Tuesday, December 30, 2014

China Cooking Oil Prices 2-year Slide

With plentiful supplies of soybeans worldwide and weak demand, China's cooking oil prices have been falling for the last two years.

A Hangzhou newspaper reports that a five-liter bottle of soybean oil is under 30 yuan (about $4.90). A supermarket procurement officer estimates that retail prices in his store this December are down 40-percent from a year ago.

Cooking oil companies have been running frequent promotions with bright stickers on shelves and posters. They give away a small bottle taped to a large five-liter bottle. Early in 2014 the free bottles were 300 ml, but now companies are giving away 700 ml bottles. The supermarket procurement manager says the two biggest cooking oil companies have had two price cuts this year--one in April and the second in October--each about 10-percent.

The supermarket manager says the decline in prices is linked to declines in soybean prices on the Chicago Board of Trade. According to the National Grain and Oils Information Center, the average unit value of soybean imports fell from 3417 yuan/metric ton in September to 3268 yuan/mt in October, a 4.4-percent decline in one month.

National average prices from China's National Bureau of Statistics show that the decline in retail soybean oil prices has been more pronounced than declines in rapeseed and peanut oil prices over the past two years.

Source: Dim sums blog analysis of data from National Bureau of Statistics.

According to the Hangzhou newspaper, the unit price of imported rapeseed oil is down 28 percent from a year ago, due to a good harvest of canola in Canada. Imported rapeseed oil costs 6200 yuan/mt, much lower than the price of domestic rapeseed oil in Hubei Province of about 8250 yuan/mt. The Hubei price is down 1000 yuan from last year. The newspaper comments that the supply of vegetable oil exceeds the actual demand in the market. 

Supermarket procurement officers told the Hangzhou newspaper that prices of high-end oils like corn and olive oil have not fallen as much. Most of the sales volume is in mid-to-low-end soybean oil, mixed oil, peanut and sunflower oil. 

The National Grain and Oils Information Center reports that volume of soybean imports for January-October totaled 56.8 million metric tons, up 13.75 percent from the same period in 2013.

Saturday, December 27, 2014

Chinese Swine Industry's "New Normal"

A swine industry meeting held by Shuanghui Group (the company that acquired Smithfield Foods in 2013) this month discussed the "new normal" for China's swine production. The era of massive expansion and big profits is over; now the industry needs to consolidate, cut costs, adopt new concepts of environmental protection and biosecurity, and develop a self-sustaining supply of breeding stock.

"New normal" is a reference to President Xi Jinping's declaration of an era of slower but higher-quality GDP growth. An official from the Luohe City animal husbandry bureau said the "new normal" for the swine industry means thin profit margins and slower growth. The industry should not expect a return to big profits. Instead, the industry will need to restructure and producers should focus on controlling costs, develop environmental protection concepts, promote farmer cooperatives, and stick together "for warmth" to increase their say over prices.

Panel discussion at conference on the "new normal" for China's swine industry.

The chairman of Shuanghui's livestock-farming subsidiary company sounded a similar theme. He described 2014 as the Chinese swine industry's worst in the last 15 years. With downturns and volatility likely to remain common, he said feed cost-control, search for alternative raw materials, improved productivity, and reductions of other expenses are the "prescriptions to get the industry through the winter." He suggested Chinese farms will increasingly integrate their operations by producing pigs from farrow to finish and sell their own pigs (instead of selling to itinerant brokers and traders).

The speeches sounded a theme of improving quality and controlling cost. A professor raised concerns about the spread of disease and their increased complexity over the past 15 years. One speaker admonished the industry to get beyond putting inspectors and stations in place--presumably for disease control--to adopting a scientific approach to controlling disease. Another speaker said disease control lacks a scientific foundation and criticized farmers for going through the motions of disinfecting facilities and vaccinating pigs on schedule. Instead, farmers should get beyond formalism to think about what they are doing, choose proper disinfectants, and adapt methods to the actual situation on-farm.

