Saturday, January 31, 2015

China's Feed Output Declined in 2014

After a decade of spectacular growth, China's feed industry is stuck in the doldrums. China is now the world's largest feed-milling country, but the industry has been shrinking as it deals with an overall slowdown in animal production, high Chinese prices for raw materials, and sheds excess capacity.

A Chinese market analysis group, Nongbo net, estimated that China's output of manufactured feed fell 5 percent to 183.6 mmt during 2014. This would be the second straight year of declining output in the industry following a period of extremely rapid growth that outpaced growth in production of meat and eggs.
Source: Dimsums blog, using data from China feed industry association,
Nongbo net, China National Bureau of Statistics.

A global survey of feed mills by a company called Alltech estimated China's manufactured feed output at 182.7 mmt, the world's largest. The United States was number 2, with 172.5 mmt, and Brazil was a distant third, with 66 mmt. Like Nongbo Net, the Alltech survey also reported a decline in China's production during 2014. China's decline held back global feed output which grew only 2 percent during 2014, according to the Alltech survey.

These numbers are only estimates. The Nongbo estimate is based on feed industry association statistics that showed output was down 1 percent in the first three quarters of 2014. A strong fourth quarter was expected, but the fourth quarter turned out to be worse than expected. Therefore, Nongbo estimates that output for the year declined. 

One of the factors contributing to the decline is a massive re-licensing of feed mills conducted by the Ministry of Agriculture that reportedly shut down 30 percent of the licensed feed mills during 2014. The MOA campaign was related to stricter regulation of the industry to weed out mills that were not up to standard in their equipment and product quality assurance. The government-induced shake-out also follows years of complaints about excess capacity in the feed industry. While China's feed industry includes a number of large, sophisticated companies, thousands of small, low-tech mills stayed in business until the MOA stepped in to shut them down (or at least take away their licenses).

The Nongbo Net report also attributes the decline in production to a depressed livestock sector. They estimate that feed production for hogs, egg-layers, meat poultry, and aquaculture declined to varying degrees. Hog feed output was estimated to have fallen 5 percent after a big decline in hog prices early in 2014 and disappointing demand during the customary peak holiday season during the fourth quarter. Poultry output was severely affected by avian influenza. Many small scale egg producers quit. Feed for egg-laying hens was estimated down 11 percent and feed for meat poultry was estimated to fall 2.5 percent. This was the second year in a row of decline for the poultry sector. Aquaculture feed output was also hit by bad weather in southern provinces during the peak season. Aquaculture feed was estimated to fall 4.5 percent. Feed for ruminants was the only type of feed that increased, up 5.7 percent. Ruminants--mainly cattle and sheep--use less than 5 percent of China's manufactured feed.

Reports of the Chinese feed industry's depressed state appear inconsistent with China's booming imports of feed raw materials during 2014. However, the imports are substitutes for China's expensive domestic corn crop which is being stashed in government warehouses. Authorities bought up nearly 70 mmt of the 2013/14 corn crop and are on pace to purchase even more this year. As of January 25, 2015, authorities had purchased 39 mmt of the 2014/15 corn crop for the temporary reserve, ahead of the pace of 2013/14 purchases. The purchase program runs through April 30.
Source: Dimsums blog, using Chinese customs statistics for calendar years.

Most of the temporary reserve purchases are in the two leading corn-producing provinces--Heilongjiang and Jilin--which are also a long way from the top feed-milling provinces along China's coast and its southern provinces. The task of Chinese officials concerned with national self-sufficiency is to stop feed mills from buying American corn and instead force-feed them expensive, moldy corn stored in thatched bins in distant provinces.

Wednesday, January 28, 2015

China's Quality Wheat Shortage

A recent Chinese wheat market commentary is the latest to call attention to the shortage of high quality wheat in China.

China had a big wheat harvest during 2014, but the country is still short of certain types of wheat not widely produced in China. China's wheat predominantly has moderate levels of gluten, but western-style breads need wheat with high gluten, and crackers and cookies need low-gluten wheat. Both are in short supply in China.

Millers have reportedly been paying 2800 to 2900 yuan per metric ton for strains of Chinese wheat that are considered high quality. The cost of imported U.S. wheat for March arrival is estimated at about 1917 yuan/mt.

Flour mills are eager to get access to imported wheat, but only 10 percent of the import quota is made available to private-sector users. During January 6-8, the government auctioned off wheat from its reserves and linked the distribution of quota to purchases made at these auctions. Millers are so eager to gain access to import quotas, they bid aggressively at the auctions.

