Tuesday, October 28, 2014

Chinese Agriculture: Don't Panic, We're Planning

On October 24, Vice Premier Wang Yang finished out a speech on building irrigation facilities with some comments that reveal China's rural policy challenges. While there is a sense of urgency in his remarks, Wang exhorted everyone to calmly consider the future and--like a good socialist--make a new plan.

English language news media picked up Wang's admonition to increase control of grain imports and crack down on smuggling to deal with record-high grain inventories, but other comments in the speech are interesting.

The comments came at the end of a speech on building irrigation facilities where he warned that rural reforms and development tasks are extremely arduous. He exhorted every level of government and locality to do a good job on agricultural and rural work as they carried out irrigation and water management construction.

Until now, China seemed to be address rural problems by spending more and raising prices, but that seems to have come to an end. Wang warned that agriculture faces "three ceilings" on prices, subsidies, and commodity inventories. Agriculture also faces a rising floor in escalating production costs. The problem is how to maintain farmer production incentives and keep production stable under these "two pressures," said Wang. How can sustainable agricultural development proceed with excessive consumption of resources and environmental pollution growing? Wang admonished listeners to "calmly assess the future," "sort out ideas for agricultural and rural work," and "scientifically" formulate a plan for the future.

Wang assured his audience that the government is pondering new policies to address the many new problems, situations, and challenges facing agriculture and rural areas as it formulates a new five-year plan for 2016-20. For example, Wang said, the government is contemplating how to keep increasing spending on rural affairs and increase rural incomes as the economy decelerates and growth in financial revenue slows.

Wang said the minimum price programs for wheat and rice should be carried out, and "temporary reserve" stockpiling for corn--the policy that created the mess--should be started at the appropriate time. Wang said the decision to announce the 2015 minimum price for wheat at the same level as this year is a result of pressure from international market prices and is an "extremely vigorous price signal" to producers.

In his comments on the fall grain harvest, Wang warned about the conspicuous problem of a tight grain storage situation with record-high grain inventories as the fall harvest is underway. With Chinese grain prices higher than world prices and grain imports rising, marketing the new grain crop faces a lot of problems, Wang said. He called for making space for the new crop in private sector storage facilities. Companies should be "organized" and "guided" to purchase grain from farmers. Banks should ensure that they have plenty of money to buy the grain, so farmers are able to sell it.

Wang's comments also included an exhortation to carry out the communist party's fourth plenum's task of instilling the "rule of/by law" in agriculture and rural areas. This was not explained but probably means standardizing regulations and they way they are enforced throughout the country--a stiff challenge in a country where "the hills are high and the emperor is far away."

Wang closed out his speech by reminding comrades to strengthen water management construction and do a good job on rural work. "The responsibility is great and the task is formidable," said Wang.
Vice Premier Wang Yang speaks October 24, 2014 at a
State Council teleconference on building irrigation facilities.

Wednesday, October 22, 2014

China Plans Massive Honesty Database

Chinese leaders have apparently deduced that dishonesty and lying are not conducive to a healthy society or economy. Authorities are moving forward with a plan to create a massive database that will enable authorities at all levels and locations to monitor, track down, and punish miscreants in government, companies, and courts of law.

For example, it's hard to produce accurate statistics when everyone lies to the statisticians. To fix this, China's National Bureau of Statistics has published draft regulations designed to punish dishonest companies that report inaccurate information on statistical surveys. Companies that deliberately fabricate false data, make false reports, conceal data or otherwise violate the statistical law will be subject to criminal penalties. The Bureau will publicize the names, addresses and owners of dishonest companies on a web site. The information will be entered in a file that will be available to commercial/industrial authorities, tax bureaus, credit information systems and banks, which will affect their ability to legally register, collect government subsidies and get loans. Dishonest companies will be on the list for one  year  unless they successfully apply for removal by demonstrating good behavior. If they're still bad, they will stay on the list a second year.

The purpose of the new regulation is to improve the quality and credibility of statistics. The Bureau is accepting comments on the draft regulations until November 5, 2014.

