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.