Then, on January 21 and 28 the government held more auctions. But this time they sold American wheat they had imported in 2013 and held in storage until now. Most of the wheat imported has been socked away in the government's "temporary reserve." They offered 196,000 metric tons during the January 21-28 auctions and about half of it sold at an average price of 2465 yuan/metric ton, or just under $400 per metric ton.

The purpose of the auctions was to add supply to the market ahead of the spring festival holiday season. By adding to the supply, there was speculation that this would bring down the price of high-quality wheat which had been driven by the lack of supply.

There were worries that this would leave the bidders from the January 6-8 auctions "embarrassed" that they had bid so aggressively to get access to wheat import quotas, only to have to government dump more quality wheat in the market two weeks later, driving down the price.

Chinese officials who run agricultural policy are still stuck in the past when wheat was a generic commodity that peasants grew and consumed themselves as noodles or steamed bread. Their silly food security slogan, "Chinese food bowls must be filled with Chinese grain," ignores the fact that Chinese malls all have European-style bakeries selling croissants and pastries that can't be made with Chinese grain. Their ham-handed approach to controlling markets is not appropriate for the increasingly sophisticated food market that is developing in China today.

Monday, January 26, 2015

Governors' Responsibility System Reveals China Grain Worries

China's State Council has issued a directive establishing a new provincial governors' food security responsibility system which demands that local leaders shoulder more of the responsibility for boosting local food supplies, storing the food and ensuring that the food is distributed to consumers who need it.

A number of articles in Peoples Daily and other outlets tied to the government have emphasized that this new system reflects the government's top priority on food security. The articles indicate that top leaders are frustrated with provincial leaders for slacking off and expecting the central government to be responsible for national food security. Chinese officials portray a sense of urgency about the food security situation despite the fact that China has a serious glut of most major commodities.

The provincial food security system charges both the communist party secretaries and the governors of each province with ensuring local food supplies. They will be held accountable by including food security in the evaluation system for officials, requiring officials to make reports to the State Council, and subjecting provincial leaders to "criticism," "rectification," or other penalties if they fall short.

The new system goes beyond the "governors' rice bag" and "mayors' vegetable basket" responsibility systems installed in the 1990s--those just ensured there is "enough to eat" but the new responsibility system demands that governors pay attention to the entire marketing system for grains. The new system reportedly goes beyond grains to include vegetable oils and potatoes.

Part of the responsibility is to boost local grain production. Governors are expected to finance provincial "grain risk funds" and pay for farmer subsidies that have stronger production incentives than the existing subsidies. They are expected to finance model farming projects and high-yielding grain production districts.

Grain storage and distribution is a big emphasis of the responsibility system. Governors are expected to hold provincial reserves to supplement the massive central government reserves which are mostly held in remote grain-producing provinces. They are supposed to crack down on the practice of "round-tripping"--shifting grain around to collect subsidies on phantom grain reserves. Provincial governors are supposed to establish a new grain marketing system comprised of public-private hybrid companies. Poorly-operated state-run grain companies are to be merged and consolidated. Private companies are expected to take ownership stakes in these new state-owned grain companies.

The new system appears to be based on frustration that rich coastal provinces neglect grain production and storage while excess supplies of grain rot in remote grain-producing areas. According to a Development Research Center official, government reserves of corn, wheat, and rice are at record levels and inventories of each grain exceed 50 percent of annual production. Another unnamed official said that huge amounts of grain go to waste in government reserve warehouses. Most of the grain has been stored at least 2 or 3 years and has degraded to the point where it can only be used as animal feed or other uses (like making fuel ethanol).

This sounds like a recipe for even more waste, confusion and statistical subterfuge as officials mainly concerned with skyscrapers, subways and industrial parks are ordered to construct model farms, warehouses, and establish bogus grain companies. All the while filing fictitious reports showing their superiors that everything is fine.

Friday, January 23, 2015

Insurance Agents Assist Dead-Pig Trade

Since 2014, Chinese police have broken up networks of diseased pig-traders and butchers in eleven provinces, arrested 110 people, and seized 1 million kg of pork and 48,000 kg of "gutter oil." Among the miscreants are insurance agents who tip off traders on where to find dead pigs they sell at a discount to butchers who then sell the meat to consumers.

Dead pigs on the back of a truck
Jiangxi Province's Gao'an Prefecture, one of the top 100 pig-selling counties, a CCTV reporter claimed to have discovered that trade in dead pigs was an "open secret" and many of them were infected with type-A foot and mouth disease (often called "disease number 5" in China). The meat from the pigs was reportedly sold to seven provinces, including Guangdong, Hunan, Chongqing, Henan, Anhui, Jiangsu, and Shandong.

