Friday, August 28, 2015

Chinese Dairy Industry: The Chosen 20

This month, China held a "D20" summit of its top dairy companies to bolster confidence in the industry  which is still living under the shadow of the melamine adulteration incident that poisoned infants in 2008. Government officials hope to revitalize the industry by anointing a group of strong companies who agree to vigilant quality control, self-regulation, to invest in modern farms, acquire high-producing cows, plant forage crops, and build reputable brand names.

The forum was addressed by top officials--Vice Premier Wang Yang, Minister of Agriculture Han Changfu, and a retired vice minister who heads the dairy industry association. It was held at the presigious Diaoyutai guesthouse in Beijing. Setting the tone for the conference, Minister Han praised the industry's achievements in recovering from the 2008 crisis, but acknowledged that the Chinese dairy industry faces quite a few challenges and difficulties.

The 7-year overhaul of the dairy industry--encouraged by government subsidies and action plans--boosted product quality, said Minister Han. Milk  tested free of melamine and other forbidden additives this year, and all milk from the "above-scale" farms meets national standards for protein and fat. The head of the inspection and quarantine agency boasts that the quality of Chinese dairy products has never been better.

Minister Han--after reciting achievements--acknowledged that some Chinese dairy companies do not produce high-quality products, consumers still lack confidence in Chinese dairy products, cheaper imported milk is pressuring the industry, and resource constraints hinder the industry's growth. Nevertheless, Minister Han insisted that the industry must "wave the banner of safety and quality," revitalize the industry, and regain consumers' confidence.

A more candid assessment of the dairy summit remarked that the industry faces a "protracted war" to revitalize itself. Despite being the third-largest dairy industry in the world, imports have increased six-fold over six years and China imports a third of its milk supply, this commentary noted. The severe lack of confidence in domestic milk products is reflected in dairy industry association data showing that only one-fourth of the nation's infant formula supply is produced domestically. Chinese parents went to extraordinary lengths to procure infant formula they could trust from supermarkets in Hong Kong and even Europe.

The lack of confidence in Chinese infant formula got attention from the highest levels of Chinese leadership. In May 2013, Premier Li Keqiang chaired a meeting that pondered ways to rebuild confidence in Chinese infant formula. The revitalization of the dairy industry was a topic of discussion at this year's National Peoples Congress.

Minister Han explained that the government's strategy is to let companies play the main role as self-regulators with the government playing a secondary role. The "D20" summit was attended by Chinese companies who are expected to form the industry's core: Yili, Mengniu, Modern Dairy, Guangming (Bright), Liaoning Huishan Dairy, Shengmu, Sanyuan Foods, Zhongken Dairy, Wandashan, Shijiazhuang Junlebao, New Hope Dairy Holdings, Heilongjiang Feihe (Firmus), Beingmate, Nanjing Weigang, Tianjin Jialihe Muye, Xinjiang West Region Spring, Fujian Changfu, Henan Huahua Niu, Jinan Jiabao Milk, and Xi’an Yinqiao (Silver Bridge). It's not clear who drew up the guest list. Presumably, no foreign-invested companies were invited.

The unspoken theme of the Beijing dairy summit was voiced by the commentary. The government's vision is to drive small, unreliable companies out of business while creating 3-to-5 big Chinese companies. Foreign-invested companies will be forced to "obey China's monopoly law." Breaking the "monopoly" of foreign milk suppliers is a chief objective. Chinese companies hope to "overcome foreign companies like Mead Johnson, Abbott Labs, and Dumex that have dominated the market for so long."

Tuesday, August 25, 2015

China Subsidizes Purchase of Substandard Wheat

In Henan Province, winter wheat output (harvested in the summer) in 2015 was 35.2 million metric tons, up 5.2% from last year. However, heavy rains in the southern part of the province around harvest time caused wheat kernels to mold and fall short of standards for purchase. It could only be sold to feed mills at a substantial discount or stored by the farmer.

