Tuesday, September 30, 2014

China's "Bad Bank" for Ag Commodities

Now, here's a business plan: lend billions of dollars to buy items at higher prices than competitors pay and store the merchandise in warehouses. Then watch the market price of the items you financed drop. Sell the merchandise four or five years later after it has deteriorated to the point that no one wants to buy it.

This is basically the business plan of the Agricultural Development Bank of China, a "policy bank" that finances purchases of grains and cotton at support prices on behalf of the government.

The ADBC has announced that it has allocated 300 billion yuan (US$ 49 billion) to finance the purchase of fall-harvested grains--mainly rice, corn and soybeans. The prices of both commodities are far above the prices in global markets, and there is downward pressure on Chinese prices. Chinese farmers are said to be eager to sell their grain as fast as possible because they expect prices to fall as the season goes on.

Soybeans kept in storage since 2010 and 2011--financed by ADBC--were offered for sale in a Chinese auction last week but less than 15 percent of the beans found buyers. Soybean prices have been dropping, so it's unclear why they chose to sell the beans from reserves at this time. Authorities have been offering millions of tons of corn for auction every week, but most goes unsold due to poor quality and bad location. Auctions demand a starting price that covers purchase price plus storage costs--a price that exceed the current market price.

The ADBC also announced 60 billion yuan (US$ 9.8 billion) allocated for purchasing cotton this fall. ADBC has already financed a massive reserve of 11 million metric tons of cotton--more than a year's consumption--by purchasing most of the country's last three cotton harvests at prices that are, again, far above the world price. This year, officials say they are going to let the cotton price fall to a market price that equilibrates supply and demand. As the cotton price falls, the value of the cotton inventory falls.

Earlier, ADBC announced 165 billion yuan (US$ 28.9 billion) to finance the purchase of summer grain--wheat, rapeseed, and the early-season rice crop. The wheat and early rice crops exceeded demand and required authorities to stockpile 25.3 mmt of wheat and 3.8 mmt of early rice to support prices. This summer, authorities tried to auction wheat from previous years that they admitted had excessive levels of mold.

ADBC's total funds for purchasing summer and fall grain and cotton equal 530 billion yuan (US$ 86 billion).

According to one article, from 2004 to 2013, ADBC issued funds totaling 2.757 trillion yuan (US$ 448 billion at current exchange rate) to finance grain purchases.

According to its annual report, ADBC loans financed 61 percent of grain purchases and 67 percent of cotton purchases during 2013, its biggest-ever year. The report showed a trend of rising profits from 2004 to 2013, based on interest payments from state-owned enterprises holding commodities. It claimed to have only 0.7% nonperforming loans. But profits should turn into losses this year as prices plummet and the true value of the assets financed by the loans is realized.

Several months ago, Chinese authorities said policy banks like ADBC and the Export-Import Bank would be the next target for reform of financial institutions. Plans are vague so far, but seem to entail a retreat from financing commodity stockpiles for market intervention. Instead, ADBC will shift toward financing infrastructure and rural business loans.

Sunday, September 28, 2014

Stoking GMO Angst in Chinese News Media

The Chinese public's angst about genetically modified foods has been evident in the country's news media over the past couple of weeks.

Two stars of China's national badminton team have been accused by lawyers of misleading consumers by their endorsements of a cooking oil brand that is made from genetically modified oilseeds. An attorney in Kunming is leading a series of legal actions brought against five major vegetable oil brands, accusing them of failing to comply with China's regulations that require labeling food products containing genetically modified organisms (GMOs). The main complaint is that labels are too small, illegible, or missing entirely. This purportedly deprives consumers of their "right to know" and prevents them from making informed choices.

The badminton stars--a husband and wife team--are accused of giving consumers misleading information. The Kunming attorney complains that the athletes endorsed a well-known brand of cooking oil as "the choice of a champion family." The attorney claimed that national team athletes are not permitted to consume GM foods. Therefore they were misleading consumers and "must be held accountable to the public." The athletes responded, saying that there is no difference in health or nutritional effects of GM vegetable oil and there is no rule forbidding athletes from consuming GMO foods.
Label on cooking oil manufactured in Weiyang, Shaanxi Province:
"processing ingredients are genetically modified rapeseed." Is it too small?

