Wednesday, April 30, 2014

Projections Show China's Grain-Hoarding Instinct

We have a pet hamster at my house. No matter how much food you add to his bowl, it all disappears. This gives the impression that the hamster is consuming vast quantities of food. But when we clean out the cage we discover hoards of food. We then realize that much of the food going into his bowl is not eaten--it's hidden away under the wood shavings.

Like the hamster, Chinese officials are compulsive food-hoarders. They stash so much grain away in warehouses that the country often imports grain when it is actually producing more than it needs.

Last week, China's Academy of Agricultural Sciences (CAAS) released its first ten-year projections of commodity supply and demand for the next ten years. The main feature that emerges from the blizzard of numbers is hamster-like compulsive stockpiling of grain. CAAS projects that carry-in stocks of wheat, rice and corn will rise from 217 million metric tons in 2014 to a plateau of 300 mmt from 2019 to 2023. CAAS thinks that China will add over 80 mmt of grain to its inventories over the next ten years!

Calculating the ratio of stocks-to-use shows that CAAS expects wheat stocks to rise from an excessive 80-percent of consumption in 2014 to a ridiculous 97 percent in 2023--they will hold an entire year's consumption in inventory. Rice stocks are expected to rise from a mere 46 percent of consumption in 2014 to 70 percent in 2023. Corn stocks-to-use is expected to bump up from 30 to 40 percent by 2018 before falling back to 30 percent in 2023.
Cotton outdoes the grain numbers. CAAS expects cotton stocks to stay at 130 percent of consumption--the result of a price-support policy that went horribly wrong--through 2015 before gradually beginning to slide down to 70 percent by 2023. The Agricultural Development Bank will be financing massive cotton and grain stockpiles for years to come.

In 2014, CAAS anticipates that the country will produce 5-percent more grain than it consumes -- a surplus of about 20 mmt -- yet they think China will import 10 mmt of grain that year. In effect, China will be importing grain to sock away in warehouses. CAAS expects the grain surplus to shrink and turn into a deficit of 18 mmt by 2022. Imports will be slightly less than the annual deficit in those years.
These numbers are not "official"--China still considers grain reserves a state secret. But they are probably close approximations of what the Chinese think grain stocks are. Chinese officials have long said they need higher grain stocks than other countries because their country is vulnerable to disaster and has poor transportation infrastructure. But Chinese officials have built expressways and railroads to every possible corner of the country and they are engaged in a massive grain logistics-building spree. There has been no recent disaster that seriously disrupted grain markets--during the Sichuan earthquake in 2008 supplies of grain and other commodities flowed smoothly. So why will they need to hold even larger stocks of grain? Why on earth will they need a year's supply of wheat in inventory?

Why does a hamster feel compelled to bury hoards of food when his owner fills his bowl daily? It's probably a tendency programmed into his DNA by ancestors who needed a cache of food to carry them through winter months. In the same way, the Chinese have a hamster-like hoarding instinct that is out of step with today's reality.

In effect, China sucks grain out of markets to ensure its own "food security." This sends inaccurate signals of scarcity to the market and undermines global food security.

The CAAS professor chairing the meeting where the projections were released explained that the forecasts are "scientific" numbers that guide markets. Perhaps the most valuable contribution of the numbers is that they give the outside world a clue about China's grain-storage obsession. Observers should not infer that China is short of grain when it imports.


Sunday, April 20, 2014

Soil Pollution Survey Finally Announced

Chinese officialdom is finally acknowledging soil contamination problems. China's first soil contamination survey was released this week, revealing that 16 percent of all land monitored over eight years was polluted above accepted tolerances. The survey found that 19 percent of farmland of polluted.

Results of China's 2005-13 soil contamination survey:
Proportion of soil survey points with contamination above maximum tolerance16.1%
Of which:
  Above tolerance limit but less than double11.2%
  Double-to-triple the tolerance2.3%
  Three-to-four times the tolerance1.5%
  Five times the tolerance1.1%
Source: Communique on soil contamination survey.

