Monday, June 29, 2015

Ukraine is China's Main Corn Supplier

China imported 380,000 metric tons of corn from Ukraine during May 2015, bringing China's shipments from Ukraine to over 2.1 million metric tons (so far) for the market year that began in October 2014. The Ukrainian corn accounts for over three-fourths of China's corn imports for 2014/15 so far.

In previous years, the United States was China's main overseas supplier of corn, but during 2014/15 China has imported less than 100,000 mt of corn from the United States. That volume is comparable to the quantity imported from Laos and half of the volume imported from Bulgaria. How did China come to snub the world's largest corn exporter and open up a corn pipeline from the Ukraine?

The Ukrainian corn connection is a calculated strategy to break China's dependence on the United States for corn imports. It is also tied into the grand strategies of "going out" and "one road, one belt" that intertwines infrastructure investments by Chinese companies with creation of agricultural export bases to supply China's growing appetite for agricultural commodities.

As China's corn imports soared during 2012, China rushed to sign an agreement to allow corn imports from Ukraine. The first Ukrainian shipment to China in December 2012 was described in a Chinese customs bureau analysis as breaking the U.S. status as sole foreign corn supplier to China.
"Congratulations to China National Complete Engineering Company 
on the season's first arrival of Ukrainian corn."

State-owned Chinese entities have been linked to big (and murky) investment deals in Ukraine.
  • China's Import-Export Bank reportedly committed to up to $3 billion in loans to Ukraine to be repaid in grain shipments. 
  • The China National Complete Engineering Corporation claims to have signed an agreement in 2012 to supply seeds, pesticide, fertilizer and machinery to Ukraine with a 15-year plan to ramp up exports of corn and soybeans to China. 
  • Also in 2012, the Ukrainian National Agricultural company announced  an agreement with COFCO to export corn to China. 
  • In 2013, the Xinjiang Production Corps, a quasi-military network of state farms and industrial operations in China's far northwest region, claimed to have signed a $2.6-billion investment deal that would create China's "largest overseas farm" using its drip irrigation technology to grow crops and livestock on 3 million hectares of Ukrainian farmland.
China had been exploring Ukrainian investment since at least 2004, when Chinese diplomats prepared a report evaluating Ukraine as a potential target for Chinese outbound investment. However, the report's only mention of agricultural investment was tea--the report emphasized energy, construction and heavy industry. China was a corn exporter during 2004, and procuring grain from Ukraine was not on China's radar screen then. This changed when the country started importing large amounts of corn during 2011/12, and there seemed to be consensus among Chinese officials that China's corn imports would keep rising as the country raised more livestock. There was consternation that the United States was its sole foreign supplier.

China National Complete Engineering described its November 2014 shipment of Ukrainian corn to China as an important part of the country's $3 billion investment in Ukraine and an implementation of the "one belt, one road" strategy--Ukraine is said to lie in the center of new trade routes from Asia to Europe. The project was described as an innovative approach to foreign agricultural investment in which both sides cooperate. According to the company, the Ukrainian grain shipments "increase the international competitiveness of a Chinese enterprise," ensure China's food security, and "give China a voice in the international grain market."

The agricultural projects in Ukraine appear to have been tacked on to bigger plans for infrastructure and energy projects. China National Complete Engineering is a state-owned company engaged in energy, construction, and port projects in places like Angola, Zambia, and Myanmar. The company's main business in Ukraine is building rail and highway projects that were launched in 2011 by an agreement signed by then-Premier Wen Jiabao. All the agricultural development projects listed on China Complete Engineering's web site are in Ukraine: vague descriptions of plans to raise corn, soybeans and livestock and construction of a pesticide factory. The company does not appear to have any expertise in agriculture.

The 2012 Chinese customs report cited above said one reason for the Ukrainian corn deal was to "suppress the Americans' abuse of price-setting power for corn." Numerous articles refer to the Ukraine deal giving China price-setting power for corn on the international market. Those purported worries about Chinese users being overcharged for corn by the Americans now appear laughable since Chinese companies are now being cajoled by the Chinese government to buy domestic corn at prices 50-to-60 percent higher than the price of imported corn.

According to a March 2015 Reuters report, Ukrainian corn shipments for April-May 2015 had a cost of 1500 yuan per metric ton including cost and freight, about 60 percent less than the cost of domestic corn. According to Reuters, the purported price-gougers in America that Chinese officials were so worried about are now charging 80 yuan less than the price of Ukrainian corn.