According to the report, a taxi driver named Mr. Chen has a secret identity as a dead pig trader. He allegedly got phone calls from a friend who is an insurance adjuster who tipped him off on where to find dead pigs to buy. The insurance worker reportedly got a 5 percent commission.

Individual arrested in dead-pig-trading sting spills the beans.
Traders got info from insurance adjusters on where to buy dead pigs.

China began an insurance program for sows in 2007. In recent years it has been extended to finishing hogs. About two-thirds of the premium is subsidized by various levels of government. When pigs die, an insurance adjuster comes to verify that pigs died and takes a picture. Other insurance workers say the insurance adjuster could withhold photographs from the insurance company if he wanted to report information to traders who come to buy the dead pigs.

This is not new.

Three years earlier, a similar case was exposed in Hunan Province where the director of a veterinary station informed traders where they could buy dead pigs.

In 2013, Jiangxi Province allocated 67 million yuan to subsidize disposal of dead pigs to address this problem.

Officials and regulators place their loyalty to friends, relatives, and business partners above their responsibility to their organization or their responsibility to protect public health.

Tuesday, January 20, 2015

Chinese Livestock Industry: 7 Challenges

At a recent meeting of China's livestock industry association, a Ministry of Agriculture official proclaimed that the industry faces seven challenges as it enters a critical period of upgrading.

Vice Director Wang Zongli of the Ministry's livestock industry office offers a candid assessment of the livestock industry that mostly echoes the party line of upgrading and modernizing agriculture. His first challenge is the "tight supply-demand balance" for Chinese livestock products. He says improvements in living standards, urbanization, and population growth are boosting demand for livestock products. Production of livestock is outstripping the country's water, land and feed resources. Wang highlights an insufficient supply of high-protein feeds, reflected by soybean imports which surged to 63 mmt during 2013 and accounted for 80% of the Chinese soybean supply. He says the growth rate of livestock has accelerated, putting more and more pressure on supply.

Challenge two is cost pressure. Labor costs, raw material prices, water and electricity costs are all rising.

Third, Wang says the animal disease prevention and control situation is still "grim." There are still many disease outbreaks. Disease prevention and control organizations are not good enough. Disease problems affect consumers and hurt the confidence of livestock producers, says Wang.

Fourth, there are persistent hidden dangers in livestock quality and safety. Quality and safety is a major responsibility that influences public health. Wang says there have been exaggerations in the news media and "malicious speculation", but the news reports do reflect problems in the industry. Wang sees the low education, low awareness of laws and regulations and lack of integrity among livestock industry workers as a core problem. People employed in livestock farming, Wang asserts, are mainly low-educated laborers who are unable to distinguish fake feed and veterinary products. He says enforcement of regulations is poor and some people knowingly manufacture, sell, and use substances that are expressly forbidden by the government. Wang complains that there are still 54 million hog producers and 61% of hogs are supplied by small operations producing 500 or fewer head. The United States has only 70,000 hog farms, he says, and just 3.5% of hogs come from small farms.

Fifth, Wang worries that the Chinese breeding system is lagging behind. Quality breeds of swine, dairy cattle and poultry nearly all depend on infusions of imported breeding stock. He says one sow can supply 1800 kg of pork in developed countries, but only 1016 kg in China. Wang calls for linking up companies with research institutes as soon as possible to improve China's ability to supply breeding stock.

The sixth challenge is the increased prominence of environmental pollution. Wang identifies three problems. The number of livestock farms exceeds environmental capacity, crop and livestock production are not linked closely enough, and technology for waste treatment is lagging. He cites statistics from the 2007 national pollution census which showed 41.9% of chemical oxygen demand (water pollution) came from livestock and poultry waste. Now regulations governing livestock and poultry waste emissions are more strict.

Seventh, Wang is concerned that science and technology does not make a large enough contribution to livestock output growth. He says China has done pretty well at importing better breeds and adopting general science and technological achievements to increase output. However, China is weak at improving quality, lags behind in technology for environmental protection, doesn't develop indigenous technologies and fails to make scientific breakthroughs. Furthermore, Wang complains that scientific research is not linked with extension, so achievements are not disseminated to producers.

Monday, January 19, 2015

Urgent! Modernize Chinese Agriculture

Chinese leaders are calling for urgent attention to the transformation of the country's agriculture.