The Statistics regulation is a small part of China's broad campaign to create an honest society described in the State Council's Plan for Constructing a Social Credit System (2014-2020) released in June 2014. The plan aims to create a complete system of records that covers all members of society to establish a culture of honesty. It is much more than a system for recording whether people pay their bills. It aims to maintain files on bad behavior in government, companies, and courts that will be shared nationwide with all government departments. The records will include dishonest government officials, safety violations, fakes, false advertising, frauds, pollution, etc. The universal nature of the database appears to be intended to address the ease of miscreants disappearing and reappearing some place else where authorities don't know about their record of bad behavior elsewhere.

The honesty system seems to be part of the campaign to promote "rule of/by law" ahead of the "fourth plenum." Like other components of the "law" campaign, the honesty system points backward into Chinese traditional culture for inspiration and moral guidance. The plan instructs Chinese people to "carry forward traditional virtues of integrity as an inherent requirement, giving incentives for trustworthiness and constraining dishonesty." Name and shame appears to be the moral mechanism--no deities, Ten Commandments, St. Peter, or Western religious/philosophical approaches to ethics and morality.

According to the plan, the social credit system is necessary to implement the scientific development concept and form a foundation for a harmonious society and a socialist market economy. It's an important measure for governance and for improving the nation's competitiveness.

The social credit system promises to increase honesty in government, business and courts. The system promises to broaden the public's participation in government decision-making, but it also will "increase its policy-making, enforcement and supervision powers, and publicize policies."

For commercial entities, the system is supposed to lubricate business transactions. One emphasis is on recording unsafe production practices by mines, use of unsafe chemicals, fireworks and pollution emissions. Another focus is on recording quality infractions by food, drug, agricultural products, and agricultural input suppliers so that various government departments in different localities can exchange information about miscreants. The social credit system will cut down on financial fraud, running away from debts, insider trading, fraudulent insurance, illegal accumulation of assets, and taking money out of the country illegally.

You can run, but you can't hide from Big Brother with Chinese characteristics.

Monday, October 20, 2014

Here Come the Chinese Agricultural Investors!

China's investment abroad in agriculture is picking up momentum, boosted by a big endorsement from the highest levels of Chinese officialdom this year.

In August, the Ministry of Commerce announced that 300 Chinese companies had undertaken overseas investment in agricultural, forestry, and fishing projects in 46 countries and regions on all five continents in recent years. The article said officials are actively evaluating opportunities and formulating supportive policies for investment in crops, livestock, and seed industries.

The pace of overseas investment in agriculture has picked up following the endorsement in a paragraph of the January 2014 "Number 1 Document" which called for accelerating the "go global" (literally, 走出去 or "go out") strategy as a way to "rationally utilize international markets." The Commerce Ministry cites the document's endorsement and emphasizes that the 300 investors are utilizing overseas markets and resources, a reflection of the incorporation of "go global" into China's food security strategy which calls for utilizing "two markets and two kinds of resources."

An official from the Ministry of Agriculture's "agricultural dragon head enterprise association" said that the 300 companies had laid a foundation for the investment strategy, but acknowledged that Chinese companies are far behind those of developed countries in overseas investment. He regurgitated another part of the "go global" strategy from the Number 1 document: to nurture large internationally competitive Chinese grain, cotton and oils companies engaged in processing, marketing and trading commodities.

In August 2014, a training course was held in Shandong Province for Chinese companies considering overseas investment in agriculture. Shandong alone has 42 companies that have invested abroad, "looking for land to plant," and "developing new resources and markets."

A Shandong company is engaged in a rice project in Cambodia. Like many Chinese investment projects, it seems to mix objectives of projecting soft power abroad, making money, and supplying food to the Chinese market. The company plans to build a "rice industry park" that eventually will encompass 300,000 hectares in Battambang Province. Using the Chinese "company + household" model, the company has rented 1200 hectares of land for a farm where it will grow rice seed from a variety developed by China's superstar rice breeder Yuan Longping and set up a "demonstration farm." It will supply seed and technical assistance to raise yields. The rice will be processed by a company mill. The project is said to "lock in grain resources" from farm to processor. A company representative says the Cambodian government has welcomed the investment funds, planned water management facilities, and prospects of higher rice yields. The project is supported by loans from China Development Bank, a government policy bank that supports overseas investment by Chinese companies.