An opinion column in the Beijing Youth News supports the lawsuit's contention, noting that labels describing GMO content are small, obscure, or absent, while non-GMO logos are displayed prominently on bottles of vegetable oil. The Beijing Youth column supports a revision of the GMO-labeling regulation, but its argument demonstrates the impossibility of requiring labeling of a product containing GMO material. The writer notes that no packages of rice have GMO labels, but tests have detected GMO material in rice sold in supermarkets and rice cakes exported to Europe. He observes that rice mills do not have the equipment to test for GMO material, so there's no way they can place a label attesting to their products' lack of GMO content.

The Beijing Youth writer seems to be unaware that no GMO rice has been approved for commercial production or sale in China. So should rice mills be required to test all the rice they process to detect any illegally-grown GMO rice and place a label on their package if they find it? Should processors of rice cakes be required to test for the half-dozen or more types of potential GMO material in all the flour they receive? Genetically modified vegetable oil is used in thousands of processed food products--will they all have to display labels? Will restaurants have to display signs indicating that their food is cooked with genetically modified oil?

A Lanzhou Morning News reporter went to local markets to see how GMO worries are affecting local consumers' shopping habits. Consumers now often ask store attendants whether various foods contain GMOs. A supermarket had a special shelf where GMO food products were kept separate from other items--nearly all products were vegetable oil made from soybeans or rapeseeds. The reporter noted that few other items had GMO labels (apparently unaware that there are only a few minor GMO food crops approved for sale in China.) He seemed alarmed that vendors in a market had GMO and non-GMO oils for sale side by side on their counters. The complaint about poor labeling was repeated. One gentleman said that labels should more clearly state GMO content so that consumers will know what they are buying. Another shopper told the reporter she hoped the print on the label could be made bigger, because "we're getting older and can't see too well."

GMO worries are showing up in all kinds of strange news stories, some almost certainly planted with ulterior motives. An article about a poll of Shanghai citizens carried a headline announcing that 80% of people worry about GMO vegetable oil. But the article's main point was that the top worries of Shanghai citizens are unemployment, inflation and getting stuck in a subway train. Respondents also said they were worried about food safety, especially new types of food, but fear of GMOs was a minor point in the story.

Another story from Lanzhou appears to be planted to ease GMO panic. A lady discovered that potatoes she bought failed to turn black after several days like they usually do. She purportedly called the newspaper's in alarm to ask whether the potatoes were GMO. The article then reported a scientist's long explanation of why potatoes turn black and explained that storage conditions and weather can affect the process. It doesn't mean the potatoes of genetically modified, readers were told.

A story from Harbin in Heilongjiang Province reports that parents of kids at a primary school flew into a panic because they suspected that school lunches were cooked with genetically modified vegetable oil. The parents reportedly gathered outside the gate of the school and were taken to inspect the factory that supplies the school lunch. There, an astute parent discovered genetically modified cooking oil from a major company based in Heilongjiang. The cooking oil was perfectly legal, but the local food and drug supervision authority advised the company to switch to non-GM oil to satisfy the parents. This story seems fishy--there's a good chance it was concocted by the province's local soybean industry to stoke opposition to imported GMO soybeans.
Primary school in Harbin where parents reportedly protested use of GMO cooking oil.

Genetic modification is probably one of the least of China's food safety problems. Will rice and wheat have to carry labels showing that it was grown in soil polluted with cadmium or lead? Will fish have a label indicating that it spent its entire life pumping polluted water through its body? Will vegetables have a label warning consumers they were exposed to smog?

Labeling possible hazards in food is impossible. Labeling a food as non-GMO is more realistic than requiring sellers to declare any possible GMO that might be in a food product. To deal with other food safety hazards, Chinese agricultural officials have pursued the opposite approach: labeling foods that are free of hazards. This began with the "green food" program in the early 1990s which labeled food that was grown in places free of soil, water, and air pollution and without toxic chemicals (it was originally an assurance to overseas customers). This approach was extended to a "non-polluted" ag product certification program in 2003.

An article published in 2011 tried to dispel rumors that genetically modified cooking oil would make Chinese men sterile by exhorting the public to "trust the government, trust science." This is precisely the problem. A population that was mainly engaged in subsistence farming a generation ago, still clings to folk traditions, has only passing familiarity with experimental science and has routinely been hoodwinked by government officials has no faith in either science or government.