In a January 7 speech on developing agriculture under a "new normal", Minister Han Changfu said the demand to speed up agricultural modernization has become much more urgent as the economy enters the "deep waters" of reform, China enters a new stage of socioeconomic development, and agriculture undergoes profound changes.  Writing in the Communist Party journal Qiushi, Minister Han reveals that General Secretary Xi Jinping himself stressed the importance of accelerating the transformation of agriculture at last December's economic work conference.

Han says that China has made a lot of progress in modernizing agriculture, but it is stuck in a state where "modern" and "traditional" agriculture coexist. With rapid economic development, large numbers of laborers have moved out of agriculture, leaving empty villages and an aging agricultural labor force. Farming has become a largely part-time activity with low productivity. While a form of modernization is in place, the "capillaries" are not developed, Han said. China needs to explore new forms of agricultural businesses and nurture a cadre of professional farmers, Han wrote. Officials will encourage integration of crop and livestock production. More effort will be put into orderly transfer of land to develop new-type farming operations.

While China has made great achievements by increasing grain production 11  years in a row, it has come at a significant price, said Han, as problems of resource degradation and agricultural pollution became more prominent. China needs to pay down "environmental debts," Han said. China will now pursue environmentally-friendly agriculture, with plans to recycle the major pollutants--plastic sheeting, crop straw and stalks, and animal manure. Han promises an "environmental governance battle" at the local level.

The urgency is magnified by pressure from the external environment. Han describes it as "a floor" and "two ceilings." The "floor" is a steadily rising cost structure for agriculture, including rising costs of labor, machinery, and physical inputs. Prices need to rise to maintain profit margins, but Chinese agricultural prices are already substantially higher than international prices. The first "ceiling" is the price of imports that constrains Chinese prices from rising higher to give farmers incentives and increase their incomes. The second "ceiling" is WTO-imposed limits that constrain China's ability to increase domestic subsidies for agriculture. Han warns that China is approaching its limit on "amber box" subsidies imposed by its WTO agreement.

Han explains that China has to transform the model of agricultural development in order to increase farm income and make the sector competitive. It has to switch from reliance on physical inputs to boost output to reliance on science and technology to raise productivity. China is experimenting with plans to boost innovation in seed and other input industries. A seed propagation belt that includes Hainan, Gansu, and Sichuan is being developed. Farm production needs to be concentrated in regions that have comparative advantage. Farms need to be linked up with processing and distribution industries to form industry chains. New types of marketing arrangements will be pushed, including e-commerce and direct marketing from farmers to consumers.

Han emphasizes agricultural safety and quality. Now that Chinese consumers are adequately clothed and fed, Han surmised, they have zero tolerance for food safety problems. Therefore, Han said China must pursue "standardized production" at the farm level and strict supervision of marketing beyond the farm gate to achieve food safety all the way to the consumer's tongue. This year, China will set up 100 "vegetable basket" demonstration counties for supplying vegetables, meat, and fish with an emphasis on food safety supervision.

Han also embraced globalization: China should attract foreign capital, key technologies, expertise and management experience to help develop China's agriculture. China should improve its ability to control imports and exports, allowing imports of commodities that are in short supply and supporting export of Chinese products that have a competitive advantage, said Han.

In a more pithy speech at Tsinghua University in December, rural policy advisor Chen Xiwen also noted the exhortation to speed up agricultural transformation. He called attention to the pressure from imports, noting that China's grain soybean imports for 2014 could surpass 90 million metric tons, and described the surging imports as indicative of more fundamental and complex problems. Chinese agricultural prices were relatively low when China joined WTO, Chen said, but now they are high. While China has a system of tariff rate quotas to limit grain imports, Chen estimating that smuggled rice from Vietnam was probably greater than the volume reported as legal imports in customs statistics. Chen described the trend of rising farm production costs as "grim."

Chen also said that the environment "red light" is on, and China is approaching the "yellow line" on subsidies. Chen implied that there was great pressure to boost subsidies in this year's target price experiments. The target price for cotton was set at 19,800 yuan/mt, but the market price fell to 13,500 yuan/mt...implying a subsidy of 6,300 yuan/mt, or 47 percent of the market price. Outside the Xinjiang pilot area, the subsidy was set at just 2000 yuan/mt, which means that cotton production will concentrate in Xinjiang. Chen also noted that the soybean target price had to be set at a high level because it was essential to prevent any more declines in soybean area. His reason was that high-protein Chinese soybeans are needed for food uses both in China and in exports markets in Japan and South Korea.