The new-found environmental consciousness is apparently spurred by widespread concern about "cadmium rice" contamination that was publicized in 2013. In December, agricultural officials began to talk about pollution and environmental problems that make China's current level of production unsustainable. Just last year, the soil survey was being kept secret and neither academics nor journalists were allowed to report on it.

The soil survey's purpose was to assess the effect on soil contamination on agricultural products and human health. It was conducted from 2005 to 2013 by the Ministries of Environmental Protection and Land Resources by monitoring pollutants in soils at sample points covering the entire mainland. Sample points purportedly covered all cultivated land area, "some" grassland, barren land, and built-up land, in all 6.3 million square kilometers.

The official news release described the results as "not optimistic" (不容乐观), with some regions having serious contamination, a troubling degree of cropland contamination, and prominent impacts of emissions from industry and mining on soil quality.

The survey found 16 percent of all land exceeded tolerated levels of 8 heavy metals and three organic pollutants. Of those exceeding the limit, 11% were less than double the limit, 2.3% were two-to-three times over the limit, 1.5% was three-to-four times over, and 1.1% was five times over the limit.

Cultivated land had the most extensive pollution--19.2% was over the tolerance--while 10% each of grassland and forest land were over the tolerance limit. Cadmium (7% of land), nickel (4.8%), and arsenic (2.8%) were the most common pollutants.
Source: Communique on soil contamination survey.

Soil contamination was worse in the south than in the north. The Yangtze River and Pearl River deltas and old industrial areas of the northeast had especially prominent pollution problems and heavy metals were common soil pollutants in the southwest and south central regions. Around industrial sites 36% of soil was contaminated. Heightened pollution was found around industrial parks, oil-drilling sites, mining, where wastewater is used for irrigation, and within 150 meters of major roads.

Ministry of Environmental Protection officials said a comparison of pollutants against a baseline from the 7th five-year plan (1986-1990) showed a rapid increase in soil pollution. Cadmium contamination increased nationwide, including 50-percent increases in the southwest and southern coastal regions, and 10-to-40-percent in northern China, the northeast and western regions.

True to form, the troubling results of the survey--which has been underway since 2005--were not released until a major health threat--"cadmium rice"--was revealed to the public, and a "solution" could be announced.

Chinese officials say they are now going to deal with the pollution problem in several ways. They will carry out more surveys to better understand the pollution problems. The Peoples Congress has made plans to include soil pollution in laws for the first time. Officials will begin to monitor emissions of pollutants to prevent pollution. A pilot soil rehabilitation program in Zhutan District in Hunan Province was announced days before the survey results were released. The Ministry of Finance has announced their budget for addressing soil pollution will increase 9.8% this year, faster than the 7% overall increase in the budget. Special funds will be allocated for the Hunan pilot.

The vice chairman of the small group on central rural work Chen Xiwen said land producing contaminated agricultural products will be taken out of production of food crops and polluted land will be rehabilitated. The amount is estimated at 100 million mu--about 5 percent of the total. Conveniently, another long-suppressed survey released in December shows that China has more cropland than previously reported, so when polluted and environmentally-vulnerable land is removed from production China is still above its "red line" of 1.8 billion mu of cropland needed for "food security."

Wednesday, April 16, 2014

Agriculture's New Role in China's Economy

A Chinese government think tank's report reveals that agriculture--historically the dominant activity in China--is fading in importance and faces some constraints on future growth.

On April 11, the Chinese Academy of Social Sciences (CASS) released its "Green Book on the Rural Economy" giving an overview of rural and agricultural development based on the latest numbers from the National Bureau of Statistics (NBS). Summaries of topics covered have been released as news items in Chinese highlighting decelerating agricultural growth, weak agricultural investment mechanisms, a narrowing gap between rural and urban living standards, and a widening agricultural trade deficit in 2013.

Agriculture's ("primary industry") share of Chinese GDP was 9.8% in 2013--under 10% for the first time and down from about a third of the economy in the early 1980s. With overall GDP growing 7-8% and agriculture growing 4-5%, agriculture's share has fallen over time. In 2013, agriculture's real growth in constant prices was 4%, a deceleration from 4.5% in 2012.
"Primary industry" share of China GDP estimated by National Bureau of Statistics.