As part of the August propaganda blitz, Farmers Daily ran an article outlining the "go global" strategy and stressed that companies are the main players (i.e., not investment by the government or individuals). An "expert" said that "going global" must be accelerated to meet China's urgent need for food security in view of the "risk of dependence on imported grain and other commodities" which "grows year by year." The article said projections indicate China will need to import 30 million metric tons of grain, 2 mmt of beef and mutton, and 3 mmt of hay by 2020.

The Farmers Daily article said the "going global" strategy is necessitated by China's rapid urbanization, extensive use of land, increased pollution of water and soil, degradation of grasslands, and severe depletion of coastal fisheries due to long-term over-fishing. According to "experts," developing overseas resources by Chinese companies "going global" is a critical part of China's food security strategy since its own farmers will not be able to supply the country's increasing demand.

The agricultural "go global" strategy has been endorsed by Xi Jinping. In 2013, central government authorities surveyed big Chinese companies about "going global" and offered suggestions for policy support. Xi's endorsement of the push for agricultural "going global" intertwined food security and foreign policy objectives by endorsing it as a means of both "preserving national food security" and "supporting foreign relations strategies." As with many other policies, Chinese companies are used as tools to carry out objectives of the State. Thus, domestic, foreign affairs, and commercial objectives are intertwined and it is difficult to discern what these investors are really up to.

Farmers Daily said officials are contemplating policies to support companies "going global." As an example of past support, Farmers Daily cited subsidies introduced about five years ago for fishing boats, diesel fuel, and subsidized loans "to promote rapid development of ocean fishing." Other possibilities are a special fund for overseas agricultural investment, subsidized loans, training for personnel, and setting up information exchange platforms. The government plans to help companies acquire overseas registrations, trademarks, and to help them develop internationally-recognized brands.

A description of Jilin Province's "going global" development strategy was presumably offered as a model for support. Jilin began in 2006 by forming a coordination group that orchestrated company, bank, insurance and government resources to develop farming abroad. It set up a company called Jilin Foreign Agricultural Development Group to invest in farms growing rice, corn, and soybeans in Siberia. The government designated import quota for the company so it could import grain (private companies have to apply for scarce quota and hope for the best when the government doles it out). In December 2013, the first 30,000-ton shipment of rice arrived in Jilin from a farm set up in Russia. This was said to be the first-ever shipment of rice from a Chinese-owned overseas farm and was described as a great breakthrough.  The provincial branch of China Development Bank has set up a Jilin "going global" fund for agriculture to promote more investments.

Farmers Daily warns that Chinese companies have learned that renting land and investing are sensitive in some countries. Companies are urged to seize opportunities in countries receptive to technology and investment where they are more welcomed.

Sunday, October 19, 2014

China Wheat Held Price Steady: Why?

On October 16, 2014, China's National Development and Reform Commission announced that next year's minimum price for wheat will be held steady at this year's level. Many people in the Chinese wheat market expected the minimum price to be raised as it has been for the last seven years. Market commentaries in Futures Daily and in China Grain Net believe the non-change in the minimum wheat price is a reflection of current market conditions and represents a change in policy direction.
The minimum price for white wheat (blue) and 
average wholesale market price (red), 2006 to 2015. Source: China Grain Net. 

The minimum price for wheat was raised every year from 2008 to 2014, a total of 920 yuan/metric ton (64 percent) over 7 years. In 2008, authorities adopted a practice of announcing a higher minimum price in the fall--planting time for the winter wheat crop--to assure farmers of a price high enough to cover rising production costs. This is the first time the minimum price was held steady since 2007.

Analysts say that a number of factors go into the price-setting decision. Authorities consider increases in production costs, the net returns to various competing crops, supply and demand conditions, and international prices. This year, China's wheat supply has increased after a big harvest--authorities purchased 27 million metric tons this summer to prevent wheat prices from falling.

According to Futures Daily, Chinese farmers have been shifting land to wheat from other crops in recent years. Wheat is the most mechanized crop and has low labor requirements. With rural labor now scarce, farmers have been reducing their plantings of other crops like cotton, rapeseed, and even garlic and replacing them with wheat. Therefore, authorities are not worried about attracting farmers to grow wheat.