Officials have been calling for "modernization" of agriculture for half a century, but they keep recycling the same ideas over and over without addressing the systemic problems. Chen Xiwen seems to share the frustration, exhorting officials not to "just talk about national features, development stages, and do research." Minister Han acknowledges that a build-up of problems has increased the urgency to radically change the development model for the sector, but he doesn't address the need to relax anachronistic "state secrets," constraints on land ownership, barriers to foreign investment and trade, and stove-piping and squelching of criticism that prevents effective governance. China has created a society where lying, bribes, and cheating are the norm (and consumers wonder why they can't trust food merchants).

China has indeed entered the deep end of the pool and needs to get some swimming lessons quick.

The graphic below summarizes the 2014 rural work conference. 

Wednesday, January 14, 2015

China Livestock Waiting for Rebound

China's swine and poultry industries are shedding capacity as cash resources get tight and peak season for disease hits.

After 13 months of decline, productive sow numbers in November 2014 were reported by China's Ministry of Agriculture to be 43.68 million, down 13 percent from their peak.

The current hog price is reported to be 13.07 yuan/kg. The price is depressed despite the approach of the spring festival, China's customary peak-demand period. After the extended period of losses, cash has been getting tight for farmers, so they have been culling sows.

Disease is contributing to the drop in animal inventories. In December, China Central TV reported that a large outbreak of foot and mouth disease occurred in Jiangxi Province. It was also reported that pork from the diseased pigs was sold in at least seven provinces. The Ministry of Agriculture announced that a district of Ma'anshan in Anhui Province had the first detected type-A foot and mouth disease. FMD outbreaks have been reported in Hubei, Hunan, Tianjin, and Liaoning. Chinese analysts think these reports may be "the tip of the iceberg"; they think disease problems may be spiking due to winter weather and cash-poor farmers skimping on disease control.

In Xiamen, two confirmed human cases of H7N9 caused sales of poultry to plummet at the city's wholesale and retail markets. Local authorities closed the markets on January 2-3 to disinfect them, and sales were one-tenth of usual after the markets reopened. This follows major outbreaks of avian influenza during 2013 and 2014.

Broiler and duck breeding flocks are down 20%-30%.

Over the past 5 years, China's hog cycle was compressed from the traditional 3-4 years to 1-2 years. Analysts say the current downturn, already extending 1-2 years could drag on quite a while longer. They note that severe declines in production capacity led to price spikes in 2011 and 2007.

Another article--perhaps trying to divert attention from severe problems in the domestic pork industry--warns consumers that imported pork could be laced with "lean meat powder" and salmonella. China's inspection and quarantine authorities have been carefully testing imported pork for ractopamine, and said they detected it in 17 batches of imported U.S. pork during November 2014. The ractopamine was found in pig feet, snouts, kidneys, tongue and other offal. All of the detections were at the Tianjin port. The Xiamen port also found salmonella in pork imported from Spain.

The article warns readers, "Don't think imported pork is so good-tasting; it could contain "lean meat powder!"

Tuesday, January 13, 2015

Dairy Companies Ordered to Buy Milk From Farmers

On January  7, 2015 China's Ministry of Agriculture issued an emergency notice urging local authorities to adopt measures to ensure that farmers are able to sell their milk. Local officials are ordering dairy companies to keep buying milk from farmers to prevent them from quitting the industry or killing off cows.

During 2013, China had a severe shortage of milk. Now, global market conditions of excess supply and falling prices are spilling over into China. 
China's farm price for milk fell from 3.92 yuan/kg last September to 3.75 yuan/kg in December.

A reporter for New Capital News went to several dairy-farming communities in Hebei Province's Xingtang County. A farmer at one community said local farmers have a contract with the Hebei subsidiary of a food company to sell them milk. However, in November 2014 the company told farmers they would only buy 80 percent of their milk. The farmers would have to figure out what to do with the other 20 percent.

The company had accumulated two months of product inventory they couldn't sell. Therefore, the company chairman ordered the Hebei subsidiary to limit purchases of new milk.

A county official said the milk price had fallen from 5.5 yuan/kg in the spring of 2014 to 3.6 yuan.

Hebei Province officials started to address the milk-selling problem in December. Provincial officials ordered local officials to "coordinate" dairy companies and farmers to address the difficulties selling milk, strengthen "supervision" of dairy farmers, requiring everyone to share the burden and risk. This appears to entail ordering companies to buy farmers' milk, telling farmers not to kill off their cattle, and ensuring the safety of milk.

When the reporter returned to visit the dairy farmers several days later, he was told that the farmers received a notice from the company eliminating the 80-percent limit and they are now able to sell all their milk at a price of 3.1 yuan/kg. County officials said the problem was "temporarily" solved.