The CASS report warns that the agricultural sector may have entered a period of decelerating growth. The report says agriculture has reached the end of its era of general increases in production. Growth may be slowed by the transformation of the mode of production and retirement of agricultural resources. The report celebrates the ten-straight years of increases in grain output but warns the public not to expect the string of increases to continue. This reflects the party line agricultural officials have been reciting since December. They are now acknowledging that past agricultural growth is unsustainable--it was basically mining soil fertility and water resources in a way that achieves farm output in the present at the expense of output in the future. 

The report also notes an important contradiction--the rural households who control most of the farmland have little inclination to make investments in it. NBS estimates fixed asset investment by two groups: households and non-households (mainly government and companies). Non-household investment in agriculture accounted for just 2.6% of fixed asset investment in the Chinese economy while rural households' fixed asset investment accounted for 2.4%--combined these two accounted for 5% of all fixed asset investment. However, the share of investment in agriculture is probably about 3% because other statistics show that nearly all rural household fixed asset investment is in rebuilding or refurbishing their houses--rural households' investment in agriculture is minimal. 

The report notes that investment by rural households is slow and decelerating while non-household investment in agriculture is accelerating. Rural household fixed asset investment grew 7.2% in 2013, slower than their 8.3% growth in 2012. In contrast, non-household investment in agriculture (mainly by government and companies) grew 32% in 2013, up from 29% in 2012. This reflects the dysfunctional financial intermediation in China which channels bank and equity market funds to government-sponsored projects and big companies while starving individuals and small businesses of capital. Thus, rural households--who control the land and do most of the farm work--make minimal investments in agriculture. A big part of the current agricultural restructuring strategy is to entice companies to fill this investment gap.

Income statistics also reflect the agricultural conundrum: rural people have quietly been transformed from a class of "farmers" to an underclass of unskilled laborers who shuttle between construction sites, factories, and their home village. The "green book" celebrates the rapid growth in rural household income and consumption expenditure, but it also reports another milestone: the share of rural household income from wage income exceeded the share from household businesses--mainly farming. The share of rural income from family business declined from 70% in 1995 to 43% in 2013. The share of income from wages rose from 22% to 45%. With most of their income coming from off-farm sources, rural residence (农民) is no longer synonymous with "farmer". The people who live on the land have a flagging interest in farming and see little promise for the future, so why invest in it?

Source: Calculated from National Bureau of Statistics data on rural household income.

The other components of income also reflect weaknesses of China's rural economy. Property income for rural households has been growing, but has been stuck at about 3% of income since 2007. In contrast to urban families who commonly own multiple real estate properties and have financial investments, rural households don't have many assets and get low returns--investing their funds in building houses they can't sell or lending to friends and neighbors. Rural people are not property owners who invest for the future--they are unskilled itinerant laborers. 

The growing share of transfer income in the rural household income statement reflects the government's flood of subsidies for farming, retirement and health schemes. These subsidies distract the rural population's attention from the fact that they are largely missing out on the investment riches enjoyed by city people. In some instances transfer payments support rural people moved off their land into apartment buildings. Transfer income is up to 9.9% of rural household income now.

The "green book"--and other Chinese economists--recognize this conundrum: the people on the land have little inclination to invest in it. The government's project now is to clear these people off the land to make room for real "farmers" who treat agriculture like a business. Villagers will be bought off with small annuities representing a rental for the usage rights to their land and moved into apartment buildings whenever possible.

Sunday, April 13, 2014

Subsidizing Factory-Style Rice Farming

China's official strategy for addressing agricultural problems is to replace traditional peasant-style farming with an industrial-style model of standardized mass production. The transformation is taking place gradually, one link in the supply chain at a time. One key strategy is to standardize products by concentrating the supply of inputs like breeding stock and seedlings on large-scale factory-style operations, often with subsidies.