A wheat trader in Henan Province said the market was expecting a modest increase in the minimum price. He attributes the decision to keep the minimum price unchanged to the loose supply-demand situation and a plan to gradually close the gap between relatively high Chinese wheat prices and lower international prices.

The minimum price for Chinese wheat is equal to about $384 per metric ton. The season average price for U.S. wheat this year is projected to be in the range of $202-$215 per metric ton.

Another factor is the impact of high wheat prices on profits of flour mills. A pattern of "flour weak, wheat strong" squeezed the profits of flour mills, causing some small and medium size mills to shut down and others to scale back production. The government also has a campaign to boost and upgrade agricultural processing industries, so easing upward pressure on costs makes more resources available for upgrading facilities.

Keeping the wheat price steady is also viewed as part of a grand transition in China's approach to domestic agricultural support. In the spirit of letting the market have a "decisive role" in resource allocation, authorities plan to stop intervening directly in agricultural markets, instead letting markets set prices based on supply and demand. They plan to give farmers assurance of good returns by giving them direct subsidy payments based on the difference between the market price and a target price.

Some say leaving next year's minimum price unchanged is laying the foundation for transition to a more market-oriented policy. Market participants will build their price expectations on market supply and demand factors instead of government announcements. Authorities are reportedly eager to introduce a target price subsidy for wheat and other commodities after they see how pilot programs for soybeans and cotton turn out this year.

The talk about the market determining wheat prices is inconsistent with other announcements by Chinese authorities that government grain reserves must be increased. Surely the government plans to hold reserves so it can intervene in the market. Moreover, big government purchases of grain to fill official granaries send confusing demand signals to the market. The confusion multiplies when reserves are kept in secrecy.

While Chinese authorities are probably sincere about the "decisive role of the market" rhetoric, they really don't trust the market. They are very good at managing the market when they can build in one-way bets by raising exchange rates and prices every year. But the policies build imbalances and the mechanism seizes up when prices stop going up. They design elaborate policy mechanisms that are impossible to implement and are soon forgotten.

Chinese officials also misjudge market conditions. Food Security Strategy for 1.4 Billion People, a book published by China's State Council published exactly two years ago warned that global grain prices had bounced back to levels higher than the 2008 grain-price crisis, and "The whole world has now entered an era of high grain prices..." The book promised to steadily increase the level of grain prices. Two years later the world is struggling with low grain prices. [Since 2012, the season average price for U.S. wheat has fallen 20%-25% while the Chinese minimum price has been raised 15%.]

The Chinese food security book worried that U.S. use of corn for biofuel is a food security threat since it limits grain available to other countries. Yet two years later one of China's biggest imports is DDGS, the by-product of U.S. ethanol production. Moreover, Chinese authorities have announced their intention to roll back DDGS imports by rejecting shipments where they find unapproved GMO material.

Chinese officials are obsessed with stability, self-sufficiency, avoiding reliance on the United States and other objectives that market outcomes would produce. With so many conflicting objectives, intervention is guaranteed to continue.

Tuesday, October 14, 2014

Foreign Meat: Shaky Inroads in China

Imported meat is making inroads in the Chinese market, pitting the interests of consumers against those of producers--no longer one and the same. Nevertheless, getting meat into China appears to be a risky game, given a strategy of tightening and loosening import procedures based on domestic market conditions.

A July article in the Guangzhou Daily observed that the rising import of meats is generally welcomed by consumers, but is greeted with resentment by people in the domestic meat industry.

The Guangzhou Daily reporter visited supermarkets to get the views of consumers and managers on imported meat. The manager of one store told him sales were up 20%-40% so far this year. Most of the business is relatively low-priced cuts of Australian beef. Sales of high-end beef--128 yuan for the most expensive T-bone--are increasing as fast.

Another manager told the reporter that he once tried selling imported beef in 2008-09, but it didn't last long. Since the end of 2013, however, sales have taken off and he now sells 3-to-4 shipments a week.

The appeal is quality and taste. A Ms. Liu told the reporter, "I feel the quality of imported beef is much better. I feel confident about feeding it to my child. The price is a little high, but I can bear it."