Shandong Province has seen a steep decline in milk prices too. Ministry of Agriculture teams reportedly have been sent there to "coordinate."

The urgency of the milk measures seems to be motivated to avert another catastrophic problem like the melamine adulteration that was exposed in 2008. Hebei Province and its now-defunct Sanlu company was the epicenter of that incident. A similar period of depressed prices and culling of cows preceded the incident in 2007. When prices recovered later in the year, short supplies caused milk prices to spike and gave milk stations strong incentive to water down and adulterate milk.

The MOA emergency notice demanded that local governments strengthen oversight of dairy companies to ensure that they honor contracts and actively purchase milk. Echoing the 2008 problems, the notice called for maintaining orderly markets, for utilizing cooperatives to strengthen farmers' negotiating power, upgrading dairy-farming communities, supporting an alfalfa revival program, and implementing the improved breed subsidy. The notice called for local officials to fight for a subsidy to hold local reserves of milk powder.

The falling prices have been transmitted from the global market. Major dairy producers like New Zealand and the EU have seen prices fall 30%-40%. Some Chinese companies are importing cheaper milk from other countries, and reducing their local purchases. Further declines in price are anticipated in 2015.

Monday, January 12, 2015

Smithfield Pork Enters China

After buying Smithfield Foods in 2013, the new Chinese owners wasted no time in introducing pork from their new American acquisition into the Chinese market.

In May 2013, Shuanghui Group--China's largest pork processor--announced its acquisition of Smithfield Foods--the largest U.S. hog and pork producer--and the acquisition was complete by September of that year.
Smithfield sales counter at a supermarket in Zhengzhou.

In March 2014, the first 325-ton shipment of Smithfield pork arrived at a new temperature-controlled bonded warehouse at the Ningbo port in China. The pork was sold in special pilot promotions at "Smith" brand sales counters placed in supermarkets in Zhengzhou, Henan Province. Shuanghui is test-marketing the Smithfield pork in its home province and plans to expand to all key cities in Henan by next year. 

The advertising emphasized taste, nutrition and food safety. Consumers were told that pigs are fed nutritious grain and the meat is more tender and juicy than other pork. Consumers were assured that pork is fully traceable and is kept chilled in each step of the processing and distribution process.
Inspected by Chinese customs agents at the port in Ningbo

The promotional price is 15%-to-20% more than common pork. After the promotion, the normal price is expected to be around 14.9 yuan per 500g. (That's about $2.20/ how do they manage to ship it across the Pacific ocean and sell it cheaper than in this blogger's American supermarket about a five-hour drive from Smithfield?)

The imported pork has been blamed for depressing prices in the Chinese industry this year. Shuanghui points out that their 5000 tons is a tiny share of the 50-million-ton industry. They say they are just giving Chinese consumers more choice.

In November 2014, two Shuanghui executives explained that the traditional "kill pig, sell pork" approach is changing. The company's strategy is to concentrate on raising hogs in America and Europe while raising chickens in China. Shuanghui also acquired Spanish pork company Campofrio in 2014.  Shuanghui plans to build a 50-million-chicken project in China during 2015.
Shuanghui executive explains their China-U.S.-Spain company strategy.

Shuanghui set up a subsidiary company in Shanghai to manage the Smithfield pork business. It plans to set up processing plants for imported pork in Zhengzhou, Weiyang, Shanghai, and Shenyang. Construction on the Zhengzhou plant is planned for 2015.

Shuanghui subsidiary plants in Heilongjiang Province gained access to the Russian market in late 2014. The first shipments in November were about 6000-8000 tons. The Shuanghui shipments to Russia are taking the place of...Smithfield pork which was banned by the Russians last year because it's American. Shuanghui's Chinese pork is going to Russia, in effect, replacing Shuanghui's Smithfield pork which is now being shipped to China. Got it.

Monday, January 5, 2015

Import Quota Linked to Reserve Auctions

In a new rule Chinese companies will only be able to import grain this year if they agree to buy an equal amount of old Chinese grain from government reserves.

The new rule dated December 29, 2014 was posted on a number of industry web sites and identified as originating from the National Development and Reform Commission (but this blogger can't find an official copy of the rule online).

According to the new rule, the share of tariff rate quota (TRQ) for non-state-trading entities (10% of wheat quota, 40% of corn quota, 50% of rice quota) will be distributed to applicants based on the volume of grain they purchase in auctions of grain from state reserves to be held January 6-8, 2015. Quota for state-trading entities and processing trade (companies that import grain, process it and re-export the products) is exempt from the new rule.