An example is a 2-year-old campaign to promote concentrated seedling (集中育秧) farms as a strategy to promote double-cropping of rice. Dim sums blog reported on the initiation of this program in 2012 with a 100 million yuan fund supplemented by provincial funds. The program gives subsidies to centralized companies, cooperatives and large farms that grow large volumes of rice seedlings in greenhouses or plastic tunnels that are supplied to local farmers and transplanted--preferably with machines--in the early spring. This "early rice" is harvested in mid-summer and followed by a second rice crop harvested late in the fall.
Rice seedlings are grown in trays in "factory"-style greenhouses 
with controlled temperature and irrigation...

 ...or in concentrated plots

The program was prompted by concern that many farmers had given up double-cropping rice because the early rice crop requires too much labor to transplant. Most people don't like the taste of the early rice anyway. Officials obsessed with numbers and quotas are desperate to maximize rice output, even if the product is not really wanted. Early rice has always been largely a policy crop. It was over-produced during an earlier panic in the 1990s; then its production was discouraged in the early 2000s; now it's being encouraged again.

Guangxi Province's Xing'an County has established its first "factory-ized" (工厂花) seedling production base with strong support from upper levels of government and the joint efforts of various departments. The project is described as a response to the "Number 1 Document's" directive to explore new methods and technologies for increasing grain production and farmers' incomes. The base reportedly supplies seedlings for over 5000 mu of rice fields (820 acres), and the rice crop got started two weeks earlier than usual.
The trays of seedlings may be transplanted to fields by machine...saving labor...

...or they may be transplanted by hand.

Like many Chinese programs, the seedling-supply effort has been ramped up rapidly by mobilizing the communist party organization using a combination of carrots and sticks. In January, Hubei Province agricultural officials formulated a plan and ordered each county and prefecture to make plans to increase the area covered by the early-rice concentrated-farm seedlings. Each township had to sign a responsibility agreement to reach a goal for "concentrated rice-transplanting." Performance on the rice-transplanting campaign was included in the work-performance evaluations for local officials. In Jianli County, officials set a target that would boost area covered by the program by 8% this year, and they set a goal to start 17 new farmer "cooperatives" to supply the seedlings. Hubei Province says area supplied with seedlings by the "concentrated" bases increased 25% this year.

Subsidy funds come from various sources. Major grain-producing Hubei counties received "award" payments totaling 15.9 million yuan ($2.5 million) to fund 52 key county-level seedling supply bases. Some local governments kicked in their own funds. Jianli county budgeted 150 million yuan "from various sources," and several counties gave special awards of 2-to-3 million yuan. Yangxin County allocated 30% of its central government award (for being a major grain-supplying county) to support the program and allocated an additional 500,000 yuan to buy machinery.

Each locality in Hubei picked a main seedling supplier to support, and urged farmers to sign agreements to purchase the seedlings from that supplier early in the year. This contrasts with farmers' customary method of going to a market and haggling over seed prices. In Jianli County, each "seedling factory" (育秧工厂) signed contracts to supply fields covering 130,000 mu (21,415 acres). Officials are "exploring" ways of unifying purchase of seeds by members of grain-planting cooperatives and machinery cooperatives, family farms and large-scale rice farms.

Provincial and local governments are offering training classes and advisory services to boost implementation of the seedling-supply program. Counties took advantage of the slow winter months when farmers aren't busy to hold training sessions. There are multi-level trainings--classes at the county level, T.V. programs, explanatory materials, township training, face-to-face training and advisory services over the telephone.
Banner reads: "Implement concentrated seedlings; strengthen grain production." 
The desperation to boost rice production numbers as villagers stream out of their fields to work in factories and construction sites is the driving force behind the program.

China's "industrialization" (产业化) of agriculture is a strange hybrid of communism and capitalism. "Industrialization" can easily be mistaken for a "capitalist" endeavor, but it has been a sacred mantra of communists since the days of Stalin and Mao.

China's unique melding of politics and business and its vast bureaucracy appears to have the capacity to ramp up big programs in a short time. In reality, it's a big cat-and-mouse game. Subsidies come from all directions to support Potemkin-style structures and machinery. Targets, quotas and agreements are sent down from one level to the next until they finally reach the farmers. Farmers are rounded up for a meeting where they become instant members of a "cooperative," or officials go door to door pressuring villagers to sign contracts to buy seedlings. The farmers make a show of complying by submitting fake statistics and planting fields along the road where officials can easily see them from their caravans of shiny black sedans. Farmers then continue to go about their business after the officials go home or move on to the next campaign. The result is chaos, confusion, and acrimony--exactly the opposite of the order (序), "information-ization" (信息化), and harmony (和谐) the communist party is supposedly trying to achieve.