Industry and political players taking advantage of a semi-informed public to stoke fears of GMOs in order to quash imports or promote foreign policy strategies are playing a dangerous game.

Saturday, September 27, 2014

China Plans Many Rural Reforms

China's chief rural policy advisor asserted that major reforms are necessary for agricultural development but reforms will be gradual.

At a recent speech given at China Agricultural University, Chen Xiwen--vice director of the "central rural policy leadership group"--signaled that major reforms are needed to address fundamental changes in the country's agricultural supply and demand and rural economic structure. While there is progress in rising grain production and closing the gap between rural and urban incomes, Chen raised concerns about a rising reliance on agricultural imports.

Chen worried that China has become a net importer of the three major cereal grains--rice, wheat and corn--since 2010. He attributes this to steadily rising demand for ag products and a gap between Chinese prices and lower international prices. Chen claims that Chinese farmers, processors, traders, "the state", and consumers all face a dilemma of no profit. He attributes this to low labor productivity, scarce land resources, and a low contribution of science and technology to agricultural production.

Chen also blames the surge of imports on current international trade rules which he says lead to abuses. He doesn't elaborate, but presumably this is a veiled complaint that the WTO and other international institutions are stacked against China. Chen asserts that China must protect its ability to increase agricultural production and must strengthen its position in international agricultural trade.

The current economic situation is both pushing reforms and slowing them down. Chen said that 50 different agricultural and rural reform items were proposed at the "third plenum" of the 18th party congress held late in 2013.

Chen highlighted progress on reforms of the "agricultural price formation system," the domestic agricultural support and protection system, registration of land rights, and reform of the residency registration system, The chief item related to price formation and domestic support is this year's "target price" subsidy pilot which has been pushed forward as a way of addressing the problem of Chinese prices being pushed above international prices by domestic price supports. Reforms of land and household registration have been proceeding slowly and cautiously due to opposition by vested interests and fears of social instability.

Chen asserted that agricultural development cannot proceed further without reform. He said many other reforms are being evaluated and promised many more major reforms in the future. However, he said the reforms would be gradual, "not overnight." Chen mentioned several land-related reforms, including the system for reassigning rural land, marketization of collective land, and mortgaging and reassignment of rural housing property rights.

Sunday, September 21, 2014

China's GMO Impasse

Chinese officialdom appears to be at an impasse on its approach to genetically modified foods. The GMO impasse may have deeper roots than most observers realize. It may be emblematic of a broader collision between officialdom's "modernization" strategy and a creeping distrust of authority that is undermining the communist party's reliance on "science" as a palliative that hides the fundamental flaws in the system.

The flashpoint is the Ministry of Agriculture's failure to renew "safety certificates" for three GMO crop strains in August 2014. These GMO varieties were in the advanced stages of testing, and loss of safety certificates prevents moving toward commercial release. There was no explanation for the non-action and no indication of whether approvals might be granted in the future. A Chinese scientist involved in developing the crops told a journalist it was "inconvenient" to comment on the failure to extend the certificates and said inquiries had to be made with the university's propaganda office.

The crops with lapsed safety certificates include two strains of insect-resistant rice and a type of corn that promotes pigs' absorption of phosphorus from feed. Apart from these, the only other crops that have received such safety certificates include pest-resistant cotton and several obscure strains: a tomato with extended shelf-life, petunias with altered color, and disease-resistant strains of pepper and papaya. The rice has attracted the most attention since its approval would make it the first main GM food crop available in China.

The GM rice varieties were developed by researchers at Central China Agricultural University. They have been in the approval pipeline for 15 years. Application for safety approval was first made to the Ministry of Agriculture in 1999. After 11 years of initial assessments, safety certificates good for five years were awarded August 17, 2009. These certificates reached their expiration date last month and were not renewed.

The safety certificates are needed for the rice to proceed through testing in field trials to evaluate how they perform in production and ascertain environmental impacts. The approval process for GM crops includes many stages. It begins with laboratory tests and trials feeding rats. Then there are field trials and environmental release. The next stage is to obtain a production license and approval for commercialization. The GM rice is still in the testing stage and was supposed to be restricted to fields surrounding the university for testing purposes only.