Breeding was another common theme. Ironically, while China produces half the world's pigs and was the earliest site of domesticated pigs, the industry today relies on imported breeds. A Shuanghui official said the industry needs to break the cycle of importing genetic stock, propagating, selling pigs, degraded quality, and then starting over again with more imports of genetic stock. The Shuanghui official said his company has a plan to bring in foreign breeding stock to develop native Chinese "brands" (breeds) of pigs. (In February, Shuanghui imported 550 breeding pigs valued at 8 million yuan from Denmark.)
Shuanghui's Wandong breeding farm in Henan Province.

The meeting was held in Luohe City, the location of Shuanghui's headquarters, with about 200 attendees from swine production companies, pharmaceutical manufacturers and municipal animal husbandry and veterinary officials. It was not a nationally prominent meeting, but the discussion reflects an important turning point for China's swine industry. Like the broader Chinese economy, the swine industry is no longer growing at a breakneck pace, and overnight riches are a thing of the past. Now the industry is settling down to figure out how to manage effectively and become efficient.

Friday, December 26, 2014

Aussie FTA and Chinese Dairy Imports

The China-Australia free trade agreement will gradually reduce tariffs to zero on Chinese dairy imports from Australia. This follows a 2008 China-New Zealand FTA that contributed to a New Zealand dairy-export boom. A November article in a Chinese publication, Economic and Nation Weekly, asked whether the competition from imports would pressure the Chinese dairy industry.

China's current tariffs on dairy products are mostly 10-to-15-percent, so the tariff reductions in theory could increase imports that would reduce the market share of Chinese companies. The low price of imports is expected to put downward pressure on domestic prices for Chinese companies.
Source: China customs data analyzed by dimsums.blogspot.com

In fact, China's dairy imports from New Zealand began their explosive growth immediately after its FTA with New Zealand took effect in October 2008. Interestingly, the FTA coincided with China's melamine adulteration crisis (test results showing infant formula was adulterated were released by Chinese authorities in September 2008). Dairy imports from other countries have also risen since 2008, but the dramatic growth of imports from New Zealand suggest that the FTA was a driving factor.

Industry experts point out that Australia still has a small share of China's dairy imports--about 10 percent for milk powder. They also point out that there are a diversity of products. European countries tend to sell finished products like cheese to China, while New Zealand mostly sells milk powder used to manufacture dairy products in China. One industry expert asserts that prices of final products in the Chinese dairy markets are still set by a few large domestic companies.

Could Chinese investment lead to growth in Australia's share of China's dairy imports? After the Australian FTA's announcement, China's New Hope Group announced plans to invest AU$ 500 million in Australia's food and agriculture with initial plans including a large dairy farming project. A New Zealand trade office representative told Economic and Nation Weekly that Chinese companies have been investing in New Zealand dairy for five years. In November, China's largest dairy company, Yili Industrial Group, announced a RMB 2 billion (NZ$ 400 million) investment in New Zealand, said to be the largest China-NZ investment ever and the world's largest integrated dairy production base.

Both New Hope Group and Yili Group say they have strategies to invest in a global supply network to meet Chinese consumers' growing demand for dairy products. An official from another Chinese dairy company, Flying Crane, said Chinese companies are preparing for the future by developing partnerships with foreign companies to gain access to technology, develop international brands, and cut costs.

The expansion is not limited to Oceania. Also in November, Yili announced a plan to invest in a US$ 100-million dairy processing facility in Kansas in partnership with Dairy Farmers of America, Inc.

An official from the Chinese dairy industry association worries about China's exposure to global price fluctuations. He calls for establishing a national milk powder reserve that he thinks could be used to stabilize Chinese prices.

Tuesday, December 23, 2014

Chicken Plant Blocked by Water Quality Concerns

Local environmental authorities have blocked construction of an industrialized chicken complex planned for a rural county in China's Shaanxi Province. Since when do environmental bureaus in rural counties block big-money projects backed by the county chief? Is this China's "new normal"? Or has the company put the project on hold until the poultry industry recovers?

According to a December 2, 2014 report from China's Daily Business News, the country's largest feed manufacturer, New Hope-Liuhe Group, planned to invest 860 million yuan (about $40 million) to build a feed-chicken industrial complex in Fufeng County in Shaanxi Province, about midway between Xi'an and Baoji city. According to the county government's description, the project was to include a feed mill producing 300,000 metric tons of feed annually, a hatchery to supply chicks to farmers, a model commercial chicken-farming base, a slaughter plant that could process 36 million chickens each year, a company to guarantee loans for farmers, and a processing plant to make health supplements. This was the biggest investment attracted by the county government, the head of the county's communist party committee strongly endorsed it and promised policy support and guidance.