As of August 15, only 16.4 mmt of Henan province's wheat harvest had been purchased, 3.4 mmt less than at the same time last year. There were similar problems in parts of neighboring Anhui Province. By August 7, eight million metric tons of Anhui's wheat had been purchased, 2.69 mmt less than last year.

Henan Province has allocated 15 million yuan (about $2.35 million) to subsidize purchase of the substandard wheat. The funds will be issued to prefecture and county governments in affected regions and used to subsidize interest on loans to processing enterprises purchasing the moldy wheat. The loans are made by the provincial branch of the government's Agricultural Development Bank of China. The Henan regions with bad wheat include Nanyang, Luohe, Xinyang, and Zhumadian. The provincial grain bureau directed traders and brokers to make efforts to buy the substandard wheat but to keep it separate from the good stuff.

Anhui officials launched a "temporary reserve" program to purchase 500,000 metric tons of substandard wheat in key counties of eight prefectures. An Anhui grain bureau official said the program's purpose is to "broaden the quality standards for purchasing wheat with 10% to 20% substandard kernels." The province claimed to have purchased 27,194 metric tons of wheat under this program as of August 7.

China's Corn Price Conundrum

Chinese officials are mulling a cut in this year's floor price for corn with a decision likely in September. China's high corn price has caused growing chaos in its corn market as its corn production, government stockpile, and imports of corn and related commodities have simultaneously spiked. Now the market is waiting expectantly for a "corn policy turning point."

In July, China's imports of corn and its substitutes reached a record volume of 4.6 million metric tons for one month:
Corn: 1.11 million metric tons
Distillers Dried Grains: 1.1 mmt
Barley: 1.28 mmt
Sorghum: 1.11 mmt

However, China's demand for animal feed is tepid. The Ministry of Agriculture said China's feed output was down 1.7% in the first half of 2015. Statistics tracking output by 180 Chinese feed companies found that feed production plummeted over 14% in the first four months of 2015 compared with the previous year. China's National Bureau of Statistics said the national inventory of hogs--the biggest consumers of feed--was down 6.1% from last year at the end of June. That suggests the hog population has been decimated by about 25 million. According to the Ministry of Agriculture statistics, pig feed production for the first half of the year was down 7.1%.

With the feed industry in the doldrums, why are they importing ingredients? A Chinese analyst explained that the imports of corn and its substitutes represent feed mills taking advantage of low international prices to import cheap feed ingredients. The MOA analysis surmised that plunging soybean meal prices and imports of corn substitutes had slashed costs for feed companies, contributing to their positive profit results for the first quarter of 2015.

While imports are surging, the Chinese government is stuck with a mountain of domestic corn estimated at over 100 million metric tons that it bought at high prices over the last three years. Another harvest is about to take place, which could swell its excess reserves even more.

According to Grain and Oils News, an unnamed National Development and Reform Commission official said they are evaluating an adjustment in the corn "temporary reserve" program in which the government sets a floor under market prices. The floor has been 30% or more above international prices since global prices plunged in 2013. There was a rumor that the program would be eliminated, but rumors now indicate that it will be retained but the floor price will be cut.

The amount of the corn price cut is contentious. According to China Business News, some officials are calling for slashing the corn price by as much as 20% in order to boost consumption of domestic corn and curtail imports of sorghum and barley. But Ministry of Agriculture officials reportedly oppose such a steep cut on the grounds that it could cause dissension among farmers in the northeastern region where about 40% of corn is grown. (The northeast has also been hit hard by China's economic slowdown.)

China's futures market anticipates roughly a 15-percent decline in the corn price. Dalian futures prices for January 2016 delivery anticipate a price of about 2000 yuan per metric ton, well below current cash prices of 2350 yuan.

The details of the corn price decision have to be determined by the Development and Reform Commission and then submitted to the State Council for approval. The decision on the corn price is expected to be revealed in September.

The Chinese government limits corn imports by means of an annual corn import quota of 7.2 mmt (which has never been filled). But there are no quotas on imports of DDGS, barley, or sorghum, and tariffs are only 3%-to-5%. Thus, feed mills who could not import corn have turned to these substitutes. In September, China has announced that a new registration system for imports of feed grains will be launched. A procurement manager for a major Chinese feed company told Grain and Oils News that the system is  intended to limit imports.

