Thursday, December 31, 2015

China Pushes Reform, Puzzles Over Grain Glut

China's top leadership plans to push ahead with deep structural reforms of agriculture and the countryside next year, but the most pressing matter is how to deal with its huge stockpile of surplus grain.

At their annual conference for rural work China's top leaders held December 24-25, 2015, President Xi Jinping and Premier Li Keqiang sent a signal to the rest of the communist party that they intend to push forward with their ambitious overhaul of the countryside. Xi celebrated the progress made during the 12th five year plan (2011-15), but he warned that agriculture and the countryside still face great difficulties. Xi exhorted officials to make rural work a key priority during the 13th five year plan, firmly pursuing concepts of "innovative, coordinated, green, open, and mutual" development while pushing forward agricultural modernization and rural reforms of all kinds.

Officials hope to move more rural people into cities, consolidate farmland into modern farms, link up farmers with processing and service industries, cut back on excessive use of fertilizer and pesticide use, foster innovation, more egalitarian economic growth, greater openness to the world economy, and much more. This "new idea" about rural development is expected to be the theme of the communist party's "Number one document" for 2016.

The urgency of the reforms is illustrated by some perverse phenomena observed by a China Agricultural University official this week. He notes that China has produced more grain than it needs, and has record inventories, yet it imported 100 million metric tons during 2014. He points out that the world is worried about a shortage of grain, yet China has a problem with surplus. The official marvels that prices in China were low ten years ago, yet now the price of corn in China is about double the FOB price of U.S. corn. He said some people are importing grain at the 65-percent over-quota tariff and still finding it profitable. The official observes the irony that rural migrants now earn about the same wages as recent college graduates--a nanny and a recent college graduate both earn about 4000 yuan per month. Yet a mu of corn brings in only 1000 yuan, rice 700 yuan, and wheat 800 yuan, so who would want to grow crops? Yet China is now cutting prices to achieve parity with imports. The only way forward for China's agriculture, the official argues, is to expand the scale of farms and mechanize.

The structural reforms are necessary, but they will take years to accomplish and produce real change in the countryside. Meanwhile, the rural work meeting puzzled over urgent problems of record-high grain inventories, pressure from imports, and neglect of farming as migrants and capital pile into cities.

The rural work meeting emphasized the urgency of drawing down excessive grain stocks at a more rapid pace, but no specific measures were discussed. The accumulation of surplus grain at high prices over the last three years is in the background as leaders advocate liberalization of farm prices and creating "internationally competitive" farms and agribusinesses that are more productive and have lower unit costs.

According to a Number 1 Business News article on the meeting, Premier Li noted that the amount of corn that needs to be released from reserves is estimated at "several tens of million tons to 100 million tons." While preventing further accumulation, Premier Li estimated that it would take two to three years to draw down excess corn inventories.

Meanwhile, the corn stockpile is still growing. A Grain and Oils News analyst reported that the government is purchasing 5 million tons of corn every week to support prices and had procured 46.2 million metric tons of the 2015 corn harvest as of December 20. The commentator said discussions at the rural work meeting and the Ministry of Agriculture's annual meeting suggested that the "temporary reserve" price for corn will be cut to 1600 yuan/metric ton for the 2016 crop, down from 2000 yuan for 2015. However, the government also has a priority of maintaining "steady growth" in rural incomes in 2016, so unspecified "government departments" are expected to give subsidies to make up the 400-yuan decline in the corn price.

Similarly, Number 1 Business News surmised that the government will likely give subsidies of 400 to 500 yuan ($61-$77) per metric ton to grain processors to use up the surplus corn. Boosting the grain processing industry incidentally is also one of the many priorities in the 13th five-year plan.

A Caixin Net commentary on the rural work meeting highlighted the recurrence of a grain surplus problem similar to that of the late 1990s and the risk of grain deteriorating in quality. Noting the failure to sell off grain reserves of the last three years, the journalist recounted having visited a region in Henan Province where rice purchased by the government in 2013 was still in warehouses.