Another shopper, Mr. Sun, agreed, "Imported beef is ...really much better tasting than similar domestic products."

Some have reservations about imported beef. It's hard to tell the unit price because imported steak is sold by the piece. The reporter calculated it himself and found the imported steak was 80-to-120 yuan per kg, about three times the price of domestic beef. Another lady who said she lived in the United States for a while claimed that the inspection is not as strict in the United States as in China. (Hmm, like most Americans, she probably learned all she knows about meat from 60 Minutes.)

Supermarkets in Guangzhou say they earn high profits on imported beef. One manager says he earns 20 yuan on a 300-gram Australian steak, what he calculates to be a 70% gross margin. Trading companies earn lower margins but their volume is much larger.

While price does not seem to be the major selling point, the rapid increase in retail beef prices has slowed down since China's imports have increased in the last two years.

Hmm, I wonder why there was such an abrupt increase in beef imports from virtually nothing in 2012 to a steady stream in 2013?

In January 2014, a Ministry of Commerce official endorsed beef imports as a means of supplementing short supplies. He explained that while China is overall self-sufficient in food, "appropriate imports" of certain items in short supply like beef are OK.

He said the Ministry makes import policies based on the relationship between domestic supply and demand. When there is a deficit, import licenses can be issued automatically, and inspection and processing procedures can be accelerated. What he doesn't mention is that the process can work in reverse: slower approvals and foot-dragging by customs officials when imports are not wanted. Would the beef keep flowing if prices started falling?

The official explained that imports and domestic production of key products are monitored closely and a twice-monthly report on contracts signed, shipments, and port arrivals is issued to "guide" companies to make rational importing decisions. The official explained that Chinese companies investing in beef abroad is another measure to boost imports by securing a stable channel for imports.

The pork industry seems to be more sensitive about imports. Very little imported pork is sold directly to consumers in supermarkets. Imports in 2013 were equal to roughly 1% of China's reported pork output, and most of that was offal sold to processors of sausages and other meat products.

Nevertheless, many in China's pork industry are convinced that any news of imported pork has a negative effect on the Chinese market. The manager of a hog farm in Zhaoqing told the Guangzhou Daily reporter that Shuanghui imported 4500 tons of [Smithfield] pork in March during a depressed period for the pork market. The manager said, "No doubt imported pork drives the price down, forcing indebted small and medium-size farms into bankruptcy. Therefore, the government should be cautious about approving pork imports."

A September article from the Ministry of Agriculture news net explores the impact of imported pork. While the article repeats the factoid that pork imports amount to just 1% of China's pork production, the author insists that any news of pork imports hurts the confidence of hog farmers. The author observes that, "In fact, policy-style pork imports have become one of the government's measures for regulating the domestic pork price."

The author further reassures readers by telling them that pork exports often face trade barriers in the form of inspection and quarantine regulations. He points out that "lean meat powders" are allowed for raising pigs in the United States and Canada, but China's laws don't permit it, so such pork can't enter China.

Friday, October 10, 2014

Import Diversification Strategy Behind China's Corn Rejections?

China has been rejecting shipments of U.S. corn for nearly 11 months now with no clear explanation. There has been much speculation about what Chinese officials are up to. Now there is another possible motivation for the inscrutable action against U.S. corn: they wanted to break U.S. dominance as China's nearly exclusive source of corn imports.

In 2013, Chinese news media grumbled about the United States supplying 98-99 percent of China's corn imports. Expedited approval of Argentina as a corn supplier in 2013 was attributed to an urgency to create competition for U.S. corn. However, Argentina has only managed to send one shipment of corn to China since then.

China struck a phytosanitary agreement with Brazil to supply corn in November 2013, a move that was interpreted by Chinese observers as a measure to break the dominance of the United States as China's near-exclusive corn supplier. However, the Chinese apparently didn't know that the GMO corn variety MIR 162 is also planted in Brazil. Brazilians are frustrated that only 2900 metric tons of their corn has made it to China--all of it before the agreement was signed.