Companies located in seven grain-deficit regions (Beijing, Shanghai, Tianjin, Zhejiang, Fujian, Guangdong, and Hainan) and four fuel-ethanol manufacturers will get quota equal to their auction purchases plus an extra 20 percent. This bonus quota is apparently meant to steer imported grain away from grain-producing regions to insulate those regions from the price-competition of cheaper imports. Apparently, Chinese authorities want to encourage production of fuel ethanol from imported grain.

The auctions include: 2 mmt wheat, 5 mmt corn, 4 mmt indica rice, and 4 mmt japonica rice.

Minimum opening bids have been set for each type of grain by year produced. The minimum bids are set to exceed the support price paid for the grain in the year it was procured. The minimum bids are $402-$410 per metric ton for wheat, $365-$376 for corn, $442-$452 for long grain rice, and over $500 for medium grain rice. By comparison, customs statistics for November 2014 show the average unit cost of wheat was more than $100 less than the minimum bid for wheat from reserves, and the difference was $100 for corn. That's $1-million difference for 10,000 metric tons.
Minimum bid for auction
November import price*
 per metric ton
Rice $442-$503
*average unit value from Chinese customs statistics.

Lists of thousands of lots of grain to be offered for auction are available online. About half of the wheat was produced in Anhui and Henan Provinces during 2013. Much of that wheat was of poor quality because there were heavy rains at harvest time. A little over half of the wheat was grown in Henan during 2014, and is believed to be good quality. Nearly all of the corn and japonica rice has been stored in the open for 1 to 3 years. The grain is stored in small lots of about 300 to 1000 metric tons in hundreds of facilities in remote areas, adding to the cost of acquiring the grain. By comparison a single shipment of imported grain is often 60,000 metric tons.

Potential importers will face the calculation of whether it's worth paying premium prices for grain from reserves in order to get access to imported grain. If the tradeoff is not cost-effective, this will be another means of blocking grain imports.

Another consideration is that import quotas are spread thinly over hundreds of applicants in provinces all over the country. The import quota allocation is often too small to be viable for a shipment. Rules stipulate that grain imported with quota must be used by the applicant--it cannot be transferred to others.

The new rules are described by Chinese analysts as a measure to inject wheat into the market during the peak demand period before the lunar new year, a measure to use quota more rationally by guiding it to grain-deficit areas where imported grain is needed, and a measure to whittle down excessive grain reserves.

A wheat analyst questioned the fairness of requiring importers to participate in a once-a-year auction in order to get import quota. He also speculated that there could be a spike in auction prices motivated by competition to get quota. The analyst notes that the wheat import quota allocation has not kept up with the changes in China's flour-milling industry. Millers now need larger volumes of high- and low-gluten wheat to manufacture breads and crackers that were uncommon in 2001 when the tariff rate quota system was introduced. Without import quotas, many millers are unable to get this kind of wheat. In December 2014, Ministry of Agriculture testing found that only 2 percent of last year's domestic wheat crop had strong gluten and less than 1 percent had low gluten--nearly all of China's wheat has moderate gluten levels.

Over the last several years, the founder of China's largest feed company has complained about the import quota system. He pointed out that the private sector accounts for 95 percent of feed manufactured in China but it gets only 40 percent of the corn import quota; 60 percent is awarded to state-owned enterprises that produce minimal amounts of feed. The feed tycoon said his company bought 280,000 metric tons of import quota from a state-owned company in 2010.

Saturday, January 3, 2015

Peoples Republic of Food Surplus

Suddenly, this "BRIC" is looking soft. China has surpluses and excess capacity not just in industrial sectors like steel and ship-building but in nearly every segment of its food industry. China produces half of the world's pork and apples, two-thirds of the vegetables, 30 percent of the world's rice, 22 percent of the world's corn, and 40 percent of the world's peanuts for 22 percent of the world's population. Its grain reserves are at a record-high level.

China has too much pork. Breathless stories (like this one from the December edition of The Economist) about its supposedly insatiable demand for pork are still coming out, yet the Chinese swine industry has been shedding excess capacity for the last two years. The number of sows--essentially the machines that turn out pigs that become pork--has declined nearly every month for the past two years (if we are to believe the dodgy numbers) as negative margins between pig prices and feed costs induce farmers to quit or scale back. The number of sows is down to about the same level as 2008. In 2009, the Chinese government concocted a program to rescue the industry from such downturns by buying up frozen pork, but a recent article by a Chinese swine industry web site reported that warehouses are now filled with pork carcasses. The article estimated that China has 510,000 metric tons of excess pork capacity.

