Monday, June 30, 2014

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”? ;)


jmc said...

Very interesting article.
But I have a question : at the beginning of the article you wrote tat target price " reflect an attempt to deal with giant stockpiles".

And at the end of the article, one can read that Li Keqiang called for boosting grain storage.

So, on one had, Chinese authorities want to scrap its corn stockpiling but on the other hand they want more erserve capacity.

It is logical?

Thank you

dimsums said...

The giant stockpiles are an unintended outcome of the minimum price and "temporary reserve" programs. The stockpiles are so big officials are worried that there's not enough space to store this year's crops. That seems to be the main motivation for Premier Li's exhortation to expand grain storage. He cast it as both an urgent need and a long-term responsibility.