Monday, May 26, 2014

Price Index Insurance Pilot Programs in China

China has been experimenting with agricultural price index insurance, a new approach to mitigating the risk of price fluctuations.

A recent description in Economic Reference News highlights a pilot for vegetable producers initiated in Zhangjiagang, a prefecture in northern Jiangsu Province. The price index insurance product is offered by Peoples Insurance Company of China (PICC) with 90 percent of the premiums paid by prefecture and township governments. A basis price is set--apparently the commodity's wholesale price during the same period in the previous year. If the current period's price falls below the basis price, the producers receive a compensation payment from the insurance company based on the price shortfall.

The Zhangjiagang pilot is for leafy cabbage-type vegetables grown in the summer when they are in short supply. The basis price is set using average price data provided by local price bureau surveys every 10 days. Last year the insurance company paid out 80,000 yuan to insured producers.

The insurance covers key "production bases"--groups of producers in a contiguous area such as a village or a township. The insurance contract is signed by prefecture officials with the local branch of the insurance company. Then township officials order village officials to go door-to-door collecting premiums and signing up all the vegetable producers in their village. The number of production bases covered will be expanded this year to all bases of at least 50 mu (8.2 acres) and large-scale individual- or company-operated farms producing leafy vegetables. It will also be expanded to include lettuce and spinach.

In 2011, the Shanghai agricultural commission and Anxin Insurance Co. began offering nationwide vegetable price insurance. The experiments with price insurance were endorsed by this year's "Number 1 Document." Beijing began a pilot price index insurance product for 143 large-scale hog producers in Shunyi District in May 2013. This one was offered by Anhua Insurance Co. Beijing's Daxing district launched cabbage price insurance and Huairou district has chestnut price insurance.

The price insurance is said to be modeled on similar insurance products offered in developed countries. It's considered an exploration of less market-distorting policies. Vegetables and hogs are commodities that have had especially prominent problems with gyrations in price. 

The price insurance scheme is a slightly more sophisticated version of the "temporary reserve" stockpiling policy that has tried to assure farmers that the price will not fall below a threshold set by the government. It also bears resemblance to the "target price" subsidy scheme that is just being tried out for the first time this year. In the insurance scheme, the government finances nearly all the payouts by subsidizing 90% of the premiums, but it engages an insurance company to conduct the program.

Some experts worry that the insurance product fails to spread risk. All producers experience the same fluctuations in price, so there is risk of large payouts. Risk multiplies as the insurance is spread to more commodities and regions since the price fluctuations of various commodities in all regions to tend to occur in sync with one another. The insurer faces the risk that all prices could be low and demand payouts simultaneously. Moreover, price fluctuations for vegetables and hogs tend to be greater than production quantity risks. Thus, the price insurance faces greater risk of large payouts than traditional production insurance.

Sunday, May 25, 2014

U.S. Pork Dominates Tibetan Market

A news item from Tibet notes that 80 percent of the pork in the capital city's market is imported from the United States.

The reporter visited the Chokpori (Yaowangshan) market near the Potala Palace in Lhasa and found that 80 percent of the 40,000 kg of pork sold there is frozen pork imported from the United States. He said the pork had become popular with consumers because it is much cheaper than Chinese pork. It sells for 11 yuan per jin (about $1.75/lb) in Lhasa, and its price at the port is just 7 yuan. According to the reporter, the pork maintains its quality over the vast distance and has good quality and taste.

The reporter emphasized the safety of the pork, noting the freezers filled with neatly-stacked boxes clearly labeled with production date and lot numbers. Every morning inspectors from the local animal quarantine bureau come to inspect samples.

A local quarantine official credited the American production system for the low price. In contrast to the large number of small, inefficient producers in China, he said the American farms are large-scale industrial operations with low costs.

Lhasa's American pork take-over may be a peek into China's future.

In most of China, pork has until now been produced within a few miles of the final consumer. Now, as the country becomes urbanized, pig farms have to move further from consumers, and chilled or frozen meat will become the common way of marketing it. New regulations on hog-farm pollution are hastening the shut-down of hog farms this year.