A reduction in the domestic corn price of about 300 yuan per metric ton will reduce demand for imported sorghum and barley, according to Grain and Oils News.

Monday, August 17, 2015

Grain Milling Subsidy Firestorm in Heilongjiang

A subsidy designed to entice mills to grind up surplus grain in Heilongjiang Province has set off a "firestorm" in the local grain industry. One commentator described the subsidy as riddled with loopholes that "dug up rent-seeking worms."

China has a massive overstock of corn and rice in Heilongjiang Province. In April, the province began offering a subsidy for processing grain purchased from the government's bloated stockpile and in June the subsidy was doubled. The new subsidy is 200 yuan for each metric ton of rice and 400 yuan for each ton of corn purchased from state reserves from April 15 through October 31, 2015. Rice must be milled and corn must be processed into starch or alcohol products. (Jilin Province has a subsidy of 150 yuan per metric ton for corn processing.)

The controversy is over the list of companies eligible for the subsidy. Only mills with an annual capacity of 100,000 metric tons were eligible for the subsidy. The provincial government issued a list of 102 rice mills and 26 corn processors in Heilongjiang that were eligible.

A journalist for China's Central TV spent ten days investigating companies on the subsidy list and found that many companies deemed eligible for the grain-processing subsidy were either closed, bankrupt, or had no processing equipment. The journalists' report prompted outrage from grain millers excluded from the list.

The reporter recounted visiting a rice mill in Hegang City where a guard told him the mill's boss had disappeared in 2014 after the business accumulated more debt than he could repay. The guard allowed the journalist to look around the deserted facility where he found the courtyard overgrown with weeds and the equipment idle. The journalist went to another mill where walls had collapsed and some rooms had been turned into a chicken coop.

Four of the ten rice mills in Hegang City supposedly eligible for the processing subsidy were bankrupt or idle. In Jixi City, there was a similar situation--abandoned facilities with rusted equipment covered with cobwebs.

The reporter also discovered that some companies on the list of processors were trading companies that buy, sell, and store grain but have no milling equipment. Mr Zheng, manager of one such trading enterprise, said his company just collects rent from the government to store its grain reserves.

Another enterprise on the list was a subsidiary of a large multinational grain-milling company but there was no rice evident in the company compound. The company was in the process of installing milling equipment and hadn't even tested it yet.

The reporter claimed that half of the companies eligible for the processing subsidy that he checked over ten days did not actually meet the qualifications for eligibility. Industry people told him that 58 of the 102 rice mills on the subsidy list were actually not qualified.

Other processors claimed to be losing money on their rice-milling business but didn't even know about the list. They claim the list was issued with no publicity or explanation. The head of a county rice industry association said, "We received the list out of the blue and discovered that we weren't on it."

Officials say the list includes enterprises with a processing capacity of 100,000 metric tons or more based on annual statistical reports from 2014 and monthly reports from the first three months of 2015. However, no government officials will accept responsibility for the the list. Provincial officials say the list was compiled from information submitted by local grain industry officials. Local officials claim provincial officials assembled the list of eligible grain mills with no input from them.

A Heilongjiang Province grain bureau official explained that bankrupt or idle enterprises may have appeared on the list because they reported false information to authorities. He blamed local authorities for not conducting strict audits of companies.

Some people in the Heilongjiang rice-milling industry say the subsidy has thrown the industry into "complete chaos." Rice-millers are at break-even or losing money. The companies receiving the subsidy supposedly were able to cut prices, giving them a competitive advantage over those not receiving the subsidy.

The reporter claims that he learned 1000 of the 1,488 rice mills in the province closed in the two months after the subsidy was increased.

According to another analysis, starch manufacturers in Jilin Province lose 140 yuan on each ton of corn they process. That province's subsidy would give them a tiny profit of 10 yuan per ton. The analysis estimates that Heilongjiang's 400-yuan-per-ton subsidy would make alcohol distilling profitable, but Jilin's subsidy would not be big enough. The article reports that starch processors are operating at 53% of capacity and alcohol distilleries at 44%.

