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.
| Commodity |
Minimum bid for auction
|
November import price*
|
| per metric ton | ||
| Wheat |
$402-$410
|
$286
|
Corn
|
$365-$376
|
$273
|
| Rice | $442-$503 |
$482
|
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.
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