Lhasa is way ahead of the rest of the country on food-miles. Most of Lhasa's food has to be shipped in due to the lack of local food production in Tibet. Shipping frozen pork from America is cheaper than shipping it from, say, Sichuan, Henan or Heilongjiang. While Chinese consumers are said to have a strong preference for freshly slaughtered meat, those preferences can change if there is money to be saved.

Thursday, May 22, 2014

Officials: Big Reserves at High Prices

Some of China's top agricultural policy advisors acknowledged that China has massive reserves of grain that are "hard to digest" given low international prices. In light of these problems, they say the "temporary reserve" price-control policies will have to be changed. The comments were made at a May 16 forum on food security held in Beijing.

Cheng Guoqiang, a senior agricultural policy advisor and advocate of "target price" subsidies, said reserves of corn and rice are at a historical high, and other commodities are at 60-70% of their record levels. Overall, he said, China has a half-year's grain consumption in inventories--that would be about 300 million metric tons.

Nie Zhenbang, former head of the Grain Bureau, said grain imports have been flowing into the country despite big domestic inventories of grain. This is because international prices are much lower than China's prices. Nie said granaries in the northeast were filled to capacity with corn and inventories are plentiful in the south, as well.

Ni Hongxing, director of the Ministry of Agriculture's Agricultural Trade Promotion Center, described the big grain reserves as "hard to digest." He said the big reserves ensured China's food security, but he sees the China-international price gap continuing for quite some time. Thus, China imports cheap grain that flows into the market while it stockpiles expensive domestic grain. In view of this situation, Ni said the temporary reserve stockpiling policy needs to be changed in favor of a more company-oriented policy.

The high-level food security forum was held at the Chinese Academy of Agricultural Sciences in Beijing and hosted by the Ministry of Agriculture's Research Center for Rural Economy and the China Agricultural Resources Fund.

Tuesday, May 20, 2014

Chinese Soybean Defaults Reflect Underlying Weaknesses

In mid-April, news began spreading that Chinese importers were backing out of soybean purchases. Some defaulted on their contracts because the penalties and lost deposits were less than they would lose by accepting the soybeans. As usual, the situation is murky, Chinese industry leaders are blaming the foreigners and calling for more subsidies and protection from the government. But the root of the crisis lies in the immaturity of the Chinese economy:
  1. Everyone makes money as long as prices go in the same direction, but everything freezes up when prices go in the opposite direction.
  2. Rigidities and interest rate controls create black market arbitrage opportunities that distort markets for real commodities. 

Chinese Commerce Ministry officials have been in Shandong Province--ground zero for the crisis--talking to soybean importing companies to find out the extent of contract defaults and whether importers are being denied letters of credit.

According to the news media report, the officials found that rumors exaggerated the number of defaults, concluding only 100,000 metric tons was actually in default, not the 2 million metric tons or more rumored. Companies told the Commerce Ministry officials they are operating normally.

The Shandong Sunrise Group--China's largest soybean importer--has been at the center of the crisis. It was rumored to have defaulted on multiple cargoes with others en route lacking letters of credit, but Sunrise's chairman claims the company has not defaulted on any shipments. Sunrise claims to have a 70-billion-yuan (over $10 billion) line of credit adequate to import soybeans despite incurring big losses on them.

With prices rising at the Chicago Board of Trade, and Chinese vegetable oil and soybean meal prices down, losses on processing soybeans in China are said to be at an historic high of 300-to-500 yuan per metric ton. Importers admit they have been backing out of shipments, but more often through wash-outs or transferring the cargoes to other buyers. The Sunrise chairman claims his company sold cargoes to an American company at a loss of 100 yuan per metric ton--they would have lost 800 yuan processing them in China.

Chinese buyers had been contracting for excessive volumes of soybeans despite a depressed market. Chinese vegetable oil companies cut retail prices in 2013 and cut them again in March 2014. Demand for feed and soymeal has been down since last year and was hit again by fears of H7N9 that severely reduced demand for chicken in 2014.

The actual monthly demand for imported soybeans in China is estimated to be 5-to-5.5 million metric tons a month, but buyers had reportedly contracted for as much as 20 mmt in the first three months of 2014. On March 29, the Chinese Food and Native Product Import-Export Association called a meeting where soybean industry representatives agreed to cut back on soybean imports to reduce processing volume and eliminate excess supply. Nevertheless, imports increased in March and April and within weeks rumors of soybean defaults began circulating.