Daily Business News reported that the site selected for the slaughter plant was rejected by the county environmental protection bureau because of its potential effect on water quality in the Wei River. The exact reason is not entirely clear. The site was too close to water-monitoring equipment in the river. If I understand correctly, the treated effluent from the plant would not be diluted enough for the water to meet quality standards. A spokesperson for the feed company gave a conflicting explanation, saying the site was turned down because it was too close to the highway on one side, and too close to a village on the other side.

Since the rejection 20 months ago, the environmental protection bureau has not received a new application from the company for a site approval. Company officials say they are still looking for an alternate site, but none has been found. They say they are no longer promoting the project. The slaughter plant was central to the project. The feed mill has already been built, but with no slaughter plant the feed will have to be sold elsewhere.

This news that a county environmental protection bureau blocked a projected backed by the county chief is remarkable. China's environmental protection authorities are known for going along with authorities on investment projects. Normally a work-around can be found, such as moving the water quality monitoring station upstream.

Or, maybe the project is no longer feasible. Chicken demand went south after two avian influenza scares the last two year and feed prices are sky-high, so maybe environmental regulations are an excuse to cancel an unprofitable project...

The story brings into focus the conflicting priorities of the current Chinese leadership. On one hand, they are saying that they will transition from single-minded pursuit of GDP growth to a better quality of life for citizens, including attention to environmental protection. On the other hand, the authorities are beating the drum for "modern agriculture" and "agricultural industrialization" and concern about food safety is pushing poultry production toward such company-controlled fully-integrated projects like this.

If such a project can't be built in China's Shaanxi outback where officials are still eager for investment, where can it be built?

Monday, December 22, 2014

Chinese Rice Mills and Underground Finance

A Jiangxi Province newspaper recently told the cautionary tale of a rice mill owner who disappeared after his side business as an underground lender got him deep into debt to family and friends. The story appears to be a warning about the dangers of underground lending, but it illustrates how China's Ponzi-style economy is unraveling.

"Mr. Li" got into the rice-milling business in 2009 when he invested several hundred thousand yuan to buy some milling equipment. He was "instantly transformed from farmer to factory boss."

In 2011, he built a mill using a 2-million-yuan loan that was secured by his inventory of unprocessed rice. The debt kept spiraling. During 2012-13, he borrowed 10 million yuan from several banks, but rice-milling business started running into trouble as the Chinese economy slowed.

The rice mill wasn't generating enough cash to cover his daily expenses, so Mr. Li became an underground lender in 2013. He lent 8 million yuan to a businessman from Zhejiang Province at an interest rate of 5-percent per month. He raised the money largely by borrowing from family and friends.

For four months, the Zhejiang businessman paid the interest promptly, but he disappeared when he got into financial trouble and still owed Mr. Li the 8-million-yuan principal. Mr. Li still owed his family and friends, and he himself was effectively bankrupt. If he sold his factory and equipment, he thought he could only raise about 2 million yuan. His grain inventory was already pledged as collateral for bank loans. He was 10-million-yuan in debt. This year, the court seized his factory and warehouse to pay his creditors.

Mr. Li himself went into hiding. He couldn't go home because he owed so much money to family and friends. The Jiangxi newspaper says there are dozens of such rice mill bosses who have disappeared because their cash chain broke down. Because rice-milling generates low returns, many bosses got into underground lending. The Jiangxi newspaper chastises these rice bosses for using their rice-milling business to borrow money for underground finance--"using money to make money."

A bank worker confirmed that many rice mills borrow money secured by inventories of rice and guaranteed by a third party company. The Jiangxi newspaper explains that the third party guarantor is responsible for the loan if the rice mill can't repay. If the guarantor doesn't come up with the money, the bank is stuck with the loan.