Thursday, April 10, 2014

China's Grain Stockpile Grows

Chinese authorities have been fretting about "food security" and grain self-sufficiency. Suddenly, the country has a massive glut of grain--nearly a fourth of this year's grain harvest has been stashed in reserves to support prices.

In January, Chinese authorities reported that grain reserves were at a record-high level. They were out of storage space and using temporary structures and rented space to store the grain. During 2013, authorities purchased 82.5 million metric tons of grain through support-price programs, 24 percent of the 345 mmt total purchases. The support price purchases were up from 31 mmt in 2012.

Authorities auctioned off 34.8 mmt of grain into the market and arranged interprovincial transfers of grain inventories totaling 13.5 mmt during 2013.

In the first three months of 2014, authorities continued to buy corn and rice aggressively to support prices. As of April 5, purchases of corn for the "temporary reserve" to support prices reached 64 mmt for the season. The total is expected to reach 67 mmt by the end of April. That total would be equal to 31 percent of the 2013 corn harvest.

Support-price purchases of japonica rice are also at a historical high of 13.6 mmt as of the end of March. Over 10 mmt was purchased in Heilongjiang Province.

Tuesday, April 8, 2014

China's Hog Prices Plummet: Quitters vs Start-ups

Chinese hog prices have been plummeting for about four months--the latest downturn in a series of cyclical gyrations in China's bipolor hog market which is constantly flipping from surplus to shortage and back again. An interesting recent posting reveals the strategic behavior of Chinese hog producers trying to figure out how to navigate the hog cycle.

The writer--apparently a farmer or industry analyst--has seen people writing in an online forum responding to the steep downturn in prices in two opposite ways. Some say they're bailing out of the business and selling off their sows. Others are asking whether it's a good time to get into the business.

He speculates that the people selling off their sows have lost confidence, are losing money, piling up debts and ready to give up. People thinking about getting into the business think the cycle may be at its bottom, and expect a rebound in prices and profits later in the year. Ultimately, both groups of people are making a judgment about where the hog cycle is going--not that different from financial investors. The writer, however, argues that "real" hog producers don't base their decision on judgments about price cycles.

The writer offers several considerations "real" hog producers should take into account.

Is my farming technique advanced enough? Do my sows bear 2.2 litters per year, or only 2? Does a litter have 10 piglets or 9? Is my farm's mortality rate 10% or 15%?

Am I willing to work harder than my counterparts? Do I have access to vaccines, feed, pig traders? Is my location better-suited to working off-farm? If I persevere through two or three cyclical downturns where I lose 300 yuan on each pig, will I make enough in the good years to be better off than working off-farm?

The writer remarks that raising pigs is an unforgiving, highly competitive market. Whether you stay or go depends on your competitiveness. If you are not as efficient as your competitors, you should get out. "The tide of concentration" is steadily rising. Or, as American farmers used to say, "Get big or get out."

The writer seems to be criticizing the speculative behavior that contributes to the hog industry's volatility--people who jump in and out of hog-raising in sync with cycles. The writer urges people to raise pigs only if they're good at it. If they are, they should stick out the downturns and wait for a "new dawn to come," "after your brothers have lost confidence."

Saturday, April 5, 2014

Crackdown on Smuggling Agricultural Products

At the beginning of 2014, China's Customs authority launched a "Green Wind" campaign to crack down on smuggling of agricultural products. The campaign covers ports all over the country and products as diverse as rice, wheat, soybeans, peanuts, edible oils, sugar, cotton, starch, and meats. The campaign was described as part of a broader effort to curb the "momentum of large-scale smuggling" over the last several years.

According to the article, the campaign has several motivations: to prevent loss of customs and tax revenue, prevent food sanitation and safety problems, and to maintain national food security. The concern is that smuggled products with low prices will depress Chinese prices and harm Chinese producers. The smuggling crackdown is described as a food security "firewall."