According to industry insiders, imports of soybeans were driven by profits from underground lending and one-way bets on the exchange rate that divorced soybean-importing from the actual supply and demand for the commodity. Importers got funds from a letter of credit from a commercial bank that had to be repaid in 90-to-180 days. Until the soybeans arrived, the importer would make short-term loans to other borrowers in need of cash at high interest rates. The importers also took advantage of the rise in the Chinese currency against the dollar during the period from the signing of the contract to delivery of the soybeans to make profits.

An industry insider told Company News that this was a virtually risk-free way to make money on a 60,000-metric ton cargo worth 250 million yuan, and it was widely practiced in ports in Shandong, Jiangsu and Guangdong Provinces. The Sunrise Group chairman complains that people in other lines of business piled into the soybean-importing business to make money in this way. (The Sunrise chairman himself reportedly made his stack of cash in the petrochemical business but he views himself as a bona fide soybean-processor.)

For whatever reason, the banks stopped issuing letters of credit. The conventional explanation is that they were deterred by the negative processing margins. One company representative denied that the government ordered banks to stop issuing the letters of credit. The exchange rate arbitrage was reversed when the Chinese currency began falling against the dollar this year.

A Heilongjiang soybean industry association official (nearly always quoted in soybean articles) blamed the problems on excess soybean processing capacity. The Sunrise chairman is calling for the government to give soybean importers subsidies or tax breaks and to "raise the threshold" for entry into the soybean processing industry.

The news media doesn't acknowledge it, but the excess capacity is itself a distortion created by government-directed bank lending. In 2008, officials were alarmed that multinational companies had nearly half of the country's soybean processing capacity. They launched a campaign to finance more capacity construction by state-owned companies like COFCO and Sinograin. The credit from state-owned banks created the excess capacity, depressed returns from processing soybeans, and induced operators to find other ways to earn profits. The big gap between official interest rates (paid by state-owned companies) and gray market rates created the "soybean finance" arbitrage opportunity that further divorced soybean import decisions from basic supply and demand.

The Sunrise Group chairman blames the lack of pricing power for the crisis. He laments that the Chicago Board of Trade determines the price of soybeans with no say from Chinese companies. In addition to his demand for subsidies, he recommends that Chinese authorities establish a soybean futures market in the new foreign trade zone in Shanghai as an alternative to CBOT. But doesn't China already have soybean futures trading at the Dalian commodity exchange? Didn't China start futures trading 20 years ago only to shut it down within a couple of years?

According to one report, Chinese authorities began the "temporary reserve" program to gain soybean pricing power when prices crashed in 2008. That attempt to divorce Chinese prices from the international market failed badly and is being eliminated this year.

China will never have a well-functioning commodity market as long as prices are tightly controlled with non-transparent government intervention and without timely, reliable market information. The Sunrise chairman also laments the power of USDA reports to influence the market. But Chinese statisticians don't report their soybean production  guess  estimate until a year after the soybean harvest.

Sunday, May 18, 2014

Grain Tax Break Covers Soybean Reserve Sales

A decree by China's State Council expanded a tax waiver for state-owned grain marketing enterprises to include sales of soybeans held in government reserves beginning in May 2014.

Chinese authorities use the 13-percent value added tax (VAT) to encourage or discourage various behavior and to create price wedges between domestic and international commodity prices. The VAT is a 13-percent tax (for ag commodities) on the difference between the purchase value and the sale value, but there are all kinds of exemptions and rebates. Exported commodities get a rebate on VAT, except when authorities want to discourage exports. Commodities sold by farmers and farmer cooperatives are exempt from VAT. The VAT raises the cost of imported commodities by 13 percent since the VAT is assessed on the gross value of imported shipments, including tariff, when they reach China.

The new tax waiver for soybeans extends coverage of a 1999 Tax Bureau decree (财税字[1999]198号) that waived VAT on sales of grain and edible oils from government reserves conducted by state-owned enterprises responsible for managing reserves. The waiver also applied to grain used by the military, grain for disaster recovery, and to grain supplied to people displaced by reservoir construction projects. The waiver does not apply to processing of grains.