The subsidy has not induced much consumption of grain from reserves. Less than 1% of Heilongjiang rice offered for auction on August 13 was sold. Only 3% of the 2.3 million metric tons of Heilongjiang corn offered for auction on August 14 was successfully sold. Imported corn from the United States was also auctioned on August 6 and 13--all of it sold.

The new, more complex subsidy schemes that China plans to implement--like target price subsidies and index insurance--will create a giant cat-and-mouse game in which the hunt for subsidies becomes a key to business success. Problems collecting accurate data, lack of coordination, bickering among government departments, and false reporting will create chaos and strife where Chinese officials' plan to bring "order" to the market.

Saturday, August 15, 2015

China's agricultural imports in disarray

Lost in the story about China's currency devaluation this week is the country's struggle to insulate itself from global farm commodity price deflation which has been going on for nearly two years (four years for cotton and sugar). Domestic Chinese prices of grains, oilseeds, and sugar are 30-to-40 percent higher than the price of imports at current exchange rates, and the recent 3-percent devaluation of China's currency against the dollar has only chipped away at that yawning price gap.

An analysis of China's agricultural imports by its Ministry of Agriculture for the first half of 2015 shows that China's trade deficit in agricultural products shrank 20% from a year earlier. But a closer look shows a complicated mish-mash of surges and declines across various commodities. The 10% decline in agricultural import value reflects cheaper soybeans, plunging imports of edible oils, and a collapse of dairy imports.
 Dimsums chart based on China Ministry of Agriculture data.

China is still importing a lot of farm commodities. China imported 64 million metric tons of agricultural commodities during January-June, up nearly 10% in volume from the same period last year. This puts China on a pace to import over 120 mmt of ag commodities this year, a prospect that will prompt much consternation in Beijing. Officials there are worried about how to deal with the seemingly contradictory "three increases": increased grain production, rising imports, and record-high domestic inventories of farm commodities.

As usual, soybeans are the dominant import item, accounting for nearly half of the import volume. However, the volume of soybean imports increased only 2.8% year-on-year while the value declined 20%. China moved away from importing other oilseeds and oils. Import volume of rapeseed was down 13%, palm oil was down 14%, rapeseed oil was down 18%, and soybean oil imports were down 67%.

The second-biggest chunk of imports by volume is represented by corn and its substitutes. China imported 2.7 mmt of corn (nearly all from Ukraine and Bulgaria) in H1 2015, 5.4 mmt of barley, 5.4 mmt of sorghum, and 2.4 mmt of distillers dried grains (DDGS), a total of nearly 16 mmt. (The MOA analysis neglects to include 5.9 mmt of cassava imports--another corn substitute.) Imports of Ukrainian corn doubled from last year and sorghum and barley imports more than doubled as feed mills sought cheaper alternatives to expensive Chinese corn. However, imports of DDGS were down 24%. Officials are eyeing these imports as they worry about how to clear out their massive inventory of domestic corn with another huge corn crop on the horizon.

Rice and wheat imports were modest in comparison--each was only 1.4 mmt during H1 2015. The modest volumes are due to limits imposed by tariff rate quotas. Demand of high-quality imported wheat is robust and prices are high. A rice market analysis by Farmers Daily reports that domestic rice prices are still under pressure from cheaper imports even though stronger enforcement efforts had curtailed smuggling along the southern border. Farmers Daily expects most of the recently-harvested early rice crop to be sold to the bloated government reserve.

Cotton imports during H1 2015 were down 29% from a year earlier. Chinese authorities pledged not to allocate any additional "sliding scale" cotton quota this year as they try to whittle down those inventories as well. The volume of imports of over 1 mmt exceeded the tariff rate quota for the year. Despite the decline in Chinese cotton prices, China's textile industry increased its imports of yarn by 20% to 1.2 mmt.

The world dairy industry--eager to hitch its wagon to surging Chinese demand--is not pleased that China's milk powder imports were off 43% in H1 2015 from a year earlier. Lamb imports were also down 24%. However, pork imports were up 7% despite a severe decline in domestic pork output during H1 2015. Beef imports were also up 18%.