A coordinated effort by authorities in three ports--Shandong Province's Qingdao and Rizhao and in Guangxi--intercepted 130,000 metric tons of smuggled peanuts and sesame. The article described this as "equal to the output of a major-producing county." The peanuts reportedly came from India and had aflatoxin levels far in excess of the allowable tolerance.

To show the increased degree of smuggling, the article reports that the volume of smuggled sugar intercepted by authorities rose from 761 metric tons during 2011 to 9,665 tons in 2012 and 14,000 tons in 2013.

This blog has previously described the smuggling chain for poultry and a crackdown on rice smuggling last year.

A 2012 article on rampant sugar smuggling in southwest China described it as "a colony of ants moving house." The Guangdong Sugar Industry Association estimated that smuggling totaled 1 million metric tons of sugar that year--about 7% of national consumption.

A document calling for a smuggling crackdown in Hainan estimated that 90% of imported meat sold in the province is smuggled. A Hainan crackdown in 2013 intercepted 6.2 metric tons of frozen chicken feet, chicken wings, pork bellies. In another incident, they found 1200 frozen pangolin carcasses (a protected species) and 80 live sea turtles.

In October 2013, authorities seized 790 metric tons of smuggled cotton discovered in a warehouse in Dezhou, Shandong Province.

Two reporters in Wuhan observed boxes of smuggled beef were common in a city's wholesale market. The reporters were told that smuggled beef mainly goes to company cafeterias and small restaurants; because it's cheaper, it's very competitive in the market. [It's unclear how they determined the beef was smuggled--beef can be legally imported from some countries.] They also reported that a shipment contained some very cheap Indian beef mixed with beef from Uruguay and Australia.

A wholesaler in Kunming told a reporter that smuggled sugar comes into the country from Vietnam and then to markets in Yunnan. She said the smuggled sugar is bought by restaurants, small workshops and a few food and pharmaceutical companies.

High Chinese prices are the driver of the smuggling surge. The sugar article said the main motivator was a 1000-yuan price difference between Chinese prices and the price of smuggled sugar. The Hubei article said the price of smuggled beef was just over half the price of domestic beef.

During 2012, smuggled sugar was said to be putting downward pressure on high Chinese sugar prices. The price in consuming regions is normally higher than in producing regions--but that price-pattern was reversed because cheaper smuggled sugar depressed prices in consuming regions.

The Wuhan beef story reported that supermarkets were selling Chinese beef for 40-to-50 yuan per 500g [although it was from China, it was shipped across the country from Horqin, Inner Mongolia]. A farmer said he sold beef at 35 yuan and calculated his cost at 30 yuan per jin, but he heard some people had been selling beef at 20 yuan and wondered how they could sell it so cheap. The reporter found the cheap beef was imported [not necessarily smuggled]. The operator of a slaughterhouse blames plunging volume and losses on smuggled beef. He claims he knows beef traders who have switched to dealing in smuggled meat, and some of the imported meat has horse meat mixed in [just like Europe!].

Friday, April 4, 2014

Agribusiness Credit: Feast or Famine

Chinese agribusiness is "feast or famine" when it comes to financing. Companies like COFCO and WH Group (formerly Shuanghui International) have seemingly limitless financial resources to go on multi-billion-dollar spending sprees. But most of China's agribusiness companies--including those that sell on the global market--are strapped for cash.

"Financing problem and countermeasures of agricultural products exporting industry," a January article in the Chinese publication International Financing -- available at this site (with sleazy ads) -- summarizes the problems faced by Chinese agricultural-exporting enterprises in financing their businesses.

The author observes that the hot growth in China's exports of agricultural products followng WTO accession in 2001 came to an abrupt halt after the global financial crisis in 2008-09, and has had difficulty recovering.

The author notes that the macroeconomic environment has been difficult for ag-exporting companies in China. Global demand weakened after 2008-09, the Chinese currency appreciated, and they saw rapid increases in agricultural prices, labor and input costs that eroded Chinese companies' international competitiveness.