China's poultry industry has excess capacity, attributed to avian influenza outbreaks the last two years, and it faces a shake-out of farms. The top four poultry companies lost a combined 300 million yuan in the first quarter of 2014. The head of China's livestock industry association said the country had a surplus of grandparent-generation flocks in 2013. It has been rumored that Chinese officials have a plan to boost poultry and egg exports early in 2015 to use up some spare capacity.

The feed industry has excess capacity. Feed industry output went down in 2013 and fell again in the first half of 2014 after posting annual growth of 8%-10% for years. A June 2014 article said, "Some people thought there was excess capacity in the feed industry as early as 2008, but with the passage of time the excess capacity problem has intensified." China's feed industry association said there were over 10,000 feed enterprises in China in 2013. The number is expected to fall to 9000 this year. The article estimates that five of the top feed manufacturers are utilizing about 50 percent of their production capacity. Lysine, a feed additive made from corn, is said to have 2.3 million metric tons of production capacity, nearly three times the actual demand.The chairman of China's largest feed company says the market is saturated and competition is fierce. He says margins are continually squeezed by rising wages and fringe benefits, increasing food safety requirements, and demands for new product development.

An article last month celebrating the opening of futures trading in corn starch on the Dalian Commodity Exchange proclaimed that the starch industry has serious excess capacity. Corn represents about 80 percent of starch production costs, and China's corn prices are now the highest in the world. The article says that much poor quality corn with high moisture stored in the open in the northeastern region can't be used by starch manufacturers except for making paper. The article says that environmental regulations and lack of financing are pushing out small manufacturers. Large companies--the article says--can withstand the downturn because they have their own electricity generation and can make money from further-processing.

As flour-milling expanded over the years, excess capacity became more and more of a problem, concluded a report by Henan Province's statistics bureau earlier this year. In June, Henan's flour-milling capacity utilization was estimated at 46 percent and just 18 percent for small and medium mills. Economy Daily reported that the flour industry's capacity had doubled in five years while wheat production rose only 20 percent, creating a serious excess capacity problem.

Last month, a business news publication reported that 80 percent of rice mills in China's northeast are idle because most of the unprocessed paddy rice is in a "rice lake" held in government warehouses.

Well, China should grow more fruits and vegetables since they are "labor intensive" and in China's "comparative advantage," right? No, these industries also have excess capacity. It has been pointed out that China already has 80 percent of the world's greenhouses and produces two-thirds of the vegetables in the world. 

The Hubei Daily reports that a 300-acre development of greenhouses on the outskirts of Wuhan has been abandoned and fallen into disrepair. A real estate developer whose construction business dried up was enticed by the local government to plant vegetables with a subsidy of 10,000 yuan per mu (about $10,000 per acre) to build the greenhouses. The project lost money and was soon abandoned. The scheme was part of the "vegetable basket program" that subsidizes big vegetable production bases to supply city food needs. The reporter wonders why such a program is needed since Wuhan has had plenty of vegetables for the last 15 years. He thinks such wasteful subsidies are common throughout the province and nationwide.

The industry that produces the metal frames for the greenhouses is also suffering from excess capacity.

A 2013 research report proclaimed that China's tomato paste and apple juice industries have serious excess capacity problems. Tomato sauce capacity utilization was estimated at one-third in 2012. Both products come from remote areas of western China and nearly all the products are exported since there is minimal domestic demand. They are generic products that came to dominate the market because they were cheap. Exports were pummeled by the world recession in 2008-09 and with Chinese costs rising, poor quality and substitutes available from other countries, they are losing competitiveness.

How could this implosion happen? Suddenly there's too much of everything. China's Minister of Agriculture has often talked of "rigid" growth in demand that necessitates big expansion of production. It turns out demand isn't as rigid as supposed. There apparently was a lot of waste in China's food consumption process--exposed by the order to cut back on official banqueting, travel, and special cafeterias for officials. And when domestic prices are higher than everyone else is paying, Chinese consumers learned to economize.

After years of go-go growth, the piper must be paid. "If you build it, they will come" worked for a surprisingly long time. Big companies expanded by adding shiny new facilities all over the country, but the crude workshops in alleys and courtyards with low costs and minimal overhead stayed in business too. Nearly every industry has been saying for years that there is a big shake-out on the horizon. The squeeze of falling output prices against rigid raw material prices may finally bring the long-expected shake-out.

Now, can China make the transition to a truly market-oriented economy where supply is driven by consumer demand instead of government directives, subsidies, and make-money-fast hysteria? It looks like there will be some painful years ahead before we learn the answer.