There has been an uproar in Chinese news media about the GM rice strains finding their way into markets. Anti-GMO activists and a Chinese TV reporter claimed to find GM material in rice they bought in supermarkets. Since 2006, the European Union's testing authority has detected GM material in 218 batches of imported Chinese rice products, including 24 this year. There has been an uproar over the suspected leakage of rice from GM trials into the Chinese market. Several months ago, Chinese authorities introduced regulations requiring fields for GM rice-testing to be surrounded by tall fences and imposing severe penalties for selling GM rice illegally.

Chinese public opinion on GM foods is polarizing. Many scientists favor commercialization of GM crops while the public is becoming resistant. The Central China Agricultural University Professor who led development of the GM rice together with 60 academicians sent a letter to China's leaders in 2011 urging them to push ahead with commercialization of GM crops. They warned that slowing the approval process would seriously harm research and would be a "national mistake." Another scientist accused the letter-writing scientists of grandstanding. Days before the certificates were to expire, a food science professor at China Agriculture University who seems to be the government's anointed spokesman on food issues urged that commercialization of GM crops developed by China itself should not be delayed. News media, commentators, and a military general circulate rumors and conspiracy theories involving GMOs. Health-conscious Chinese consumers routinely victimized by unscrupulous businessmen and lax regulatory authority are receptive to any potential food scare and have been easily persuaded to jump on the anti-GMO bandwagon.To counter this trend, GM rice-tasting events were held in 20 Chinese cities in August. One young man participating in the GM-tasting testified that he once believed conspiracy theories but now eats GMOs with no worries.

An opinion piece in Yangcheng Daily, a Shenzhen newspaper, questioned why the Government let the GM rice safety certificates expire without any explanation. According to Yangcheng Daily, some experts say that fear of public opinion is preventing Government officials from acting on the GMO approvals. However, the anti-GMO tide of public opinion is itself generated by the public's lack of confidence in the Government's ability to ensure food safety, said the Yangcheng Daily article. The Yangcheng opinion writer suggests that slow approval is appropriate until there is public consensus. Pushing GM crops through without that consensus would further undermine public confidence. However, remaining silent and giving no explanation may elevate consumer fears by presuming that the Government must have evidence that GM crops are unsafe. Furthermore, said the Yangcheng Daily, the Government owes the public an explanation since so much has been invested in developing the crops.

The approval process has been opaque all along. The documents supporting the 2009 safety certificate approval were not released to the public until lawyers wrote to the Ministry of Agriculture in 2011 demanding publication. The documents were not released until July 2014.

China's GMO conundrum reflects the undermining of Chinese officialdom's attempt to construct a "modern" society by a rapidly-emerging "post-modern" critique in Chinese society.

Since Deng Xiaoping, Chinese officialdom has pursued a strategy of "modernization" which entails adopting the technology and the institutions that they think made Western countries rich--big, technocratic government; huge, sprawling companies; big banks; and sophisticated technology. These are what academics would call the trappings of "modernity." Until about a decade ago, China was one of the most enthusiastic proponents of GMO technology. One of Chinese agricultural officialdom's chief projects for decades has been to replace unimproved local crop varieties and animal breeds with improved varieties developed by big government research institutes and disseminated to farmers by big "leading companies."

However, the failure to modernize or reform institutions of governance in China has undermined the strategy by creating distrust of government, companies and technology. All of the big institutions--government, companies, research institutes, even farmer cooperatives--are still operated in the same way Chinese institutions have always by governed: by small coteries of powerful men, their family members, classmates, and other personal connections. The common people have no voice in the governance of institutions.

Moreover, the unique feature of communist party control and interlocking/interchangeable management between government and business means that regulatory authorities are more loyal to business operators than to the common people. Hence, regulators have often given a pass to friends in business on food safety and pollution matters.

The steady stream of food safety and pollution incidents has undermined public trust in both business and regulatory authority. The common people no longer trust the "modern" institutions and are vulnerable to any conspiracy theory that comes along. Thus, they are unlikely to accept any assurance by government or business that, say, genetically modified foods are safe to eat.

The lack of trust in "big business" and technocratic government--based on the belief that their interests are intertwined and are divergent from the interests of the general public--is exactly what is pushing Western societies into a post-modern food system that rejects GMOs and yearns to return to "local food," "heritage breeds," and chickens in the backyard--exactly the kind of subsistence agriculture that China is trying to get away from. This post-modern view of the food system is rapidly gaining traction in China and undermining the country's "scientific development" project.