The author cites so-called "green barriers"--foreign-country standards and chemical-residue tolerances that allegedly discriminate against Chinese products. However, he also acknowledges that Chinese companies do have quality problems because small, fragmented farms turn out raw materials that vary widely in quality and grades, companies use traditional "backward" management, China has varying quality standards, and he admits some ag products do have excessive residues from pesticide and fertilizer.

The article's main point is that trouble financing their business is one of the chief constraints on China's agricultural exporters. Only a few companies favored by the Government or foreign investment bankers are able to raise capital by IPOs and bond offerings. Bank loans are the chief source of financing, but most companies have trouble getting bank credit as well.

One reason is that most of the exporters of agricultural products are predominantly small, privately-owned companies. Most of have sales in the $1-to-2 million range, and many have annual sales under $1 million. Companies based in central and western provinces are smaller than those on China's east coast.

The financing problems are partially due to the peculiarities of agricultural-related businesses. In comparison with industrial enterprises, agricultural exporters face relatively slow-growing markets and high risks from pest or weather losses, spoilage of perishable commodities, and price swings. Potential lenders shy away from such high-risk business.

Most companies procure large volumes of agricultural raw materials and process them into low-value-added generic products.

The companies' cash cycle is mismatched with banks' lending cycles. Companies have large seasonal cash needs to purchase raw materials when they're harvested, while the revenue stream is spread over a longer period. Farmers who sell the raw materials want to be paid in cash -- they have even weaker access to credit -- so there are enormous seasonal needs for working capital.

Agribusiness companies lack collateral that can effectively secure loans. Banks or third-party guarantors are not inclined to accept agricultural commodities as security since they are bulky, stored in remote locations, illiquid, vary in quality, and prices fluctuate. Agribusiness companies have few fixed assets to secure loans--buildings and equipment also tend to be in remote locations and have low market value.

Many agricultural-processing companies are located in small cities and towns where banking is poorly developed. Their location also makes it hard for bankers to verify information, and it's costly to service loans for far-flung borrowers. Bankers don't trust small companies that often have chaotic, "nontransparent" accounts, evade taxes, and have weak management mechanisms.

The author recommends a mix of policies to address these credit issues.  He proposes that government and industry associations serve as a platform to improve the reputation and credibility of agribusiness companies. He also calls on companies to clean up their accounting and control their internal finances. The author recommends policy-style banks like the Import-Export Bank and Agricultural Development Bank give special financing, and the government should set up a special fund for exporters. He says the government should foster innovation in the loan guarantee business.

The main prescription--policy-type banking--actually works against small businesses. In an economy where interest rates are inflexible, policy banking inevitably becomes a rationing mechanism that channels credit to politically-connected borrowers. This is how China's rural banking system became dysfunctional in the first place--banquets and bribes were essential to getting loans from the 40,000 "rural credit cooperatives." These "cooperatives" were initially set up to finance communes in the 1950s and are still the titular backbone of rural banking, but in actuality they served as ATMs for the well-connected. They are being consolidated and reborn as rural commercial banks, but it's unclear whether their management has been fundamentally changed.

China's current overall debt problems derive from excessive lending by State banks to industries like cement, ship-building, metal working, and solar panel manufacturing that created excess capacity and a corporate debt burden. Less well-known is excess capacity in oilseed-crushing that resulted from handing out cash to state-owned companies to build new plants starting in 2009 as a strategy designed to dilute the share of crushing capacity held by multinational companies. There is similar overcapacity in meat processing and other agribusinesses where "policy finance" at the local level has financed big mechanized plants in nearly every county. In these industries there are frequent calls to "raise the threshold" for the industry--to cut excess capacity by eliminating the small agribusiness companies this article is worried about. Thus, the ultimate end of policy finance is to create oligopolies of well-connected companies.

Financing problems cascade from the bottom up. Rural land and houses can't be used as collateral, so farmers have no way of securing loans, so they demand cash payment from agribusinesses. Legal ambiguities and selective enforcement of laws encourage flouting of laws, subterfuge and duplicity that makes all borrowers potentially untrustworthy and limits lending to those with personal connections to bankers. Rates on loans are capped, so lenders can't legally charge rates that will cover their risk. So lending is pushed into the "shadow"-banking sector where there are no limits on rates. Futures markets function mainly as casinos for speculators with weak links to fundamental supply and demand, so they can't be used to hedge risk.