The 1999 waiver did not explicitly include soybeans. The May 2014 decree expands the waiver to cover soybeans sold from state reserves.

The main beneficiary of the waiver is Sinograin, the state-owned company in charge of managing government reserves. A Sinograin employee told a China Grain and Oils News reporter that the waiver would simplify tax accounting procedures because currently some localities collect the VAT on reserve soybeans, others don't, and still others have varying policies on the VAT.

The significance of the waiver is related to the "shun price" (顺价) principle, which roughly-translated means costs must be passed on when grain is sold from reserves:

sale price purchase price + [interest + tax + reasonable profit + labor expense].

In other words, grain can't be sold at a loss. When grain is offered at auction, the minimum price is set to cover these costs. When market prices are below the purchase price, none of the grain can be sold and it stays locked up in reserves. Exempting the seller from the tax reduces the threshold price slightly, making it easier to sell the reserve grain.

This year much of China's corn and soybeans were purchased at "temporary reserve" prices that exceed market prices. Now that the November-April procurement period has ended, authorities (and Sinograin and the Agricultural Development Bank of China which finances the reserves) are eager to dump their reserves back into the market and make them more price-competitive versus imported commodities.

Friday, May 16, 2014

269 Million Chinese Workers @ $1.90/hour

China's National Bureau of Statistics (NBS) reported its annual statistical profile of rural workers employed in nonfarm work. It shows a gradually growing class of rootless untrained workers who man factories and construction sites. Their wages are rising rapidly, but are still low at $1.90 an hour. Living expenses are rising even faster. About half receive free or subsidized housing from employers, but that proportion is gradually falling.

NBS estimates that the country had 268.9 million rural nonagricultural workers in 2013. The number of rural workers increased 6 million from 2012 and is up 45 million from 2008 when NBS first started reporting annual numbers. (In English translations, NBS calls these people "rural migrants" but many work near home and live at home.)

China's rural nonagricultural labor force of 268.9 million equaled 34.5 percent of China's employed workers in 2013. It was roughly twice the entire U.S. nonagricultural labor force of 136.4 million.

Most, but not all, of the work is performed away from home: 102.8 million were employed in their home township while 166.1 million worked away from home. Of those working away from home, 47% were outside their home province.

Wages have been going up much faster than the number of workers. The average monthly earnings of rural nonagricultural workers rose 13.9 percent in 2013. This follows increases of 11.8% in 2012, 21.2% in 2011, and 19.3% in 2010.

Monthly earnings for rural workers averaged 2609 yuan, or $421 at an exchange rate of 6.2 yuan per dollar.

On average, they worked 25.2 days per month and 8.8 hours a day. Based on 222 hours of work per month, the average worker earned 11.75 yuan per hour, or $1.90 per hour at the current exchange rate. This doesn't include the cost of housing and feeding the workers borne by employers.

Most are employees working for wages; only 16.5% were self-employed. Of employees, 60% worked in manufacturing and construction sectors, while 82% of self-employed worked in services.

These are workers, not consumers. They live on a shoestring, presumably saving or sending most of their earnings home. They only spent an average of 892 yuan ($144) per month on living expenses. Most of that was spent on their housing--453 yuan ($73)--although 47% received free housing from their employer and 9.2% got money for housing from their employer. The predominance of employer-provided housing underlines the rootlessness of the workers. Less than 1 percent of migrants owned a home in the city where they work.

Expenses are going up faster than earnings--average living expense increased 21.7% in 2013. The share of workers getting employer-provided housing fell 3 percentage points. Expenses are higher in big cities, at 972 yuan, versus 807 yuan in small towns.

Most workers are unskilled: 29.9% received nonfarm occupational training and 32.7% received technical training. Only 10% had received any agricultural training.

The workers spent 9.9 months on average in nonfarm employment. Presumably, they spent significant time at home in their villages helping with seasonal farm work like planting or harvesting. No one knows how many people work on Chinese farms. Much of the work is now part-time.

China's unsustainable development model has taken it far down an alley it will be hard to get out of now. In a normal economy, workers are also consumers who spend their earnings, creating more demand that creates a self-sustaining economy. Since the 1990s China's growth model has relied heavily on exploiting a massive surplus of unskilled impoverished population that was locked up in the countryside on subsistence farms for decades. This group--a third of China's labor force--provides cheap labor to turn out manufactured goods and build edifices to support the near-first-world living standards of China's privileged urban minority.