China agricultural imports, January - June 2015
Item 1000 Metric Tons Percent change
Total 64,846 9.8
Wheat 1,414 -45.1
Corn 2,651 92.5
Rice 1,428 7.5
Barley 5,365 120.0
Sorghum 5,356 160.0
DDGS 2,442 -24.8
Cotton 1,084 -29.4
Yarn 1,184 20.0
Sugar 2,313 66.2
Soybeans 35,155 2.8
Rapeseed 2,343 -13.1
Palm oil 2,474 -13.7
Rapeseed oil 426 -18.4
Soybean oil 152 -67.5
Pork 320 7.6
Beef 184 17.5
Lamb 131 -23.9
Milk powder 424 -43.0

Thursday, August 6, 2015

Corn Price-Cut Rumors

Rumors have been swirling about how China will address its corn policy logjam. Chinese authorities have been struggling to insulate the country from agricultural commodity price deflation over the past two years. By supporting prices, authorities have piled up over 100 million metric tons of corn according to some estimates, and another near-record harvest is on the way. Chinese corn prices are some 30 percent above the price of imports, and authorities have made little progress in whittling down the corn surplus. Financial pressure is mounting. Something has to be done, but it has been difficult to agree on what measures to take.

Grain and Oils News reported that "endless" rumors about impending corn policy changes have circulated one after another this year. Most rumors involve either eliminating the "temporary reserve" price support policy or cutting the support price after this fall's harvest. Other rumors included subsidies for transporting corn from the northeast to southern China and subsidies for processors.

Last month, the Ministry of Agriculture released a cryptic document 1480 which seemed to call for liberalization of corn prices. On July 30, the National Development and Reform Commission touted the stability of the rural economy in the first half of 2015, which also included language calling for "an improved corn temporary reserve program", a push toward marketization of grain purchase and sales, and a streamlined price formation mechanism that sends a signal of reform to the public.  Today the Ministry of Agriculture blamed high corn prices for recent increases in pork prices.

Industry insiders say that officials have decided what to do but they are still debating the details. The most likely course seems to be that the temporary reserve for corn will be continued, but the price will be cut 10% to 20% from last year's level. The degree of the cut is unknown, but a price slightly above the "market price" of about 1900 yuan per metric ton seems to be the most likely level.

The National Development and Reform's rural economy report also called for "adjusting imports and exports" through "strict control of grain imports." There was no elaboration on this, but it means that inspection and quarantine authorities will be sifting through cargoes looking for any weed seeds, fungus, or GMOs that could be an excuse for rejecting imported grain.

A futures analyst with COFCO advises observers to wait patiently for officials to announce the reform.

Whatever reform emerges, it is expected to reduce the price of corn. With that expectation, corn has become a hot potato. No one wants to be holding corn when its price goes down due to an arbitrary policy announcement. Grain and Oil News said that starch processors have become cautious in buying corn as raw material. Where they would normally buy two carloads of corn, now they are buying one. Auctions of corn from the government's temporary reserve are attracting little interest.

Of course, Sinograin, the government-owned grain reserve corporation will be hit hardest. Estimates are that it holds more than 100 million metric tons of corn in inventory which will suddenly be worth about 20-to-30 billion yuan (about 2-to-3 billion dollars) less after the prospective cut in corn prices--hence the fierce behind-the-scenes debate.

This loss will probably be covered by the Ministry of Finance. It's probably less than the cost of a single facility for the upcoming Winter Olympics, but losing money on grain lacks the cache and prestige of blowing it on ski jumps and ice rinks for curling.

Wednesday, August 5, 2015

Grain Traders: Bridge from Farmer to Granary

The Chinese State is intent on creating an economy dominated by corporate behemoths. Big, sprawling corporations are viewed as strong and easy for authorities to manipulate and control. Small, fragmented business entities are viewed as chaotic, undercapitalized, weak, and unstable. In reality, the flexibility and market knowledge of independent entrepreneurs is vital to the resilience of the country's economy. In many cases, the lumbering behemoths rely on the microenterprises to a surprising degree.