Looking at the financing chain also reveals why China's agribusiness sector may be facing a bigger systemic risk than most people realize. As long as agricultural prices were rising every year, the system functioned OK. The commodities agribusinesses owned always went up in value; loans were repaid. But as prices go down, the commodities fall in value. The chain of grain depots, warehouses, processors, and lenders can no longer keep the cash flowing and may fall into insolvency, causing the whole system to lock up.

News media reports of billion-dollar shopping sprees by the few anointed companies--the 1% of Chinese agribusiness--is diverting attention from festering problems among the 99% in China's agribusiness sector.

Wednesday, April 2, 2014

How China Grows Non-GMO Wheat

China is afraid of genetically modified crops because they might possibly somehow harm consumers someday. Vice Minister of Agriculture Niu Dun brags that China's restrictions on GMO-labeling are more strict than in other countries. Unlike other countries that permit 1%, 5%, or 10% GM-content without labeling, China requires foods to be labeled if there is any GM content whatsoever, even .00001%. Chinese people must be notified if they are eating a single modified gene because it might be dangerous. Last month, Vice Minister Niu snuck in a jab in a news media interview, complaining that the United States had not given China enough information about a mysterious field of genetically modified wheat found in Oregon.

All of China's wheat is non-GMO, so it's safe and environmentally benign, right? Let's look at how China grows its non-GMO wheat.

Since 2012, China's main strategy for boosting wheat production has been to mobilize armies of farmers, tractors, airplanes and drones to drench wheat fields with a cocktail of chemicals. Farmers Daily said the central government budgeted 1.7 billion yuan ($275 million) in 2013 to subsidize a "one spray, three protections" program that distributes subsidized pesticides, fungicides, growth promoting chemicals, liquid fertilizer and micronutrients to all wheat-growing areas. These chemicals are mixed together in tanks and sprayed on wheat fields.

The standard level of subsidy was 5 yuan per mu. Last year the spray covered 340 million mu (56 million acres) with the chemical cocktail. The pesticides protect wheat from pests like aphids; fungicides prevent diseases like leaf rust and powdery mildew; growth-promotants and fertilizer help the heads of wheat fill with more kernels and prevent them from losing moisture and getting blown over. The Ministry of Agriculture estimates that the spray raised the average national yield by 3.5%.

Common chemicals include a systemic fungicide called thiophanate-methyl (TM) and cypermethrin. a fast-acting neurotoxin in insects.

According to the U.S. EPA's reregistration eligibility decision for thiophate-methyl,
"TM is a systemic fungicide used on a variety of tree, vine, and root crops, as well as on canola and wheat. TM is of low acute toxicity, but causes liver and thyroid effects in animal studies and has been classified as a probable human carcinogen. Its metabolate, MBC, has also been shown to cause adverse testicular effects. However, dietary exposure to TM residues in food and water is extremely low as is the cancer risk posed to the general population. Of greater concern is the risk posed to pesticide workers, particularly mixers/loaders/applicators, and field workers who come into contact with treated foliage/crops/lawns/turf/etc."
Consumers will find no label on flour or bread warning them that it might contain traces of these chemicals.

Rich districts spray the countryside with pesticides, fungicides and other chemicals from helicopters and drones. According to the National Pesticides Telecommunications Network (NPTN), cypermethrin is highly toxic to fish, bees and aquatic insects.

drone spraying in Beijing

Pesticides delivered by well-fed official in his black car.
Company officials deliver "one spray, three protection" subsidized chemicals to spray on wheat...and took the subsidies back to the company.
 Official issues orders to spray via megaphone.
Look what was under the Christmas tree!

So, this is China's "scientific outlook on development." They obsess over unproven risks. Instead, they subsidize other activities that have scientifically-established risks--spraying the countryside with carcinogenic, bee-killing chemical cocktails.