Friday, September 19, 2014

High Corn Prices Bite China's Livestock

"A tiny kernel of corn has become our great burden," said Mr. Yuan, the manager of a dairy farm near northeastern China's Dalian City. He purchases 60,000 kg of corn monthly at 1.35 yuan/500g (over US$ 11 per bushel). Corn prices have been rising but milk prices haven't, forcing farms to absorb the higher cost.

Ms. Liu raises 3000 hogs near Dalian and needs to purchase 200,000 kg of corn each month. She says corn accounts for 75% of production costs. The hog price is 7.4 yuan/500g, 5.5 times the corn price. Chinese farmers estimate that they need a hog price of 8 yuan to break even.

At a 20,000-hen egg farm, corn is said to account for 60% of production cost. A manager says the high price of corn has induced many egg farmers to substitute other feeds for corn. The egg price is rising, partly due to high corn prices but mainly due to tight supplies as laying hen inventories are still relatively low (presumably the fallout from avian influenza outbreaks earlier this year).

It is reported that newly-harvested corn is being sold as soon as it is dried. The price is about 1.3 yuan/500g.--about $423 per metric ton. The U.S. Gulf FOB price for corn is $162 per metric ton today. If Chinese livestock producers could import corn, they could save about $200 per metric ton.

Chinese hog prices are equal to roughly $132 per hundredweight. U.S. hog prices are about $70-$80 per cwt. If Chinese farmers try to boost their price to the breakeven price of 8 yuan/500g ($143 per cwt) as many Chinese pork industry analysts seem to be forecasting, imported pork will have significant price advantage. Watch for trade barriers to block pork imports in the near future.

Thursday, September 18, 2014

China's "Seed Sovereignty" Strategy

The Chinese government is giving domestic seed companies tax breaks, engineering consolidations, and setting up a jerry-rigged system of supplying publicly-funded seed research to private companies to prop up its seed industry. The aim is to stem the dominance of multinational companies in China's seed market and preserve "seed sovereignty."

The official China News Network reported on the seed industry strategy discussed by Ministry of Agriculture officials at a seed industry trade fair in Changsha, Hunan on September 16. In a series of documents issued since 2011, China's State Council has identified the seed industry as a "strategic foundational industry" essential to agricultural development and food security. The Government has issued supportive policies and is preparing a revision of the "seed law" which purportedly promises a "golden age" welcomed by the (Chinese) seed companies.

While China has the second-largest number of seed varieties in the world, its big seed companies are said to have only 0.8 percent of the global seed market. The "loss of quality seed resources" is said to be a serious concern. With multinational companies flooding into the market, the country's "seed sovereignty" is said to be threatened.

The seed companies have been granted a waiver of business taxes said to be valued at 650 million yuan (over US$ 100 million) in 2013. Official policy is to promote mergers and acquisitions to whittle down the vast number of small seed companies. The "threshold" has been raised for staying in the seed industry. The number of seed companies declined 30 percent, from 8700 in 2011 to 5200 now.

The revised seed law seems to envision a melding of public research with private marketing for the seed industry. Most seed breeding is conducted by publicly-funded research institutes. The government plans to increase spending on research while seed companies are described as the main players in commercializing new seed varieties. The government also seems to have a role in seed propagation. Hainan Province has a plan to set aside 50,000 mu of land for seed breeding and propagation.

Relying on public funding of research is more tricky than it sounds because government funds often fail to appear or they appropriated for use by bureaucrats and self-interested institutes to waste on flashy buildings, vehicles, and overseas trips. In a perhaps not-unrelated announcement, authorities are investigating the misappropriation of funds appropriated for research on genetic-modification of crops since 2008. 2-to-3 billion yuan was budgeted annually over that period, but "effective oversight was lacking." Some high-level researchers were in charge of research projects on GM crops while also operating or holding stock in companies. This may be why the seed law is being revised to "clearly separate" research institutes from companies.

Saturday, September 13, 2014

Target Price Details Dribble Out

During September 4-12, Chinese authorities released a series of six online documents (one, two, three, four, five, six) explaining the concept behind pilot "target price" subsidy programs for cotton and soybeans and providing a few additional details. According to the explanations, the programs are not just a change for these two commodities--they represent a blueprint for a new approach to agricultural support that will reduce government meddling with prices and let the market mechanism have a "decisive role."

