farmer would like to rent 1000 mu (165 acres) to grow grain, horticultural crops, and raise livestock, but coordinating with collective members to consolidate a large parcel of land is difficult.

With villagers reluctant to let go of their land, rents have gone up to over 1000 yuan per mu (about US$ 1000 per acre). With such high rents, producers are inclined to use rented land to grow high-value crops instead of grain.

In Shaanxi direct subsidies for grain range from 56 yuan per mu to 81 yuan per mu, depending on the region. This is equal to 25-35 kg of grain or less than a day's wages and you get the subsidy whether you grow anything or not. Large-scale farmers say the subsidies don't have much impact now. They would prefer to get help with financing.

The inclination to rent land has always been relatively low in Shaanxi. In 2007, Shaanxi reported only 2 percent of its land had been transferred, compared with a national average of 6-to-7 percent that year. Since then it has risen fast. Shaanxi's land transfer was up to 5.7 percent in 2009, 10 percent in 2012, and 11.8 percent in 2013.

Shaanxi officials have been trying hard to promote land transfer. In an article earlier this year, Shaanxi officials said land transfer was very important to releasing surplus rural labor and promoting coordinated rural and urban development. Officials attributed Shaanxi's low rate of land transfer to the province's low level of development, few large-scale farmers, and villagers' lack of understanding of the land policy. Officials said villagers were afraid the policy might change after they entered a land transfer agreement and they would then lose their land. So they would rather leave their land idle than rent it out to someone they don't trust.

Shaanxi has been setting up township and county offices to coordinate land transfer, settle disputes, etc, but this has been disrupted by a  consolidation of townships. Some 17 percent of townships have been eliminated as administrative units and have no funds to support the land transfer services. In 2011, the province issued a document offering financial support for land transfer but little of the promised money has been allocated.

Many of the verbal agreements are vague, and disputes often arise over the deals. Multi-year rental agreements often set a one-time rental fee that doesn't change. When rents and prices go up in later years, lessors want to renegotiate the rent. Some rental contracts extend beyond the period of the lessor's contract on the land, posing possible disputes in the future. Some renters change the use of the land to a nonagricultural use after getting control of the land.

Shaanxi officials want to bring their land transfer rate up to the national average. In May, another policy document was issued to promote land transfer. They will educate villagers about the importance of land transfer and their rights. Within 3 years they plan to issue certificates of land rights to all villagers.

A provincial fund to support land transfer will be initiated. In developed regions, villagers will get a subsidy of 100 yuan per mu if they rent out their land. In poorer areas, the large-scale farmers, companies or cooperatives renting-in land will get the subsidy.

Chinese Agriculture: Don't Panic, We're Planning

On October 24, Vice Premier Wang Yang finished out a speech on building irrigation facilities with some comments that reveal China's rural policy challenges. While there is a sense of urgency in his remarks, Wang exhorted everyone to calmly consider the future and--like a good socialist--make a new plan.

English language news media picked up Wang's admonition to increase control of grain imports and crack down on smuggling to deal with record-high grain inventories, but other comments in the speech are interesting.

The comments came at the end of a speech on building irrigation facilities where he warned that rural reforms and development tasks are extremely arduous. He exhorted every level of government and locality to do a good job on agricultural and rural work as they carried out irrigation and water management construction.

Until now, China seemed to be address rural problems by spending more and raising prices, but that seems to have come to an end. Wang warned that agriculture faces "three ceilings" on prices, subsidies, and commodity inventories. Agriculture also faces a rising floor in escalating production costs. The problem is how to maintain farmer production incentives and keep production stable under these "two pressures," said Wang. How can sustainable agricultural development proceed with excessive consumption of resources and environmental pollution growing? Wang admonished listeners to "calmly assess the future," "sort out ideas for agricultural and rural work," and "scientifically" formulate a plan for the future.

Wang assured his audience that the government is pondering new policies to address the many new problems, situations, and challenges facing agriculture and rural areas as it formulates a new five-year plan for 2016-20. For example, Wang said, the government is contemplating how to keep increasing spending on rural affairs and increase rural incomes as the economy decelerates and growth in financial revenue slows.