Chinese analysts have linked the strategy of diversifying corn importers to the refusal of 1.25 million metric tons of U.S. corn since November 2013. A Xinhua News Agency economic analyst told Number 1 Financial News that approval of the genetically-modified corn variety must take into consideration "external trade factors." He noted that China had been pursuing a corn import diversification strategy at the same time it was rejecting U.S. corn.

The recent surge of Chinese corn imports from Ukraine suggests a strategic approach to corn supply. A Grain and Oils News article reporting recent customs data was titled, "In the future our corn import will be much more diversified." According to the article, China is being subjected to international market fluctuations and has signed agreements with Argentina, Ukraine and Brazil since 2012 to diversify its corn suppliers. Based on customs statistics, the article celebrates the decline in the U.S. share of corn imports from 98% in 2013 to 64% so far in 2014. Ukraine's share is 20%, up from zero last year. Another article reporting corn import statistics notes the diversification strategy and notes that China imported no corn from its traditional supplier, the United States, in August 2014.

In March, Reuters reported that large private Chinese feed mills were purchasing Ukrainian "non-GMO corn" and barley since U.S. corn had been rejected. This was said to be fulfillment of the agreement with Ukraine to repay loans with grain. The agreement was signed in 2012, but only 163,500 tons had been imported before this year. Ukrainian corn shipments started arriving in July and totaled over 400,000 tons by August. It is unclear why it took two years to get the Ukrainian grain trade moving.

The implied motivation for the import diversification strategy is that Chinese buyers think they are being overcharged for U.S. corn. Note that the agreements with new corn suppliers were struck during 2012-13, when U.S. corn prices were unusually high due to drought. U.S. prices have dropped since 2013's record harvest and are now a little more than a third of Chinese corn prices.

So where is this concern about overcharging for corn now that U.S. prices have dropped? Chinese corn consumers are now paying nearly three times as much for corn as their U.S. counterparts.

As usual, a Chinese decision causing great friction appears to be based on multiple considerations that are not revealed to outsiders. Negotiations with the Chinese to resolve the situation are unproductive since negotiators don't know what their Chinese counterparts are trying to achieve. The sclerosis of Chinese decision-making contributes to the confusion. Chinese officials often make a decision based on a flawed interpretation of current circumstances; when circumstances change officials lack flexibility to adjust ill-considered decisions.

Thursday, October 9, 2014

China Eager to End Price Support Policy

According to China Times, officials of China's National Development and Reform Commission and Ministry of Agriculture are eager to eliminate "temporary reserve" agricultural price support programs in favor of "target price" subsidies. According to officials, the experimental target price subsidies are likely to be extended to cotton producers outside of Xinjiang "Autonomous Region" and to corn as soon as 2015.

According to Futures Daily, China is having another big corn harvest (despite panicked reports of drought over the summer), and there is strong downward pressure on corn prices. In an area of Henan Province, corn with 25% moisture is reportedly selling for 1.1 yuan/kg, a little more than half the customary 2-yuan price. In Jining, Shandong Province, a grain depot manager says that corn yields are over 650 kg/mu this year (the national average reached 600 kg/mu in 2013 for the first time) and prices have fallen from 2.5 yuan/kg to 2.24 yuan/kg over the past two weeks. In China's northeastern region, the price for corn with 30-percent moisture is reportedly down to 1.44-1.48 yuan/kg.

According to Grain and Oils News, authorities have moved 40 mmt of corn out of northeast China since May 20, but a record stockpile of 70 mmt of "temporary reserve" corn still remains. The stockpile was accumulated by supporting prices during the past two years and will likely grow larger this year. Grain and Oils News anticipates that China's corn market will have an excess supply for the foreseeable future.

With corn prices falling, farmers are watching to see whether authorities will announce a "temporary reserve" price for corn this year. At a grain-purchasing conference held in Harbin, there were indications that officials will again purchase corn for the temporary reserve, but no announcement was made on what the price will be. In July 2013, officials announced an increase in the corn price despite clear indications of excess supply. Will officials announce another increase in the corn price this year?

The minimum price for wheat is usually announced by early October--before planting of winter wheat. The wheat market is also waiting to see whether a higher minimum price for wheat in 2015 will be announced this month. Authorities have also announced that their purchases of wheat surged by 20 mmt during 2014.