The target price will be set by the government once a year. The price is to be announced before crops are planted to give a "clear signal" to guide farmers and the market. The target price is set with reference to production costs to ensure farmers can earn a reasonable return. With costs rising each year, the target price can be expected to rise as well.

This year, the target price of 19,800 yuan/metric ton for cotton was announced April 5. The soybean target price of 4800 yuan/metric ton was announced May 17. If the "market price" is below the target, the government will pay a subsidy to producers based on the difference between the target and market prices.

The "market price" will be the provincial average paid by processors or grain depots during the peak purchasing season (September-November for cotton; October-March for soybeans). The average will be calculated from price monitoring by the National Development and Reform Commission, Ministry of Agriculture, Grain Bureau, and Supply and Marketing Cooperatives. The explanatory materials emphasize that the subsidy will be based on the provincial average price, not the price actually received by the farmer.

The market price will be the price paid by cotton gins, grain depots, and enter-factory price of soybean crushing plants. The price at the farm gate will not be used because there is so much variation due to moisture, foreign matter, etc. Farmers that sell higher-grade crops at a higher price will get the same subsidy as those that sell poor-quality crops at a low price. The explanatory materials emphasize that this feature gives farmers incentive to maximize quality and price of crops they sell.

The cotton price calculation requires assumptions about several other parameters since the target price is for lint after it has been separated from seeds. The explanatory materials supply a formula showing how the market price is calculated using the lint price, seed cotton price, the cottonseed price, the proportion of lint in the seed cotton and an average processing cost.

"Temporary reserve" purchasing--described as a kind of price support policy--used until this year will cease after the introduction of the target price subsidy for cotton and soybeans. Farmers will sell their commodities at market prices. Their support will come in the form of direct payments instead of guaranteed minimum prices.

The explanatory materials say funds will be allocated to each province based on the difference between the target and market price and production statistics from the National Bureau of Statistics. Then provincial authorities will issue payments directly to producers. The distribution method is not specified and presumably will be up to local authorities. The materials say the subsidy payment will be based on area planted, production, or sales.

The materials do not say when farmers will get the subsidy payment. Based on the explanation, the subsidy cannot be calculated until the end of the marketing season when the average price can be calculated. Normally the statistics bureau does not report soybean statistics until a year after the harvest, but let's assume they will become more timely. It sounds like farmers can expect to receive their subsidies perhaps by April, about a year after the crop was planted. And that's assuming central government officials do things a lot faster than usual and light a fire under local officials to expedite the distribution process.

Another potential pitfall is disputes over statistics. Heilongjiang Provincial officials often report quite different soybean area and production statistics than the National Bureau of Statistics. In fact, NBS statistical procedures say they  estimate grain and soybean production mainly from sample surveys of household farms, but for state farms and companies they use numbers directly reported by those farms. The state farm system accounts for a large proportion of soybean output and the statistics bureau will base their estimate of Heilongjiang soybean production in large part on numbers supplied by the state farms themselves. It's very likely that Heilongjiang and the state farm system will suddenly "discover" lots of new soybean acreage. Similar conditions prevail in Xinjiang where much of the cotton is produced by the semi-autonomous "production corps" which also reports data directly to NBS. It is rumored that new cotton acreage has already been discovered in Xinjiang.

In contrast to the government's cut-and-dried explanatory materials, another article posted on a cotton website in August reveals that there is considerable trepidation and concern about the new target price subsidies.

Officials in Xinjiang, in particular, are concerned about how farmers will be affected. The "market price" could go down further than anticipated. Officials say the key is who will come to farmers to buy cotton. They fret that the long distance, high transportation cost, and high labor cost of unmechanized farms makes Xinjiang cotton uncompetitive. The explanatory materials mention that the target price system will force cotton warehouses to find a market for cotton they purchase instead of just buying on government orders and collecting subsidies for storage costs.

Heilongjiang is also a far-flung place distant from final markets. A wide range of enter-factory soybean prices are currently quoted there, from 4000 to 4600 yuan per metric ton. The target price of 4800 yuan implies a subsidy from 200 to 800 yuan, depending on which market price is chosen. However, the price of imported soybeans is currently quoted much lower, at 3700 yuan in Tianjin and Shandong and 3680 in Shanghai and Guangdong. Will the market price in Heilongjiang remain at such a high premium? With global soybean prices falling on news of a massive U.S. harvest, Chinese officials are probably worried about falling domestic market prices that will inflate the cost of their "target price" subsidy far beyond what they planned.