Another journalist visited a Jiangxi county in August and found that 42 of the county's 105 rice mills  had shut down since 2012. With little cash and low profit margins, small and medium mills had no money to pay workers or buy unprocessed rice. Many were using family labor to mill small quantities held in inventory to keep supplying their loyal customers. The journalist gave an example of a mill that invested 20 million yuan to expand, but was only generating a few hundred thousand yuan in profit.

It's beginning to look like China's booming economy was largely a giant Ponzi scheme propelled by reckless bank-lending ordered by the government to recover from the 2009 recession. Chains of debt were sustained by one-way bets on real estate, commodities, and the exchange rate. The system is breaking down now that the one-way bets have disappeared.

Saturday, December 20, 2014

Chinese Farmers in Russia Hit by Ruble Crash

Chinese farmers growing crops over the border in Russia have been hit by the fall of the Russian currency. This year Chinese farmers are bringing most of their Russia-grown crops back to China instead of selling them in Russia.

There are said to be 70 Sino-Russian cropping, livestock, and agricultural processing projects covering 400,000 hectares in Russia. Over the past decade, there has been a growing stream of Chinese farmers crossing the border to grow crops in Russia. Heilongjiang, Jilin and other provinces have reportedly invested US$ 200 million in Russian farms.

Most of the farmers are from the state farm system in Heilongjiang Province where land is scarce and the increase in mechanization has reduced the need for workers. Across the border in Russia's far east they can rent land much cheaper, the soil is good, and they can farm huge farms with large machinery.

The Hulin Eastern Star Farm has a 20,000-hectare farm in Russia where they grow 20,000 metric tons of soybeans and 80,000 tons of corn. The farm manager says the price in Russia will be 400-500 yuan less than the Chinese price this year, so they will send 95 percent of their produce back to China to avoid losing money.

Bringing the crops back to China is costly. It involves a long journey by truck, tariff, taxes, and inspection. Chinese border authorities require the grain to be packed in bags, adding more cost.The Chinese soybean price is nearly double the price in Russia, so farmers say it's profitable to send the crops back to China even with the high costs.

The head of the Heilongjiang soybean industry association estimates the province's soybean output to be about 5.8 million metric tons this year. The Chinese production of soybeans in Russia is estimated in the range of 20-to-30-thousand metric tons, so he's not worried that the influx of beans will put pressure on Chinese prices.

At the Suifenhe border crossing, a transit area for grain from Russia is busy. The most popular crop is soybeans. People in Heilongjiang estimate that 90 percent of the soybeans grown on Chinese farms in Russia will be brought back to China this year.

Thursday, December 18, 2014

China's "Farm Diplomacy"

Chinese President Xi Jinping always makes time for rural visits during his trips abroad. Premier Li Keqiang has been featuring agricultural investment and opening trade with new partners in his trips abroad. This is part of China's "farm diplomacy" which elevates agriculture to an important role in foreign policy.

A propaganda piece from the official Xinhua news agency reviewing Xi Jinping's Latin American visit during July 2014 introduced the "farm diplomacy" strategy. Chairman Xi has visited an Argentine ranch, brought seeds along on a visit to Fidel Castro's family hacienda, had coffee at a rural home in Costa Rice, visited a cattle farm in Australia, inspected a farm in Ireland, attended a tulip exhibition in the Netherlands, and drove a tractor in the United States. When he visited the United States as vice president he insisted on holding a meeting on agriculture in Iowa where he got reacquainted with a farm family he had previously visited in the 1980s.

Xinhua dubs this "farm diplomacy" (农庄外交) and asks, "With such a busy schedule, why does Xi Jinping always make room in his schedule for visits to the countryside?" 

First, Xinhua explains that Chairman Xi has a deep appreciation for the common people and the countryside as a result of his years in northern Shaanxi Province as a  young man. Second, Xi is "preoccupied" with how to improve the lives of rural people and develop the countryside. Says Xinhua, Xi has made agriculture a priority in each leadership position during his postings as municipal and provincial leader and now as China's new leader.

Xi has made agriculture an important part of China's foreign relations. Xinhua says all the countries Xi visits ask him to taste their food, hoping that China will import it. Agreements on agriculture are an important part of China's relations with other countries, says Xinhua. Since agriculture is a topic that all people can relate to, Xi's countryside visits build rapport with foreign hosts.