Officials are also anxious to eliminate the sugar "temporary reserve" program. Officials are said to be planning to announce an elimination of "temporary reserve" stockpiling policies in the 13th five-year plan now being formulated. It's unclear whether the "minimum price" programs for rice and wheat will also be eliminated. One analyst observes that a target price subsidy for corn is very likely to be introduced in 2015 because corn is not a food grain and therefore less sensitive than wheat or rice.

The decision to extend the target price subsidy to more commodities and regions depends on the results from this year's trial target price programs for cotton and soybeans. If the trials fail, officials will presumably have to look for another subsidy method.

The abandonment of price supports comes six years after the "temporary reserve" was introduced and ten years minimum prices for rice and wheat were introduced. Price support programs were first introduced during a period of excess supply and low prices. Since then, Chinese prices have been ratcheted upward until they are well above international prices. Now China faces a situation of excess domestic supplies and high prices. Officials have been purchasing grains, cotton, oilseeds and sugar to prevent prices from falling and now have record-high inventories of commodities. Yet, with prices above world prices, imports are pouring in, adding to the excess supply in the Chinese market. Hence the eagerness to do away with the programs.

The "target price" subsidy is said to be less market-distorting than temporary reserve stockpiling. Officials have forgotten that they said the same thing ten years ago about the minimum price purchasing scheme when they introduced it to replace the disastrous "protection price" policy of the 1990s.

Wednesday, October 8, 2014

Financing China's New Great Leap in Agriculture

China's  21st-century push for "agricultural modernization" aims to undo the fragmentation of its farming sector by consolidating farms into larger operations. Like China's ill-fated 1958 "Great Leap Forward," the new "modernization" campaign needs to gather funds to finance investment in fixed assets. The new campaign is said to be guided by the "decisive role of the market," yet the banking system--behind its veneer--is still stuck in the era of central planning. Consequently, the "decisive" market mechanism is sidelined as Chinese officials subsidize, cajole and otherwise intervene to promote investment in agriculture.

In 2011, the Ministry of Agriculture signed a memorandum of understanding with the China Development Bank to finance "agricultural modernization" projects and overseas agricultural investment during the 12th five-year plan (2011-2015). The bank's agricultural loan balance was 19.5 billion yuan at the end of 2010. A bank document reports that the balance had swelled to 46.4 billion yuan by June 2013. This bank mostly funds infrastructure, research institutes, and model farming districts, not commercial farms themselves.

The "modernization" push has strengthened since last year's "third plenum." In December 2013, Minister of Agriculture Han Changfu said the country's new push for urbanization requires big investment in agriculture but warned that investments would bring steady returns, but not "overnight wealth."

In April 2014, China's State Council issued a directive endorsing improved financial services to support large-scale farms, demonstration projects, and overhauls of farming districts to boost agricultural productivity.

On September 17, 2014, the China Bank Regulatory Commission and Ministry of Agriculture jointly announced a "Guiding opinion on financial support for larger-scale agriculture and concentrated operations." The document offered guidance to financial institutions intended to "improve the allocation of capital resources" to support the "accelerated transition of agriculture from traditional, fragmented rural households to new-style business operations that have larger scale, concentrated operations, are "organized" and "integrated with society."

The "guiding opinion" ordered banks to establish credit assessment mechanisms and record systems for new types of operators like large farms and cooperatives and consider opening special departments focused on serving such farms. Banks are instructed to experiment with new products like mortgages secured by rights to use agricultural land as a means of supporting land consolidation.  Banks are also directed to finance rural infrastructure, seed and equipment companies, logistics, storage, agricultural processing, retail markets and shops and e-commerce. They are urged to finance agricultural companies investing overseas.

The policy measures recommended by the "guiding opinion" include awards for increasing agricultural loans, favorable tax treatment, subsidized interest rates, subsidies for bank operation costs, lower deposit requirements for agricultural lenders, and issuance of special bonds to finance ag lending. Local governments are urged to offer their own support policies and subsidies for agricultural lending.