Wang said the minimum price programs for wheat and rice should be carried out, and "temporary reserve" stockpiling for corn--the policy that created the mess--should be started at the appropriate time. Wang said the decision to announce the 2015 minimum price for wheat at the same level as this year is a result of pressure from international market prices and is an "extremely vigorous price signal" to producers.

In his comments on the fall grain harvest, Wang warned about the conspicuous problem of a tight grain storage situation with record-high grain inventories as the fall harvest is underway. With Chinese grain prices higher than world prices and grain imports rising, marketing the new grain crop faces a lot of problems, Wang said. He called for making space for the new crop in private sector storage facilities. Companies should be "organized" and "guided" to purchase grain from farmers. Banks should ensure that they have plenty of money to buy the grain, so farmers are able to sell it.

Wang's comments also included an exhortation to carry out the communist party's fourth plenum's task of instilling the "rule of/by law" in agriculture and rural areas. This was not explained but probably means standardizing regulations and they way they are enforced throughout the country--a stiff challenge in a country where "the hills are high and the emperor is far away."

Wang closed out his speech by reminding comrades to strengthen water management construction and do a good job on rural work. "The responsibility is great and the task is formidable," said Wang.

Vice Premier Wang Yang speaks October 24, 2014 at a

State Council teleconference on building irrigation facilities.

China Plans Massive Honesty Database

Chinese leaders have apparently deduced that dishonesty and lying are not conducive to a healthy society or economy. Authorities are moving forward with a plan to create a massive database that will enable authorities at all levels and locations to monitor, track down, and punish miscreants in government, companies, and courts of law.

For example, it's hard to produce accurate statistics when everyone lies to the statisticians. To fix this, China's National Bureau of Statistics has published draft regulations designed to punish dishonest companies that report inaccurate information on statistical surveys. Companies that deliberately fabricate false data, make false reports, conceal data or otherwise violate the statistical law will be subject to criminal penalties. The Bureau will publicize the names, addresses and owners of dishonest companies on a web site. The information will be entered in a file that will be available to commercial/industrial authorities, tax bureaus, credit information systems and banks, which will affect their ability to legally register, collect government subsidies and get loans. Dishonest companies will be on the list for one  year  unless they successfully apply for removal by demonstrating good behavior. If they're still bad, they will stay on the list a second year.

The purpose of the new regulation is to improve the quality and credibility of statistics. The Bureau is accepting comments on the draft regulations until November 5, 2014.

The Statistics regulation is a small part of China's broad campaign to create an honest society described in the State Council's Plan for Constructing a Social Credit System (2014-2020) released in June 2014. The plan aims to create a complete system of records that covers all members of society to establish a culture of honesty. It is much more than a system for recording whether people pay their bills. It aims to maintain files on bad behavior in government, companies, and courts that will be shared nationwide with all government departments. The records will include dishonest government officials, safety violations, fakes, false advertising, frauds, pollution, etc. The universal nature of the database appears to be intended to address the ease of miscreants disappearing and reappearing some place else where authorities don't know about their record of bad behavior elsewhere.

The honesty system seems to be part of the campaign to promote "rule of/by law" ahead of the "fourth plenum." Like other components of the "law" campaign, the honesty system points backward into Chinese traditional culture for inspiration and moral guidance. The plan instructs Chinese people to "carry forward traditional virtues of integrity as an inherent requirement, giving incentives for trustworthiness and constraining dishonesty." Name and shame appears to be the moral mechanism--no deities, Ten Commandments, St. Peter, or Western religious/philosophical approaches to ethics and morality.

According to the plan, the social credit system is necessary to implement the scientific development concept and form a foundation for a harmonious society and a socialist market economy. It's an important measure for governance and for improving the nation's competitiveness.

The social credit system promises to increase honesty in government, business and courts. The system promises to broaden the public's participation in government decision-making, but it also will "increase its policy-making, enforcement and supervision powers, and publicize policies."

For commercial entities, the system is supposed to lubricate business transactions. One emphasis is on recording unsafe production practices by mines, use of unsafe chemicals, fireworks and pollution emissions. Another focus is on recording quality infractions by food, drug, agricultural products, and agricultural input suppliers so that various government departments in different localities can exchange information about miscreants. The social credit system will cut down on financial fraud, running away from debts, insider trading, fraudulent insurance, illegal accumulation of assets, and taking money out of the country illegally.

You can run, but you can't hide from Big Brother with Chinese characteristics.