Xinhua lays it on thick with language that sounds like Mao-era propaganda:

"Land is the mother of all things, the source of hope, the root of friendship. Global thinking and love for the land is the commonality of many peoples, love of the land reflects our great national identity."

"The magical land brings forth the golden friendship between China and the world. The profound meaning of Xi Jinping’s 'farm diplomacy' is becoming a brilliant chapter in China’s diplomacy."

An August propaganda article endorsed outbound investment in agriculture by Chinese companies and reiterated Xi's agricultural priority in diplomacy. According to Farmers Daily Xi Jinping said, "Pushing forward ‘agricultural going out’ is beneficial for preserving national food security and it can serve the nation's diplomatic strategy.”

Establishing a more open economy was one of the general principles espoused in the 2013 "third plenum." The communist party's 2014 "number one document" on rural policies called for raising "the level and the quality of external openness in agriculture." Xi Jinping also endorsed a "new" food security strategy as top priority during 2014. The strategy acknowledges the inevitability of imports playing a significant role in China's food supply, and it advocates taking the initiative and gaining as much control over the flow of imports as possible. Auxiliary objectives are to increase the number of countries supplying imports (giving China more bargaining power) and for Chinese companies to control the entire supply chain for food imports (ensuring more profits flow to China and that Chinese companies dictate prices).

The Chinese strategy is to intertwine agricultural trade, Chinese investment, and diplomacy. China has a long history of using agricultural projects--mostly rice demonstration farms--as a diplomatic tool in Africa and Southeast Asia. Now China is dangling promises of agricultural trade and investment to achieve its food security goals and win new friends.

The strategy has been evident in outreach to Eastern Europe where Premier Li  has included agriculture alongside infrastructure and energy as targets for Chinese investment. In December 2013, Li struck an agreement to import cattle and pigs from Romania and signed an agreement for bilateral agricultural cooperation. A similar deal was reached with Serbia. China is holding an annual agricultural trade forum with central and eastern European countries.

This mixture of commercial and diplomatic objectives makes it hard to figure out just what China is up to. Many of these deals don't seem to have much potential impact on agricultural trade. For example, Romania is a net importer of pork, yet it is expected to supply China with 3 million pigs. One of China's objectives is to expand the number of suppliers for corn and other commodities. Peru was added to the short list of countries eligible to export corn to China, but its exports are inconsequential. According to customs statistics, China hasn't gotten that much corn from Ukraine and Bulgaria this year. Ukraine may default on 20 percent of its promised corn shipments to China this year. So, it seems likely that diplomatic objectives are behind many of these deals.

The "farm diplomacy" game may divide potential allies that might challenge Chinese agricultural support or protection policies. Agricultural trade baubles may influence free trade agreements or undermine coalitions that might challenge China at the WTO. The prominent role of investment may tie trade opportunities to a country's willingness to welcome Chinese agricultural investors. Entering the EU through the Bulgarian back door may open up other opportunities.

Xi does seem to have a genuine personal interest in agriculture. His dissertation for his doctorate in Marxist education at Tsinghua University was on agricultural marketing. (Whether he actually wrote it or not, he probably chose the topic.) His dissertation also featured an ambivalent approach to markets: use markets to distribute farm products but make sure the government has a firm grip on those markets. As President, Xi seems to be exercising a similar approach. While last year's "third plenum" called for the market to have a "decisive role," agricultural trade will increasingly be decided around government conference tables.

Saturday, December 13, 2014

China Needs to Test Domestic Corn for GMOs

For more than a year, Chinese border officials have been rejecting shipments of corn containing any trace of unapproved genetically-modified strains. No GMO corn has been approved for planting inside China, but there are indications that production of unapproved GMO corn has quietly spread despite crackdowns over the past four years. If Chinese officials were really serious about keeping unapproved GMOs out of their food system, they would test domestic corn as well.

Chinese corn prices are more than double the price in the United States, but the GMO issue is a barrier to imports from all the leading exporters--the United States, Brazil and Argentina. Consequently, Chinese traders are scouring the globe for other cheap feed ingredients.