Chinese companies can't import corn without a share of the tariff rate quota doled out by the Chinese government. Sixty percent of the quota is doled out to COFCO--one of the companies that signed a deal with Ukraine in 2012. China National Complete Engineering mentions that corn it procures at a favorable price in Ukraine is shipped to China by COFCO.

China's inspection and quarantine agency has a publicity campaign featuring shipments of Ukrainian corn.

A May 12, 2015 report announced that the northeastern port of Dalian had received its first-ever shipment of Ukrainian corn. The corn was supplied by China Complete Engineering, described as a sign of progress in the Ukrainian project. Interestingly, the shipment was described as a "breakthrough" as a "new model" for supplying grain to the northeastern region--China's main corn-producing area.

A processing company is importing Ukrainian corn and re-exporting the final products. The Xiwang Sweetener Company in Shandong Province imported 150,000 mt of Ukrainian corn that will be processed into sugar products (anhydrous glucose, crystalline fructose, sodium gluconate, and maltodextrin) and then re-exported. Chinese authorities like to set aside import quotas for such "processing trade" whenever possible so as to insulate the Chinese market from cheap imported raw materials.

In February the first 55,000-mt shipment of Ukrainian corn arrived at the Zhangjiagang port in Jiangsu Province. The corn was distributed to feed mills in Zhejiang, Shanghai, Anhui, Hubei, and Sichuan Provinces.

In May, a feed mill supplying a Tibetan chicken breeding facility imported a 1073 mt shipment of Ukrainian corn.
Checking Ukrainian corn at Zhangjiagang port.

Chinese companies are not importing U.S. corn because there is still uncertainty about whether shipments may be rejected for genetically-modified content. Although the MIR 162 variety has been approved, no one knows whether another unapproved variety might be discovered. The Reuters article reported that importers are unwilling to accept the risk. Many of the articles on Ukrainian corn emphasize that it is non-GMO.

In contrast to U.S. corn shipments that regularly wait for days or weeks berthed at Chinese ports waiting for inspection and quarantine, the Ukrainian corn is getting special attention. Regarding the Shandong corn shipment, the local communist party organization assigned an expert group to coordinate the inspections and lab tests in order to ensure the "smooth and secure entrance of the corn into the country." The Jiangsu and Tibetan shipments were described with nearly identical language.

While China National Complete Engineering described its project as "eliminating unnecessary risk", they also admit to encountering "great difficulties" implementing the project. During 2014, it was widely rumored that the Ukrainians would likely default on at least 20% of the contracted amount of corn for the year. Importers holding quotas for 2014 reportedly had their quotas extended to February 2015 to accommodate the delays from Ukraine. China Complete Engineering discounted "unfounded market rumors", presumably referring to the rumored default, but the company acknowledged that political instability has resulted in changes in leadership on the Ukrainian side that complicated the deal.

A report from a consultancy called Ukragroconsult estimates that  Ukraine's corn production and exports will fall in 2015/16. Corn planting in Ukraine has fallen this year and use of fertilizer, pesticide, and high-yielding imported corn seed are down due to monetary pressures.

It's impossible to eliminate risk from agriculture. In snubbing the leading corn exporter to mitigate an imagined risk from reliance on U.S. corn, China has exposed itself to a new set of risks in Ukraine. To counter a purported U.S. monopoly, a new set of monopolies and fiefdoms have been created which overcharge Chinese processors for corn. Chinese officials and state-trading companies get to choose who gets cheap imported corn and who doesn't. Chinese officials are allegedly protecting consumers from the dangers of genetically modified American corn, but China is preparing to grow genetically modified corn itself several years down the road (more on that in a future post).

Welcome to the "decisive role of the market," Chinese-style.

Wednesday, June 24, 2015

2015 Toughest Year for China Feed Industry

During the first quarter of 2015, China's feed production was down 4 percent from the same period last year, according to production data from 180 feed companies monitored by the Ministry of Agriculture. This is the toughest year ever for the Chinese feed industry, say feed industry managers interviewed by Guangdong's Southern Rural News.

Feed companies have been cutting prices aggressively, offering two-for-one sales and other promotions to boost sales volume in the hyper-competitive market with weak demand. Many companies expanded production capacity during the last two years, and they are willing to sacrifice profit to maintain their market share. Another round of price cuts is rumored for June.