The migrants keep coming, but at a slower rate--they increased in number by 2% in 2013. Their wages, however, are rising at double-digit rates, but the workers remain rootless itinerants in the cities where they spend most of their time. They save or send most of their earnings home to villages to support dependents and build new houses. The cash flowing into villages is monetizing the countryside economy, boosting costs and prices and changing the character of farming.

Meanwhile, life in cities is becoming less tenable for migrants as living expenses rise even faster than wages.

The rural migrants also have traditionally carried out much of the trading and transportation of agricultural commodities and other goods, but are increasingly being pushed out to make room for more capitalized logistics companies.

Wednesday, May 14, 2014

Heilongjiang Grain: Half "Policy Purchases"

According to China's Grain Bureau, "policy-type purchases" accounted for more than half of the grain purchased in Heilongjiang Province for the 2013-14 market year. Authorities have been saying for decades that they want market forces to play a greater role in allocating grain, but China seems to be once again retreating from marketization as authorities obsess over "food security".

The National Bureau of Statistics says Heilongjiang is now China's biggest grain producer, with output at 60 million metric tons (mmt) in 2013, just under 10 percent of the national total.

The Grain Bureau statistics say that a total of 60 mmt of Heilongjiang's grain had been purchased by April 2014 (that's the entire harvest--surely an overstatement since farmers still retain significant quantities for their own use). The Bureau also reports that "policy-style" purchases accounted for 33.85 mmt of grain procured, or 56 percent of Heilongjiang's total. Policy purchases doubled from the previous year.

Jilin Province produced a record corn crop, but 85.7 percent of Jilin's corn was purchased for the "temporary reserve," a total of 28.4 mmt.

This year, Chinese authorities bought record amounts of japonica rice using the "minimum price" program and corn for "temporary reserve". These are classic price support programs in which the government stands as the buyer of last resort if others will not buy farmers' grain at the specified minimum or "reserve" price.

The Grain Bureau says it opened more government purchasing points in Heilongjiang to ensure farmers could sell their grain. The province has 390 facilities for storing rice purchased at minimum price and 996 facilities for holding corn and soybeans purchased for "temporary reserves." They rented 489 privately-owned granaries to store the stockpiled grain.

The increased role of government in grain-purchasing is portrayed as providing services to farmers to prevent them from experiencing losses from "natural disaster." Local government grain depots have been organized to purchase, store, and dry grain on behalf of farmers--"three services"--to eliminate hazards of bad grain and eliminate farmers' difficulty selling grain.

The services are specifically intended to address the problem of moldy grain. Due to emergency conditions in the province, national standards for mold have been relaxed in Heilongjiang to permit grain with mold content up to 5 percent to be held in government reserves.

The resurgent government role in Heilongjiang and Jilin is especially significant since these provinces are the largest producers, experienced the most rapid growth in output, and are expected to be the main suppliers of grain to southern provinces. Heilongjiang Province statistics indicate the province has expanded its grain-planting area by 30 percent since 2004. Yet the government has to buy up half the province's grain, paid a subsidy of 140 yuan/metric ton to ship 1.6 mmt to the south, and much of the corn is moldy.

While Heilongjiang is filling its bins with moldy corn that will poison livestock, quarantine authorities have been turning away imported corn containing a variety that has been tested over and over and eaten by animals in other countries for years but can't be allowed into the Chinese market because of its supposed risk.

Tuesday, May 6, 2014

Destroying Pig Farms to Save the Industry

Since 2013, officials have been demolishing pig farms all over the country. An article asks, "Pig Farm Demolition: Industry's Rebirth or Destruction?"

The demolitions are motivated by concerns about poor environmental controls and the prevalence of "problem pork" which has consumers "trembling with fear" over food safety. The embarrassment of the dead pigs floating in Shanghai's Huangpu River in March 2013 spurred the demolition campaign.

The government had been encouraging pig-farming in recent years. There are many new large-scale farms, yet many small, scattered, dirty farms are popping up, especially in rural areas.

Farmers complain that they will have nothing to do after their farm is demolished. But the article suggests that the demolitions may help save the industry by removing polluters to upgrade quality and confidence in the industry. 