China's grain marketing system is an example of the symbiotic relationship between behemoths of the corporate state and the organic microenterprise sector. In 2000, Chinese authorities created Sinograin, a sprawling state-owned corporation charged with managing its massive grain reserves. The company was created from the rump of the bloated grain marketing system that was chopped up and renamed at the end of the 1990s. Sinograin's initial registered capital was roughly US$ 2 billion, and it gets a steady stream of loans from the government's Agricultural Development Bank of China which now has an outstanding loan balance of 3.1 trillion yuan (about $500 billion).
Sinograin's headquarters building.

Sinograin only has one or two grain depots per county which are miles away from most farmers who want to sell their grain. That means Sinograin has to rely on an army of family-run grain-trading businesses to collect grain and deliver it to them.

A recent report by a Chinese researcher on the estimated 200,000 grain traders in Henan province describes the traders as a bridge between farmers and granaries. In contrast with the Sinograin depots, traders are dispersed across the countryside. Most are family operations run out of their homes or small shops in centrally-located villages or towns. They run on a shoestring, using their own savings as working capital, sometimes borrowing from family or friends when they are short of funds. The traders lack collateral for loans, loan application procedures are lengthy, and several guarantors are needed.
Grain traders go to the fields to buy wheat as soon as it is harvested. Source: Fuyang Daily.

According to the report, Sinograin depots say they don't have enough people to go out to buy grain from farmers; they wait for farmers to come to them. In contrast, the traders go door-to-door buying grain in villages, load it and haul it away in small carts or trucks. Most traders are farmers themselves, so they understand grain production and have an intimate knowledge of market conditions.

The traders make money by buying grain at a 30-to-40-yuan per metric ton ($5-$7) discount from farmers and re-selling it to grain depots or flour mills. They buy 10 to 100 metric tons per day, usually selling grain the same day they buy it, thus keeping little in inventory.

The Sinograin depots get most of their grain from these traders. According to the report, managers of Sinograin depots describe the traders as "our golden customers" whom they have cooperated with for many years.
In this county, grain bureau officials organized a campaign 
to visit villages in order to better understand the farmers; 
private grain traders are mostly farmers themselves.

The government's price support program operates by buying from traders at the support price; the farmers get a little less than the support price but they save the time and trouble it would have taken them to haul the grain to a distant depot. Sinograin is holding huge inventories of grain that are a "state secret."

The grain traders have also benefited from the price support program. Until this past year, the government raised support prices each year. That eliminated risk of losses from falling prices. Traders were assured that prices would rise each year and that Sinograin would purchase all the grain they offered at the support price.

Thus, a symbiotic relationship between Sinograin and the army of small traders developed.

The researcher who wrote the report on grain traders praises their flexibility and knowledge of the market but like most scholars and officials seems uncomfortable with small, unreliable businesses. He emphasizes the importance of "scale" business and wants them to form associations that would act like cartels to manipulate the price. He reports that there are some rudimentary networks of traders developing, but the traders don't like the association idea, wondering why they should cooperate with other traders who are their "enemy." He suggests all kinds of subsidies and loans and calls for monitoring and regulation, but one wonders if such an embrace from the government might squeeze the life out of these entrepreneurs.

China is at a critical juncture where it is ambivalent about the family businesses that are vital to the resilience of its economy. Premier Li Keqiang has called for bank credit guarantees to support microenterprise, but authorities seem intent on wiping out or consolidating unreliable small agribusiness operations on pretexts of maintaining food safety, disease control, quality or market "order." Without the army of micro-entrepreneurs, would China's corporate behemoths have a foundation to stand on?

Sunday, August 2, 2015

Glut of Low Quality Wheat in China

China's statisticians estimate the "summer grain" harvest--mostly wheat--at 141 million metric tons. They produced 4.5 tons (3.3%) more than last year, but China's wheat market already had a glut of the crop and demand from flour mills is weak. While an abundant harvest should be a happy event, many farmers are stuck with wheat no one will buy.