The cutback in pig inventories over the last two years is a major factor cutting into demand. Sales of pig feed were down 14 percent during the first quarter. With hog prices having fallen for 20 months and stiff losses last year, many farms in Guangdong Province are cautious about restocking, said one farm operator. There has already been a rebound in piglet prices, and feeder pig producers are starting to restock sows. Farmers are not enthusiastic about expanding their herds of finishing pigs, though.

Ministry of Agriculture data shows the hog inventory down 9.8 percent year-on-year in May for the farms it monitors. The National Bureau of Statistics shows a less-drastic reduction of 4.2 percent for the first quarter of 2015.

Guangdong Province gave out subsidized loans to buy feed this year to stem the decline in sales.

According to Southern Rural News, feed industry executives are eagerly watching for a rebound in the hog sector.

"Feed companies are all on edge,” said one feed company manager.

Thursday, June 18, 2015

Rent Out Land At Your Own Risk

China has a grand experiment to retain collective ownership of village cropland while encouraging villagers to rent out the rights to use the plots of land allocated to them. This untried separation of ownership from use rights is adventurous and quite risky in an environment where there is little protection of property rights and little understanding of or respect for law.
Publicity campaign for land transfer regulations in Hebei Province.  

China's Banking Times reports that Chinese villagers have six worries when they consider renting out their land.

1. Lack of formal agreements leads to frequent disputes. Most land transactions in remote areas are verbal agreements between villagers that don't specify a length of the contract or a use for the land. Sometimes the renter changes the use of the land or makes improvements to the dissatisfaction of the "owner" who may demand that the land be returned. This leads to many disputes and conflicts.

2. "Owners" worry that their rental payments may dry up if renters with shaky financing run short of funds or if their business fails to prosper.

3. "Owners" worry that they may lose their grain subsidies if a renter changes the use of the land by planting fruit trees or digging fish ponds instead of planting rice, wheat, or corn.

4. Elderly villagers worry that they will have nothing to do and no adequate means of support if they rent out their land. This is a concern for those too old to work in cities, who lack remittances from family members working off-farm, and those who rely on their land to grow food. The rent of 500  yuan per year may not be enough to support the "owner"; he/she could earn 1000 yuan from growing crops.
Villager displays his document at a township land transfer center. An ironic reminder of the shaky protection of  property rights this transaction is based on: he's wearing a jacket with a fake Nike swoosh.

5. Land could be seized by lenders if renters use it as security for loans. If the renter plants an orchard, raises animals, or builds houses on the land and fails to pay back a loan, the land may be seized by a bank or other lender. The ownership of the land cannot be mortgaged; only the products of the land and maybe the improvements on it. But if a lender doesn't get his money back, he/she may take over the land to recoup his money.

6. "Owners" worry that they won't get their land back at the end of a long-term contract. Companies typically ask for rental agreements of ten years or longer. "Owners" worry that it will be hard to get their usage rights back when the agreement is concluded. What if the renter constructs buildings, plants trees, or makes other improvements? Will the "owner" have to tear them down at the end of the contract?

With laws and enforcement constantly changing at the whim of officials, few Chinese citizens have confidence that deals made toady will be honored in the future. This is a problem for farming and other land-based activities that require long-term investments that are recouped over many years. This leads to a mentality of making as much money as fast as possible--not favorable for "sustainable" agriculture. Sorting out these problems is critical to the success of Chinese agriculture.

Sunday, June 14, 2015

Officials Demand Grain Quantity Over Quality

Chinese people are no longer worried about filling their bellies with food; now they want a more diverse diet that's more healthy and with better taste. However, the Chinese government's food security policy still views the population as peasants on the brink of starvation. Their policies focus on maximizing the volume of staple grains without regard to market demand, wasting resources and preventing the Chinese grain industry from becoming internationally competitive.

An April 2015 commentary on a Guangdong grain market web site makes this point by citing the news of failed "super rice" crops in Anhui Province. This "super rice", developed by China's superstar rice-breeder Yuan Longping, purportedly could achieve yields of 1000 kg per mu (but it never produces that much in the field and many farmers got no yield at all when the disease-vulnerable seeds failed to produce). The commentary points out that "super rice" rice was adopted and disseminated based on the quantity of rice it could produce without regard to market demand for it. Since this type of rice doesn't taste good, many Chinese consumers questioned its social value.