On November 18, 2014 AQSIQ, China's agency for inspection and quarantine, posted an online Q&A where Chinese trading companies peppered an AQSIQ official with dozens of questions about importing corn, sorghum, and barley. One trader was told that he can't import corn from France, and no, he can't process it into cattle feed and import it either. Another was told that he can only import corn from Russia if a Chinese company controls the Russian farm and processes it near the border. Traders asked where they could find approved corn-exporters from Ukraine and Thailand. A number were interested in importing sorghum from India and Australia, and barley from Ukraine and Australia--both for feed and for making liquor and beer. AQSIQ said that sorghum cannot yet be imported from Argentina because the risk assessment has not been completed [the final agreement for Argentine sorghum access was signed about a week after this Q&A].

One odd question posed to the AQSIQ official alleged that GMO corn is now widely planted in parts of Liaoning Province and is rapidly displacing non-GMO varieties. According to the "questioner," investigations in a number of Liaoning counties found that seed dealers surreptitiously sell genetically modified corn seeds, even though GMO corn is banned by the government. He claims that GMO corn sells for a better price because it can meet buyers' standards. In fact, he claims that government reserve depots will only buy GMO corn. He claims that these factors are pushing non-GMO corn completely out of the market in some places.

AQSIQ's response was to contact the State Food and Drug Administration or Ministry of Agriculture.

A blog post from July 2014--probably by the same person--goes into more depth on the Liaoning complaints. The post, "The investigation that got the premier's attention," alleges that seed dealers have been selling GMO corn seeds, while industry regulators ignored the practice due to their financial interests in seed companies. He visited Tai'an County in Liaoning where he was told seed dealers repackage GMO seeds as approved varieties. Some GMO seeds are sold surreptitiously directly to farmers. He names a number of varieties. Most are insect-resistant bt strains. The blogger worried that planting of GMO corn was on the verge of explosive growth.

The writer claimed that the vice governor of Liaoning received a report claiming that 70 percent of Liaoning's corn was GMO, yet the vice governor asserted this year that "Liaoning does not have a single grain of GMO corn."

"Why did the governor lie?" asked the blogger. He said dealers were secretly warned ahead of time of a crackdown. Nevertheless, three dealers were caught, but they were let off with small fines. The blogger dared officials to punish him for "telling the truth."

According to the blogger, when he visited Tai'an County no one would talk to him until his identity was confirmed and he agreed not to take photos. The frequent crackdowns announced by authorities suggest that GMO corn may in fact be widespread in China.

This month, a district of Liaoning Province was identified as a "model" for agricultural quality and safety which stipulates that officials crack down on fake, counterfeit, and genetically modified seeds. Crackdowns on GMO seed have been announced in a number of other localities in northeastern China.

During 2010, the Ministry of Agriculture banned four corn seed varieties from prominent seed companies and institutes that were illegally commercialized GMO strains. The strains had been declared as non-GMO when submitted for evaluation, and at that time MOA didn't require checking for GMO content if they were declared non-GMO.

The 2010 crackdown did not wipe out GMO corn seeds. In March 2014, a crackdown in Hainan found seven companies and institutes illegally growing GMOs, and six other suspected violators were still undergoing testing. Twelve of 15 GMO-positive samples were strains of corn (3 were cotton). Another article said 11 seed companies were growing GMO corn illegally in Hainan, including three from Henan Province, one from Liaoning, and one "well-known state-owned company." This was significant because Hainan is a center for seed breeding and propagation due to its sub-tropical climate.

Meanwhile, rumors and pseudo-science about GMOs spread among the Chinese public. There have been outlandish stories about GMO corn causing pigs to miscarry and killing rats in Shanxi Province, and causing men to become sterile in Guangxi Province. The Liaoning blogger said common people joke that they will stop eating meat next year since all the feed is GMO now. Many Chinese people think Americans don't consume GMOs; they export them to weaken the people of other countries. The cynical use of GMOs as a trade barrier on purported food safety concerns and the ambiguous approach to domestic use reinforces these fears.

If Chinese officials are so concerned about the hazards of consuming GMOs, they should test domestic corn for illegal strains with the same stringency used for imported corn. They will never do this, since they are also giving domestic corn a pass on known hazards like mycotoxins from moldy corn.