China Aims For Target Prices and Big Grain Stockpiles

Premier Li Keqiang recently announced China’s intent to adopt “target price” subsidies for grains and to boost state reserves. The new measures are a continuation of Premier Li’s strategy of moving toward a more market-oriented farm policy, but they also reflect an attempt to deal with giant stockpiles and price distortions that have resulted from the current price support policies.

In January 2014, Chinese leaders announced an experimental “target price” program to begin this year in northeastern provinces for soybeans and Xinjiang Autonomous Region for cotton. The June 25 announcement signaled the State Council’s intent to eventually adopt the target price model as a general subsidy approach that will replace the current support price programs for major commodities. The new announcement seems hasty since the experimental programs haven’t begun yet, and officials haven’t even announced the details of how the trial target price programs will be implemented with the harvest just a few months away.

The target price subsidy is a payment based on the difference between a government-set “target price” and the market price—when the market price is below the target. This is described as a more market-oriented policy that will still protect farmers’ income and motivate them to produce. However, it is likely to produce massive subsidy payments as producers make their planting decision based on the high target price, expanding supply, driving down the “market” price, creating big gaps between the target and market prices. With no way of verifying production or sales by tens of millions of producers, the program will be an invitation to fraud and corruption.

While the error-riddled China Daily article picked up by English-language news media emphasized the target-price subsidy, the Chinese-language official news media emphasized expansion of grain storage and purchasing as the main theme of the State Council’s decision. The call for more grain storage capacity appears to be motivated by a confusing mix of objectives: a short-term urgency to create more space for this year's crop and a long-term need to use huge stockpiles to control prices under the more "market-oriented" target price policy.

Noting the recent growth in grain production—including this month’s big wheat harvest--the announcement noted that some regions are seriously short of grain storage capacity. The announcement said grain purchase and storage is currently “an urgent matter” and also “a long-term responsibility.” Officials want to make sure that farmers can sell their grain at ever-rising prices. The security-obsessed Chinese regime is probably worried that problems selling grain could set off rural uprisings.

The first specific task identified by the announcement was to sell off existing grain reserves to make room for the new harvest. Grain production has continued booming over the last two years but consumption has plummeted, thus the government has had to take millions of tons off the market to prevent prices from falling. With bins full in many places, officials have recently been holding auctions to sell millions of tons of reserve corn, but there have been relatively few takers since the price is too high.

Another clue about the urgency of whittling down corn reserves is a proposal floated in the announcement to “give support to corn processors in areas with storage problems.” On June 24, Heilongjiang Province announced a 100-yuan-per-ton subsidy for processors with capacity of 100,000 tons or more for 2014-15. Subsidies for processing corn into starch and alcohol products are a sharp turn-around from less than two years ago when officials were trying to rein in industrial use which had broken through their 26-percent maximum share of corn consumption.

Premier Li’s announcement called for boosting grain storage by 50 million metric tons (mmt) during the next two years, focusing on northeastern corn-production areas and southern rice regions. Local governments are urged to boost reserve capacity by 25 mmt this year, and to keep a 6-month supply on hand. Private operators are urged to invest in grain storage facilities and grain-drying equipment.

Why is China in urgent need of so much grain storage? It has roads and rail that can transport grain to any corner of the country within days, if not hours. China is the world’s largest international trader and a big owner of shipping. Grain can be transported from the Americas or Europe to China within weeks. Surely, China is not planning to engage in a war that will disrupt shipments from a major grain-supplier during its “peaceful rise”? ;)

China's beef prices and imports surge

A 2013 beef market report by the Chinese Academy of Agricultural Sciences (CAAS) noted that Chinese beef prices rose 30 percent during 2013 and have tripled since 2002. Soaring prices and a surge of imports during 2013 were due to tight supplies combined with flourishing demand.