The commentary notes that high-yielding "super rice" was first developed in Japan, but it has never been sold for human consumption there. Japan reportedly produced 110,000 metric tons of "super rice" in 2013, but all of it was used as animal feed. Why is China growing a type of rice that is only suitable for animals in Japan?

The commentary argues that maximizing yield is no longer appropriate since China has moved beyond the stage of struggling just to feed and clothe itself. Chinese people now want to eat better: they want variety and nutrition in their diet, not just full bellies. The commentator cites examples of Japan, South Korea, Taiwan, and Singapore where rice consumption fell as diets diversified. China is also in a stage where per capita rice consumption is declining. Notably, corn surpassed rice to become China's largest crop in 2012, a reflection of the diversification of diet to include more meat.

Chinese grain policy has become more and more "detached" from the market, says the commentator. He cites the government's emphasis on early-season indica rice as an example. Like super rice, this type of rice doesn't taste good. The government encourages production of early indica rice because it is easy to store in reserves. The crop maximizes quantity because it is harvested in mid-summer, allowing a second crop to be grown for harvest in the fall. Not much single-season indica rice--that tastes better--is held in government reserves.

The commentator compares the early-season indica rice crop to steel production during the "Great Leap Forward" of the 1950s. The steel produced by melting down pots and pans in backyard furnaces met production quotas for output, but it was not useful for anything. In the same way, the early-season rice crop meets output quotas but has no demand in the market.

This not only wastes resources but holds back the Chinese rice industry's development, argues the commentator. Chinese rice needs to establish brands and reputation for quality in order to be internationally competitive. The focus purely on quantity ignores the market and impedes the industry's progress.

The commentary's arguments can be applied more broadly. Chinese flour millers and textile manufacturers are begging the government to let them import high-grade wheat and cotton to mix with the vast quantities of low-end commodities produced by Chinese farmers in response to quantity-first policies. Chinese policy incentivizes farmers to mono-crop high-yielding but fertilizer-hungry corn to the exclusion of low-yielding nitrogen-fixing soybeans. Corn is in surplus while soybean imports grow year after year.

It's time for officials in Beijing to stop looking backward and join the rest of the country in the 21st century.

Saturday, June 13, 2015

A Silk Road for Agricultural Investment

China plans to mesh its foreign agricultural investment with its "new silk road" strategy to reshape global agricultural trade.

The new silk road, or "one belt, one road" strategy was one of the themes at the "2015 China Agri-Business Development Forum" held at China Agricultural University on June 1. (The other theme was e-commerce, another potential game-changer in agriculture.) Several speeches laid out a strategy of proactively developing new suppliers for China's agricultural needs, facilitated by Chinese investment in production, logistics, storage, trading and infrastructure.

Tractors presented to Tajikistan as part of a Textile Industry Park project.

"China now needs a new strategy [to] maintain sovereignty...and occupy the commanding heights of international agricultural competition," said Cheng Guoqiang, one of China's top agricultural trade strategists. He continued: "'One belt, one road' is an opportunity to reshape the rules of agriculture and maintain stability."

As China imports more agricultural commodities, officials don't plan to passively buy from the international market. They have an ambitious vision to reconfigure agricultural trade by developing new suppliers, building new trade routes, and creating strong Chinese companies to control the trade.

The Chinese vision is to share Chinese technology, infrastructure, and experience in agriculture in various types of environments to improve yields in places like Central Asia. A China Agricultural University professor explained that agricultural "going out" encompasses technical exchange and trading in addition to buying land. The meeting emphasized that China has common concerns about food security with countries along the "one belt, one road", and "grain cooperation" could be a key link for what could be called a "community of interests" or a "community of destiny."

The dominant role of the United States in global agriculture and its Trans-Pacific Partnership initiative are likely an unspoken factor in the background in this Chinese pivot to its west. According to the article, "one belt, one road" countries accounted for about 18% of China's agricultural imports last year. They don't mention it, but that happens to be about equal to the share imported from the United States, China's largest supplier.

In April, Farmers Daily explained that the ancient silk road was once an important conduit for exchange of agricultural products and technologies, and China's "going out" and "coming in" in agriculture is "once again ready to shine."

Farmers Daily said "one belt, one road" countries include some grain exporters like Kazakhstan and Russia that are potential sources for China's "grain import diversification." Since the “one belt, one road” initiative was proposed, Chinese leaders have made many visits to countries along the road and signed agreements with Kazakhstan, Tajikistan, and Kyrgyzstan.
Tajikistan President signs Chinese agricultural textile industry park deal in December 2014.

