Thursday, August 14, 2014

Chinese Rice Mills Cry For Subsidies

Articles in two Chinese government-run newspapers warn that shrinking margins threaten to push rice mills out of business. The inferred implications of the articles are that mills need subsidies to stay in business and imported rice should be blocked to restore "order" to the market.

Two remarkably similar articles on the dire situation facing China's rice mills appeared a month apart in newspapers that serve as Chinese communist party mouthpieces. An investigation of rice mills in Jiangxi Province appeared July 23 in Chongqing Daily. A second article appeared in Farmers Daily on August 13, describing a very similar crisis facing rice mills in Liaoning Province. The two articles with different authors stated very similar findings from their "investigations" in opposite ends of the country: a major area for producing long-grain rice in the south, and a major medium-grain rice-producing area in the northeast. Their similarity suggests either the authors were working from the same propaganda playbook or one author copied from the other.

Both articles emphasize the "paddy strong, rice weak" pattern that has been a theme of the rice market over the last 2+ years. The price of unprocessed paddy rice has been rising faster than the price of milled rice products, narrowing profit margins for mills.

The article on Liaoning attributes the weak rice price to the weak macroeconomic environment in China. Farmers Daily says many construction projects have ground to a halt in Liaoning, so bosses have stopped making bulk purchases of rice to feed workers. The article says purchases by workplace and school cafeterias have dried up. Both articles also blame low-priced imported rice for the weak rice price. Imported rice from Vietnam directly competes with long-grain rice in the south. The Liaoning article claims that it also puts downward pressure on the medium-grain rice price in northeastern China.

Both articles attribute the rising price of paddy rice to the government's increased price support and rising production costs. A grain bureau official quoted in the Jiangxi article has another explanation. He says mills "blindly" expanded capacity beginning in 2010 to qualify for participation in government rice auctions.  Mills competed to buy rice to fill their processing capacity, thus bidding up the price of unprocessed rice.

Both articles say mills are experiencing shrinking or negative profit margins. Many are closed or operating below capacity. Some mills operate at night when electricity rates are lower. Others automated packaging to save on labor. Nevertheless, many medium and small mills have unpaid debts and are having trouble getting credit. The Liaoning article says large mills continue operating at a loss to maintain their customer base. One industry expert says a shakeout of mills is on the horizon. The prospect of mills closing is said to be a pending disaster for farmers.

Both articles suggest that rice mills need subsidies to survive, but they are vague about the type of subsidy. Both also emphasize the importance of large mills as industry leaders and mention "disorder" in the market. Both mention that some large mills got subsidies to buy automated equipment or to build grain storage facilities.

The articles probably have been planted to justify subsidies for rice mills to build storage facilities, following up Premier Li Keqiang's announcement of such subsidies last month (see last month's post on "China's Subsidized Rice Glut."

A second reason for the articles may be to justify measures to block imported rice to restore "order" to the market as preparations are made to buy a new rice crop at inflated prices. Good Morning, Vietnam!

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