At the end of December 2013, the average price in beef-producing provinces was 57 yuan per kg (about $4.23/lb) and the price in southeastern provinces was over 70 yuan ($5.20/lb). Since then, prices have gradually fallen but remain at a high level. Compared with pork prices--blamed as a chief cause of inflation in past years--beef prices have shown much stronger upward momentum since 2011 (see chart).

 

Source: China Ministry of Agriculture data analyzed by dimsums.blogspot.com.

According to official statistics, China’s beef output increased 1.7% during 2013 to reach 6.73 million metric tons. However, some doubt the accuracy of the numbers. An Economic Reference News article on the beef industry in early 2013 reported that beef cattle numbers have been falling dramatically in Shandong and Anhui, two traditional beef-producing provinces.

The CAAS analysis cites several reasons for sluggish growth in production. First, a grassland ecological restoration program has reduced the number of cattle (and sheep--also soaring in price) in major pastoral regions of western China to rehabilitate overgrazed pastures. The program has raised production costs by channeling livestock from nomadic-style grazing to confined production systems with higher costs. (Interestingly, this program was initiated in 2011, the same year beef prices began their surge.) The analysis says this is a short-term disruption of production.

The CAAS analysis also cites higher costs of labor, feed, disease prevention, transportation and other factors. A 200-kg calf now costs 8,000-10,000 yuan in 2013, up from 5,000 yuan in 2011. Net returns are low, and the long production cycle of fattening cattle makes it uncertain that farmers will recover their investment. Thus, many farmers have quit raising cattle and slaughtered their heifers.

Consumer demand for beef is rising in China. Beef and mutton were traditionally consumed by Muslims, Mongolians and other ethnic minorities in grassland regions. Now the predominant Han ethnic group—which traditionally consumed pork as their primary meat—is increasing consumption of beef due to health considerations and popularity of hot pot and barbeque restaurants. The average per capita purchase of beef was reported to be 2.5 kg per person in urban areas and 1 kg in rural areas during 2012, well below the world average. Economic Reference News cites experts who believe two-thirds of beef is consumed away from home.

During 2013 China imported 294,200 metric tons of beef valued at $ 1.27 billion, a four-fold increase from the previous year. The average unit value of imports was equal to about $ 2/lb, less than half the Chinese price of beef. Imports came from Australia, Uruguay, New Zealand, Canada, and Argentina. China’s exports of beef fell by half to 5,874 metric tons.

 

The flourishing demand and high prices have stimulated a new mode of beef production in Heilongjiang Province. A Harbin investment company has just announced a plan to entice farmers to invest in an 11,000-head Angus beef cattle production project. Chinese farmers contribute 500 yuan to a "risk fund" for each animal they raise in the facility. The company centrally purchases feeder cattle and provides free feed, vaccines, and water treatment. Farmers raising cattle at the facility receive a payment of 4 yuan per kilogram of weight gain. According to the announcement, the net return to the farmer/investor/employee is expected to be 1000 yuan per head. This is described as a new style of cooperation between companies and farmers.

Large vs. Small Farms in China--Costs and Returns

During May 20-21, China's Minister of Agriculture Han Changfu made an inspection tour where he advocated "family farms" in Songjiang, an outlying district of Shanghai. To emphasize the advantage of large-scale "family farms," Minister Han emphasized their net earnings of over 20,000 yuan per year--higher than earnings from working off-farm.


Speaking to a "family farmer" who used to work as a mason, Minister Han said, “You are happy farming [and] enjoy the rural scenery. In a year you can earn 27,000 yuan and the green fields are ‘your masonry.’” Han called for implementing the third plenum of the party’s 18th congress by energetically "pushing forward the healthy, orderly development of family farms."


However, in order to assemble large parcels of land one must rent dozens of smaller parcels from neighboring farmers. As demand for land increases, land rents have been rising, threatening to wipe out the purported profits of the large farms.


A 2012 survey of farms in Jiaozuo--a prefecture of northern Henan--compared the costs and returns of 24 large farms and 360 small-scale peasant farms. The farms grew winter wheat followed by corn. There was a negligible difference in grain yields between the two types of farms. The overall income from farming is roughly the same for the two types of farming--the difference is the way it's distributed.