On April 28, China announced the first "National-Level Foreign Agricultural Industry Park" on the Russia-Heilongjiang border. The park was established in 2004 by Heilongjiang Dongning Huaxin Group and reportedly has 68,000 hectares of cropland and livestock processing with investment of $120 million.

"Agricultural 'going out' is not just going overseas to 'cultivate land,'” said Farmers Daily. It is also investment in up- and down-stream industries like processing, logistics, storage and seed; strengthening cooperation in grain, ocean fishing and other key industries; and nurturing a set of large internationally competitive multinational companies. It also involves building a transportation network to link up Asia with Europe and Africa to reduce logistics costs and remove bottlenecks to moving agricultural products.

And all this needs to be financed. Loans from the Asian Infrastructure Investment Bank, BRIC Development Bank, Shanghai Cooperation Bank, and Silk Road Investment Fund are four financing "platforms," supplemented by provincial funds, other banks and investors.

State-owned commercial banks are also in the act. The Agricultural Bank of China promises to support Chinese companies "going out" to propel the "one belt, one road" initiative. The bank says it has already set up a work mechanism for this task, "paying close attention to the government's foreign investment strategy in agriculture, energy, and transportation." The bank is compiling a catalog of potential investments, setting aside funds for companies "going out," and expanding export insurance and other risk management products. The Agricultural Bank has signed an agreement on agricultural investment with the Tajikistan Agricultural Investment Bank. The bank is lending $60 million for a railroad to Tajikistan and 20 million Euros for an infant formula factory in France.

"With people, money, land, infrastructure, 'one road, one belt' can be called the 'east wind' for China’s agricultural 'going out,'” said Farmers Daily.

In March, agricultural officials of Shaanxi Province held a meeting with business leaders where they heard that agriculture is an important area for developing economic cooperation in Central Asia under the new silk road initiative. Leaders of 14 companies, including Haisheng Fruit Development Co.--the leading supplier of apple juice concentrate--heard about opportunities and support policies for "going out." Each company explained their experience with foreign investment, plans and difficulties they face. Jiangxi Province had a similar meeting in April.

At the Agricultural Development Forum, Cheng Guoqiang said Kazakhstan has great potential to produce more wheat since its average yield is only one-fifth that of China. Let's hope China is aware of the Aral Sea disaster that shows the consequences of short-sighted crop production in an arid region.

Sunday, June 7, 2015

Price Supports Crumble: What Next?

China's policy of supporting agricultural prices is crumbling at the edges. "Temporary reserve" policies for cotton and soybeans were abandoned in 2014. Now authorities are giving up on supporting rapeseed prices just as this year's harvest begins. It's not clear whether authorities can maintain high prices for cereal grains in the face of pressure from budgetary pressure and cheaper imports. Nor is it clear what alternative policy might take the place of support prices.

According to news from a May 20, 2015 meeting to discuss marketing of "summer grain" (crops harvested and marketed during the summer months) a new policy for rapeseed will take effect this year. The "temporary reserve" policy of offering a uniform minimum price for rapeseed nationwide will no longer operate in 2015. The central government will give five provinces (Jiangsu, Anhui, Henan, Hubei, Hunan) subsidies of 200 yuan per metric ton purchased, but provinces will set their own policies. Provinces can choose to give a direct subsidy payment to rapeseed producers or they can subsidize processors. The details of this year's policy have not been announced, leaving the market in a state of confusion as the rapeseed harvest begins.

An article from Grain and Oils News explains the context of the policy change. The temporary reserve policy for rapeseed was launched in 2009 to shield farmers from plummeting prices after the 2008 global financial crisis. A classic price-support policy, the government set a minimum price and promised to buy up rapeseed when the market price fell below the minimum. The government's grain reserve corporation, Sinograin, purchased the surplus rapeseed, extracted oil from it and stored the oil with subsidies from the government.

The policy worked OK during years of rising prices, but it ran into trouble when global prices for edible oils fell during the last two years. The Chinese policy was out of step with world prices, maintaining a high price of 5100 yuan per metric ton that far exceeded world prices the last two years. This became a "price with no market." Edible oil produced from rapeseed at the support price had to sell for about 10,000 yuan per metric ton to cover costs, but imported rapeseed oil costs about 6000 yuan. Domestic rapeseed was processed and stored, while cheaper rapeseed oil was imported. 