At an April conference, a State Council researcher described the target price as a major systemic transition, but he warned that no one knows how it will affect farmers. "Now everyone is unsure, and it's hard to anticipate the risks behind it," the researcher said.

The director of the Ministry of Agriculture's Research Center for Rural Economy raised concerns about the long-term plan for implementing target prices. He warned that China lacks the data needed to implement such a program: "If fundamental work is not carried out well, it could disrupt the market." Moreover, the director raised the question of which commodities will be covered by target prices in the future and which ones excluded.

While the target price policy is described as a market-oriented support method, officials also imply that their hand has been forced by the failure of the current support price methods. They note that minimum prices were raised year after year until they were at a level that exceeded international prices. This distorted the market, created artificially-high demand for imports, and forced officials to stockpile commodities, including 90% of cotton production. The budgetary pressures and untenable distortions have pushed them to accelerate the target price experiments and hope they are successful.

Saturday, September 6, 2014

China is Awash in Grain

Suddenly, China is awash in grain. There was so much grain in government reserves this spring, authorities worried that there wouldn't be room to store this fall's harvest. China's grain reserve corporation--Sinograin--set a goal of clearing out 32 million tons of grain by the end of October and began auctioning off grain at a furious pace in mid-May. They sold 30 mmt by the end of August.

This 1970s poster says, "Reap an abundant harvest; store grain everywhere."

China's grain production continued to soar over the past two years but demand slowed. With supply greater than demand, the market prices fell below the government's price floor. Authorities had to purchase large volumes of surplus grain to prevent prices from falling.

From November 2013 to April 2014, authorities purchased 70 million metric tons (mmt) of corn in northeastern provinces for its "temporary reserve." This was added to 35 mmt purchased in 2012/13 plus normal reserves held by the government.

Authorities purchased 25 mmt of winter wheat from the May-June 2014 harvest--three times the amount purchased in 2013. The total purchased by all types of buyers soared 41 percent from 2012 to near 70 mmt. China's wheat market now is said to have "three highs": "high prices, high government purchases, and high inventories."

There is also a surplus of rice. Officials worried that there wouldn't be room to store the early rice crop harvested in July. They purchased 2.6 mmt to support prices.

In a Peoples Daily article Jiangxi Province officials explained the strategy for coping with the flood of grain: "auction, sell, move, repair, build, and rent." Officials have been holding weekly auctions of grain reserves since May and had auctioned 30 mmt by mid-August and they have stepped up sales of old grain in their "rotation" plans. Officials are requisitioning rail cars and coordinating the movement of grain to provinces that have a deficit. Old, dilapidated granaries are being repaired and they are renting storage from privately-owned depots and processors. Allocation of central government funds has been expedited to meet targets for new grain storage this year and next year.

Sinograin incurred losses of 560 million yuan ($90 million) during January-June as it cleared out its stockpiled grain. The Peoples Daily article reports that prices are seriously out of whack: milled rice prices are less than paddy rice prices, new grain is cheaper than old grain, prices in production areas are higher than in consuming areas. The large volume of grain purchased by the government is keeping prices artificially high. Prices of imported grains are lower, putting downward pressure on prices in coastal regions. For example, the CNF price imported U.S. wheat fell steadily after the harvest and is now below the Chinese support price. The current price of corn in northeastern Chinese ports for shipment to the south is $416, but the estimated cost of imported U.S. corn for arrival in October-November is $243.
Source: China Grain and Oils Information Net.
Chinese farmers were said to be happy this summer after receiving payment for their wheat and early rice. Cost of production surveys conducted in Henan and Anhui Provinces this summer found that net returns to wheat growers were up about 20% this year despite increases in production costs. However, grain producers are being helped at the expense of rice and flour mills and livestock producers.
Another way to dispose of excess grain inventories: a fire at a Heilongjiang granary in May 2013 destroyed an estimated 34,000 tons of corn and 18,000 tons of rice. At the time, the fire was said to be an alarm bell on the risk of holding large grain reserves. The estimated loss of 100 million yuan was much less than the 560 million yuan lost this year by selling off old grain.