A pile of unsold wheat in China's Henan Province.

According to a report on wheat marketing progress in China, demand for wheat from flour mills is weak this year and prices are down about 80-100 yuan per metric ton from last year. The Chinese government has a price support program to buy up wheat when prices fall below the minimum set by the government. As of July 23, the government's grain reserve company had already bought 29.2 mmt of this year's wheat harvest, but many farmers have moldy wheat that even the government refuses to buy.

This year there were widespread rains at harvest time that caused kernels to sprout or become moldy in some major producing areas of south central Henan Province and Anhui Province. Most of the wheat in these areas doesn't meet the government's standard for purchasing wheat for the support price program. In one county of south-central Henan, a grain bureau official estimates that 80% of the wheat is below the standard for purchasing. Grain traders will only buy the wheat at a steep discount that farmers are not willing to accept.

In late July, one of China's large-scale grain farmers who rents 2000 mu (330 acres) in southern Henan Province had 1,000 metric tons of wheat unsold. Last year she sold all of her wheat by June 20 last year, but of this year's harvest she says, "I never thought wheat would be so hard to sell."

She has the grain stored under tarpaulins on the ground where it is vulnerable to mold, sprouting, and insects. She used equipment to dry it but the electricity cost 600 yuan per day (nearly $100). She estimates having lost 300,000 yuan on this year's wheat.

There are disputes about whether crop insurance policies cover the moldy wheat. In Qianyang County of Shaanxi Province--another region hit by widespread wind and rains at wheat harvest time--the insurance company's county manager gave his preliminary assessment that wheat insurance would cover fields where the wheat stalks had been blown down by heavy rains, but the policy doesn't cover losses from mold and sprouting after harvest.

Mr. Geng, a dissatisfied Qianyang County farmer, describes the insurance official's response to his claim as "playing with words." The county director has filed a report with his company's headquarters and is waiting for a final decision on coverage for the wheat.

Chinese officials have worked hard to prevent the "hard to sell grain" (卖粮难) phenomenon that contributed to rumblings of rural discontent during the 1990s. A Peoples Daily commentary warned that keeping farmers happy with good prices is the foundation of national food security. The commentary repeated President Xi Jinping's recent bromides about creating brands for grains, integrating grain farmers with processors, and enlarging the scale of farms. More specifically, it called for local governments to compensate farmers for moldy grain losses using money from "grain risk funds," offering "more accurate" grain subsidies with stronger guidance, and improving the crop insurance system. (The insurance company mentioned above has probably gotten a call from Zhongnanhai.)

On July 30, measures to alleviate the unsaleable grain problem were announced. Anhui Province launched a "temporary reserve" to buy wheat in targeted areas, although it is using the same quality standards as the national "minimum price" program. Sinograin, the grain reserve corporation, is sending out equipment and technicians to dry grain. The Agricultural Development Bank announced that it had allocated 130 billion yuan  ($21 billion) in credit--so-called "money waiting for grain"--to purchase this year's wheat harvest. The bank said companies buying grain should not have to issue IOUs since there's plenty of credit.

Good quality wheat is actually in short supply in China. According to the wheat marketing progress report, people in the business describe the wheat market situation as: "Poor quality wheat is hard to sell; good quality wheat is hard to buy." According to the report, China's production of quality wheat with strong gluten went down this year by an estimated 3 mmt. Prices of high quality Chinese wheat strains are high, ranging from about $11.60 to $12.70 per bushel. The tight supplies of high quality wheat are driving strong wheat imports--429,000 metric tons arrived in June despite the massive domestic harvest coming off the fields in China that month.

The economic slowdown in China continues to reveals the inflexibility and waste in its economic system. China has a glut of wheat, yet the government encourages farmers to produce even more of it. Authorities formulated a strategic plan to increase production of high-quality wheat 12 years ago but farmers still fail to produce varieties of wheat that are in short supply as bakers turn out more pastries, pasta, and cookies. Policies that prevent market prices from equilibrating supply and demand waste resources and inevitably lead to conflict.