China seems to have started to turn the corner from its growth at all costs strategy.

Smithfield, Shuanghui's "foreign brother"

China's Shuanghui Company acquired Smithfield Foods last year and became the world's largest pork company. Now Shuanghui is launching a plan to market Smithfield pork throughout China this year.

On April 26, the first Smithfield sales counter was opened in Luohe City, a small city in Henan Province that is the home base of Shuanghui. This was said to be a new "homecoming" for Shuanghui's "foreign brother." Another "Smith" brand counter was opened at a Lianhua supermarket in Zhengzhou.

Shuanghui has a plan to roll out pork from Smithfield throughout China over the course of 2014. In May they plan to open 10-to-15 special "Smith" meat counters, boost it to 20-to-30 in June, and sell nationwide in the second half of the year.

The plan is to import 5000 metric tons of Smithfield pork into China in 2014. The author points out that would be equal to about 1 pound for each person in Zhengzhou.China has been a net importer of pork since 2008. According to the article, China's pork imports were up 13.4 percent in 2013.

In the past, imports were mainly frozen pork used in processing plants. Imported pork was seldom available in retail markets. Shuanghui hopes to import chilled pork and pitch it as a high-quality, convenient product. They have done a lot of research to overcome logistical problems in order to get the pork from the Smithfield processing plant to the meat counter in China within three weeks, with the temperature controlled during the whole process.

China's pork industry is in a consolidation process. Less than half of processing capacity is utilized. Shuanghui has sales of 50 billion yuan, but that's reportedly less than 5 percent of the Chinese pork market. During 2012-13, China's Ministry of Commerce required all pork companies to be re-licensed, which resulted in 5000 companies being shut down. COFCO, China's largest state-owned agribusiness is rumored to be in negotiations to acquire Jinluo, another of China's leading pork processors, but neither side is confirming the rumor. Previously, it was rumored that COFCO was in talks to acquire Yurun, but negotiations stalled.

Shuanghui's first quarter report said the company slaughtered 3.9 million hogs during January-March 2014, up 38 percent from the same period in 2013. Operating income was up only 5 percent, but profit was up 40 percent. Meanwhile, hog producers have been losing 300 yuan on every hog they send to the slaughterhouse this year. Sounds like Shuanghui is benefiting from lower Chinese hog prices.

Sunday, May 4, 2014

(Another Wasteful) Big Oilseed Tree Plan

Beware the "win-win" campaign that promises to make money for companies while eliminating poverty.

China's State Council is preparing a big plan to plant oilseed-bearing trees on sloped land, salinized land, and wetlands they plan to remove from grain production. The plan calls for planting oil-bearing trees like tea oil, walnuts, a type of almond, oil peony, maple and sumac on 200 million mu (about 33 million acres) of land by 2020, with a planned output of 5 million metric tons of edible oils. This will utilize land not suitable for grain production and reduce imports of edible oils, says the draft document.

In a common pattern, China is again basically rehashing similar plans formulated in the last decade. In the mid-2000s, a cabal of Chinese authorities, multinational companies and State-owned Chinese companies formulated big plans to produce biofuels by growing starch, sugar or oil-bearing crops to be used as raw material. The most prominent were sweet sorghum, cassava, sweet potatoes and jatropha--all portrayed as costless sources of energy since they would use raw material grown on land unsuitable for food crops.

This blog reported on an early flame-out of sweet sorghum for ethanol in 2008. Farmers were induced to grow the crop, but the companies promising to buy it ran out of cash and disappeared. In 2007, a plan was announced to construct a refinery in Guangxi Province to make 200,000 metric tons of ethanol from cassava planted on 1.4 million mu of nearby land.  Since the refinery began operation, China's imports of cassava have spiked--initially from southeast Asia and now from Africa.

Another big failure was jatropha, a bush that produces fruit with a seed that has high oil content. The oil is inedible but can be processed to make biodiesel. A decade ago, there were grand plans to grow jatropha across wide swathes of Asia and Africa, but Bloomberg Business Week reported on its spectacular failure.