A November 2013 article from Laiwu, a prefecture in Shandong Province, raised concerns about the shaky financial state of local agribusiness and described numerous strategies being considered to boost lending to local agribusinesses at the local level. According to the article, local agribusiness companies are seriously short of cash and unable to pay back loans due to a slow-down in demand, a contraction of bank credit, high interest rates, rising costs and moribund exports that started in 2012. A number of prefecture governments have funds to support financing agricultural development ranging from $1-to-$2-million, and Laiwu is urged to expand its fund. Support for companies includes interest-rate subsidies, tax reductions, preferential land use, science and technology support. There is a "bridge loan fund" to meet cash shortfalls for companies "with good business prospects that are unable to repay loans on time."

The Laiwu article indicates that local governments "actively struggle for agribusiness credit" by engaging in negotiations with banks on behalf of grain marketing enterprises, partially matching company investments in storage facilities, and funding loan guarantees for agribusinesses. The article urges local government to guide each commercial bank to loosen credit requirements for agribusinesses, lower interest rates, and coordinate loans from multiple banks to meet seasonal credit needs.

Meanwhile, there are regular reports of Chinese companies making massive investments in agriculture. Last month, a giant real estate conglomerate called Hengda Group announced its plan to invest 100 billion yuan in "modern agriculture" to create branded products including bottled water, cooking oil and dairy with safety assurances. The Laiwu article also recommended that local governments actively try to attract such investments from nonagricultural companies in agriculture.

In December 2013, Development Research Center rural policy expert Han Jun warned that the flood of agricultural investment by companies could be "blind" and misguided if not thought out carefully. With China still lacking a social security system for the rural population, Han worried about the consequences of pushing millions of small farmers off the land.

China's "modernization" of agriculture is just getting underway. "Modern" modes of production that developed since the mid-20th century depend on mechanical equipment, sophisticated buildings, irrigation systems, scientifically-bred plants and animal stock, greenhouses, laboratories, as well as highly-trained farmers and technicians. This requires massive investment. To make the investment financially viable, modern agriculture also must rely on a large scale of operation to spread the fixed costs over large volumes of output.

The new modernization campaign bears disturbing similarities to Mao's 1958 "Great Leap Forward." It is another "great leap" from perhaps the most labor-intensive agriculture ever to large-scale "modern agriculture." Like Mao's "Great Leap" that created giant mechanized communes, today's agricultural modernization is a crash program to concentrate capital and land in large production units.

Without an efficient system for financial intermediation, the accumulation of capital in agriculture is slap-dash, capricious, and possibly fraught with danger.

Wednesday, October 1, 2014

Xi Jinping Endorses GMO Technology

Chinese President Xi Jinping apparently has stepped in to quell public angst about genetically modified foods by endorsing transgenic technology for agricultural products.

The endorsement came as part of a speech on agricultural issues he gave in December 2013 that was not previously released to the public. He began the speech by relating his personal experience of hunger. He recounted how he himself went hungry during the "three years of natural disaster." As a primary school student he often had nothing to eat but soup. Later, when he was sent to the countryside as a young man during the cultural revolution he was often hungry, going for months without a taste of meat or a drop of cooking oil.

Xi's speech had a familiar theme of self-reliance and restoring China to a strong position in the world. If China has a food problem, "No one can save us," said Xi. He warned that China cannot buy enough food from the international market for even half a year, and China must not beg. Therefore, China's food bowl must be filled mainly with its own grain, said Xi.

Having established the necessity of self-reliance, Xi endorsed genetic modification of crops. Xi acknowledged that it's normal to be worried about a new technology, addressing public discomfort about GMOs.  Xi described genetic modification as both a new technology and a commercial opportunity in which China must not be left behind. China must be bold in innovative research while being careful in commercialization. Xi warned that big foreign companies must not be allowed to control the market for genetically modified crops. Xi insisted that China must occupy the commanding heights in this industry.
Photo supplied by Farmers Daily shows Xi Jinping as a young man in the countryside.
Does he look hungry?

Most of the speech's themes have been incorporated into the party line this year. It has often been repeated that Xi identified food security as a number one priority at last year's rural work conference where this speech was given. Comments by agricultural officials have repeated Xi's message of taking a leading role in research while strictly regulating approvals. The speech's release gives the public an endorsement of GMO technology in Xi's own words. Does the public trust Xi enough to go along with his endorsement?