Source: Henan Statistics Bureau survey

The cost of physical inputs and services per unit of land was nearly the same for large and small farms. Large farms had slightly higher expenses for interest and depreciation. Most of the surplus over these expenses is paid to rural villagers with collective land ownership rights. When small-scale farmers cultivate the land themselves they pay little or no rent, so their net return is the combined return to their management and their land ownership. The "labor cost" mostly reflects the opportunity cost of family labor, so this "cost" is also income to the land-holding family.

The biggest expense for large farms was the land rent of 722 yuan per mu (about $722 per acre) which ate up most of the net return per unit of land for large farms. The large farms pay land rent to village land-holders, thus the rental expense for large farms is an income stream for village land-holders who rent land to them. Large farms typically hire local villagers to do farm labor. Thus the large farms' labor cost is also an income stream to the villagers. The combined land rent and wages per mu that large farms paid to villagers was only slightly less than the net return and labor cost of small farms. Large farms use half as many labor-days per unit of land (3.2 days versus 6.8 days per mu) compared with small farms, so the main result of organizing the land in large farms is lower labor input and more machinery inputs. Ironically, maintaining collective ownership of the land creates a class of mini-landlords who sit at home or work elsewhere while collecting rental payments from large farms.

A June 5 commentary argues that large farms are not a panacea for Chinese agriculture and larger is not always better. The author points out that large-scale farms need complementary investments in irrigation, management, marketing, roads, storage, field-leveling and other infrastructure to make a large farm viable. Moreover, assembling a 1000-mu farm entails consolidating hundreds of plots and appeasing dozens of landlords, also a costly and difficult process. He cites the example of Netease, an internet company that spent years setting up a pig farm, delayed in part by disputes over land. The commentator adds that big farms often need to be paired with related projects. For example, a large pig farm needs an organic fertilizer factory to treat the manure, methane gas and electricity generation.

The large-farm campaign creates another layer of subsidies. Many local and provincial governments give large farms subsidies to offset the land rents that eat up returns and fund costly investments. Rent subsidies, in effect, are a transfer payment to village landholders. Government subsidies for investments mean that only a chosen few "model" farms have needed investments--there isn't enough money to fund investment by the entire industry. Thus, large scale farmers end up concentrating on their fight for government support, says the commentator.

Ethanol From Cadmium Rice

A Chinese rice expert suggested planting new "super rice" to suck heavy metals out of polluted soil. He recommended that the toxic rice be used to produce fuel ethanol.

The recommendation was made at a fuel ethanol conference held in Guangdong Province. An aid to China's octogenarian superstar rice-breeding Yuan Longping gave the speech--Yuan was unable to be present due to "an important meeting." The "super rice" varieties tend to absorb large amounts of heavy metals from the soil. Yuan's aid suggested that planting these super rice varieties could be a cost-saving measure to rehabilitate the soil by sucking cadmium and other toxins out of polluted soil.

It is estimated that one-fifth of China's cultivated land--including 25 districts of 11 provinces--and 12 million metric tons of grain produced in China are contaminated with heavy metals.

Since the rice would be toxic, it was recommended that biofuel companies make it into fuel ethanol, purportedly "turning waste into treasure." 

It is estimated that "12 percent or so" of the soil in Guangdong Province is contaminated. However, scientists say there is still no accurate data on soil contamination in the province. A new soil survey was begun this year but testing is not complete and results won't be released until next year. "The evaluation is not good."

Guangdong reportedly obtains over 90 percent of its energy from outside the province--mostly coal. According to a speech by an official of the provincial development and reform commission, Guangdong's first fuel ethanol project is under construction. The Zhenjiang cassava ethanol plant is expected to begin producing 150,000 metric tons of ethanol annually in 2015. It will supply fuel ethanol to four prefectures in western Guangdong.