A Chinese reporter asked why Sichuan Province's grand jatropha plan had never "caught fire." The plan left behind nothing but empty plans, debts and hillsides covered with untended trees. In 2006, the Ministry of Science and Technology designated Sichuan as a "demonstration province" for industrializing biotechnology. A crash plan was set to plant jatropha trees on 1.8 million mu (nearly 300,000 acres) in Sichuan by 2010, and 9 million mu by 2020. American and British companies and PetroChina announced a 20-billion yuan investment plan for Sichuan's jatropha industry. A refining plant was built to process the oil into biodiesel fuel 500 kilometers away in Jiangsu Province's Nantong City (presumably to export it to Europe).

The American company disappeared, and the British company withdrew by 2006. Jatropha-planting stalled and only about 200,000 mu were planted. There was no cash to tend the trees, and many died. The Nantong refinery was idle due to lack of raw materials. The jatropha trees bear little fruit--although they produce lovely flowers, most are male and never develop fruit. The trees were planted on land that lacked water in normal times. To compound problems, southwestern China experienced several years of severe drought, so water availability was worse than usual.

The Sichuan article reports on a jatropha investor who got subsidies of 5 million yuan and borrowed 7 million yuan from banks to plant 30,000 mu of trees. In 2011, only 1000 mu were bearing fruit--about 50 kg per mu--and sales totaled about 100,000 yuan. Li has annual expenses of 500,000 yuan to support 15 permanent employees, many temporary workers and transportation (but not including interest on bank loans). His company reportedly loses 400,000 yuan annually. The project promised great returns but only loaded him down with debts.

Thursday, May 1, 2014

China in Africa--Two Faces

China's engagement in agriculture in Africa is depicted to the rest of the world as a magnaninmous "south-south" aid program. For domestic audiences, Africa is a source of food for a Chinese population that has ravaged its own resource base.

The dual messages are evident in two articles posted on Chinese websites this week.

In one article, "China-Africa Cooperation in Agriculture Mutually Beneficial," cooperation between Chinese and African governments in agriculture is described as part of a growing collaboration that many Chinese companies view as a profitable investment opportunity. The investment is described as "south-south" cooperation that addresses the lack of infrastructure and low-tech nature of Africa's agriculture, and creates jobs for Africans. The article describes a strategy emphasizing use of fertilizer and pesticides, seed breeding, and pest-prevention in a four-way collaboration between universities in Uganda and Guangzhou, the Uganda agriculture ministry and a Guangzhou company. Ironically, excessive use of chemical fertilizer, toxic pesticides and weak seed-breeding are big concerns expressed in China's description of domestic agricultural policy this year.

A second article, "Xiamen Encourages Companies to Plant Grain in Africa," describes a government-industry partnership to procure grain supplies for a big city in China. Xiamen--a large coastal city in Fujian Province--signed an agreement with the Southeast Africa Common Market (COMESA) for five Xiamen companies to produce grain in the 19 member countries. The companies will set up large-scale production of rice, wheat, soybeans and other crops and build grain storage facilities to address "Xiamen's food security problem."

The program involves five companies tied to Xiamen's grain bureau system. The article emphasizes government-company partnership as an inherent part of the strategy. The director of the Xiamen grain bureau reveals that this venture is intended to meet the revived "governor's rice bag" responsibility system with mandates that local leaders figure out how to supply their citizens with grain. The rhetoric also reveals that this is part of China's strategy of "two kinds of markets, two kinds of resources" to set up tightly controlled overseas channels to fill its food deficit.

The chairman of a Xiamen rice company described the venture as "our responsibility" to grow rice in Africa and ship it back to Xiamen. Describing it like a rice pipeline from Africa to Xiamen, he emphasized their control over the entire supply chain: "the rice is ours, under our control; our control begins in the fields."

The strategy of Chinese companies producing grain in Africa is odd, since companies have little or no experience actually producing crops in China. Nearly all of China's grain is produced by small-scale rural household farms. These companies are involved in storing and transporting grain at the behest of government officials and are notoriously inefficient at it. China appears to be bringing the most inefficient, clunky parts of its economy to Africa.

The Xiamen Grain Bureau director said, "This is a great leap, showing we have grasped the initiative on food maintain the rice bag." He described the venture of Xiamen companies going out as "the first of its kind," implying that this is a model other Chinese cities will follow.