According to Grain and Oils News, an estimated 6 million metric tons of rapeseed oil is now stockpiled in the temporary reserve (that would be nearly a year's production). The annual storage cost is estimated as high as 1.5 billion yuan ($240 million) plus interest costs of 4 billion yuan ($650 million). When oil from the reserves was offered at auction recently at 5800 yuan per metric ton there was little interest due to quality concerns.

The government can't keep stockpiling rapeseed oil forever, so they are throwing the rapeseed subsidy task into the laps of provincial authorities. According to Grain and Oils News, provinces have two options:
  • Liberalize the price for rapeseed and give subsidies to rapeseed farmers.
  • Continue to set guidance prices for rapeseed and give subsidies to processors who buy rapeseed.
Under the first option, processors would set their own prices for buying rapeseed and farmers would receive a subsidy based on the amount of rapeseed they plant. However, paying a subsidy to farmers will be extremely time-consuming and reported area will be difficult to verify. (Anecdotal assessments already suggest big discrepancies between statistics on rapeseed area and actual area.) Grain and Oils News thinks that such a subsidy would only be given to large-scale growers.

The second option would pay processors a subsidy to offer a relatively attractive price. This would require coordination among provinces to ensure that differences between provincial prices don't cause rapeseed to flow from low-price to high-price provinces. However, prices could vary due to the financial strength of different provinces. In past years 13 provinces were covered by the "temporary reserve" policy This approach would also demand close scrutiny of processors to make sure they don't falsify their reported purchases to claim extra subsidies, said Grain and Oils News.

It's noteworthy that there is NO mention of a target price subsidy for rapeseed. This likely reflects disappointment with results of soybean and cotton target price policy trials this year.

The policy uncertainty makes it hard for buyers to set a price for newly-harvested rapeseed coming on the market this month. The support price for 2013 and 2014 of 5100 yuan/metric ton is far above current market prices of 3200-4200 yuan/metric ton in Hubei Province. If provinces set a guidance price, the level will be limited by provincial finances. Grain and Oil News thinks it will be no higher than 5000 yuan.

A separate China Grain and Oils Net investigation of the rapeseed harvest in Hunan Province reports that processors are paying 3400-3500 yuan/metric ton but they are cautious in purchasing because the subsidy policy has not been released yet. This article describes the subsidy as an attempt to address the conflict between farmers and buyers of rapeseed. Production in the province is estimated to be down 10% this year, mainly because net returns to rapeseed are low.

In Jiangsu Province rapeseed farmers say they are shocked by the sharp decline in rapeseed prices, calling it a "crisis of survival." According to a local official, the price started at 4200 yuan the morning of June 1, fell to 3800 yuan by noon, and is now down to 3200 yuan. Some farmers are paying to have their rapeseed processed and keeping the oil for their own consumption.

There has been some consternation around the world over China's price-support policies, but the policies appear to be collapsing under their own weight, one by one. First, cotton and soybeans, and now rapeseed. While it's hard to verify that China has exceeded its World Trade Organization limits on domestic subsidies, its other commitments are undermining the price supports. As a WTO member, China is not allowed to subsidize exports so it can't dump its stockpiles of surplus cotton, corn, sugar, rapeseed oil and other commodities on the world market. Its relatively low tariffs for oilseeds, feeds, and its commitment not to use unscientific trade barriers allows imports to flow into the market to replace the stockpiled commodities. Concern for the survival of loss-making textile manufacturers, oilseed crushers, and millers also induces officials to allow those businesses access to cheap imports.

The next question is whether China can maintain high prices for cereal grains--corn, wheat, and rice. Chinese officials emphasize that these grains are protected by tariff rate quotas that limit imports. Can China create a wall around its grain markets to facilitate high prices and self-sufficiency while other commodities gradually vanish? Note that replacement of "temporary reserve" programs with subsidy payments for cotton and soybeans resulted in steep declines in production, and rapeseed appears to be set to follow the same trend. Much of the land has shifted to corn and wheat due to their attractive prices.

Officials have indicated that they plan to keep minimum price policies indefinitely for rice and wheat, but there is no clear plan for dealing with the massive overstock of corn. China's tariff rate quotas have protected grains to some extent, but imports of corn substitutes--sorghum, barley, distillers grains, and cassava--are exerting the same pressure that may cause the corn-price policy to collapse. Smuggling is testing the capacity to support rice prices.

With Chinese officials struggling against cheap imports, they might actually welcome another global grain price crisis.