The Caixin journalist observes that reforms of agricultural subsidies and procurement policies have been brewing over the last two years. Chinese officials have laid out a principle of detaching subsidy support from prices, but they have no clear policy to replace market-distorting price supports. The Caixin journalist observes that the government has put its hope in target price subsidy policies they have been testing for cotton in Xinjiang and soybeans in northeastern provinces since 2014, but many industry experts are pessimistic that these policies can be expanded to other commodities due to the extremely high administrative costs and other problems.

An "Economy and People" column in Beijing's Xin Jing Bao argued that the grain stock problem can only be resolved with flexible grain prices. The author of the column gave two examples to illustrate the flexibility of farmers in responding to economic incentives. He observed that terraced rice fields had mostly disappeared about 10 years ago in his home town in Fujian Province. Most rice paddies in his hometown have been converted to duck ponds, planted in bamboo, or abandoned, yet people there have plenty to eat. Now that they earn more money from off-farm work and high-value crops they are able to buy rice instead of growing it themselves.

The column's author gives another example to illustrate the responsiveness of farmers to incentives. The writer has a friend from eastern Hubei Province which is a highly productive rice-growing region. However, in that region farmers have also been abandoning rice because it is so labor-intensive. Instead, wheat-growing has become widespread because it requires little labor. The writer observes that Chinese farmers switch crops in response to changing market conditions with a surprising degree of flexibility.

As Chinese officials pursue multiple conflicting and nonnegotiable objectives they are running out of ideas on how to proceed on agricultural policy. Caixin Net's commentary noted that the rural work meeting offered many principles but few specifics on what policies to pursue. While the discussion at the meeting reflected a view that liberalization of farm prices that aligns Chinese and world prices is "unavoidable," there are also non-negotiable objectives of maintaining rice and wheat self-sufficiency, preserving a minimum amount of farmland, maintaining rural income growth, and preventing declines in output in the main grain-producing regions. Moreover, officials need to comply with WTO commitments to keep market-distorting subsidies under 8.5 percent of production value and give up export subsidies.

With so many conflicting objectives, China is really out of feasible choices in agricultural policy...something will have to give.

Tuesday, December 29, 2015

China Cotton Production Falls 9.3% in 2015

China's National Bureau of Statistics reported that 2015 cotton production declined 9.3 percent from last year, reflecting mainly a 10-percent drop in area planted in that crop.

  • 2015 Cotton output was 5.605 million metric tons, down 574,000 tons from the previous year, a decline of 9.3 percent. 
  • Cotton area was estimated at 3.799 million hectares, down 423,400 ha from last year, a decline of 10 percent. 
  • Cotton yield was 1475.3 kg/ha, an increase of 12.1 kg or 0.8 percent from 2014.
China's cotton production continues to decline while concentrating in its far west Xinjiang region which accounted for 62.5 percent of national cotton output in 2015. The Statistics Bureau explained that the decline in cotton area was especially steep in eastern regions. Production fell more than 17 percent in the Yellow River and Yangtze River regions. Production and area also fell in Xinjiang but not as fast. According to the Statistics Bureau, Xinjiang's cotton area declined 2.5 percent in 2015 but its output declined 4.7 percent. 
Xinjiang's cotton output appears to have peaked while production in traditional cotton-growing regions of eastern and central China is in free-fall. Xinjiang's cotton output was insignificant until the early 1990s. Since then it has expanded to become the predominant producer. Production in the rest of the country has fallen by half since reaching a peak in 2006. 

While Xinjiang's production fell at a slower percentage rate than that of other provinces, its absolute decline in production during 2015 of -174,000 metric tons was the largest of any province. A media report last month estimated a much steeper 20-percent decline in Xinjiang's cotton production this year due to extremely high temperatures during July and reduced plantings. A government survey found a 15-percent decline in cotton prices received by Xinjiang farmers this year while production costs were steady. 

China cotton production
(10,000 metric tons)
2014 2015 change
Total 617.8 560.5 -57.3
Xinjiang 367.7 350.3 -17.4
Shandong 66.5 53.7 -12.8
Hebei 43.1 37.3 -5.8
Hubei 36.0 29.8 -6.2
Anhui 26.3 23.4 -2.9
Henan 14.7 12.6 -2.1
Jiangsu 16.0 11.7 -4.3

Saturday, December 26, 2015

Wired Agriculture Alliance in China

Press "ctrl-alt-del" to reboot agriculture in China. The country's leaders have ambitions to vault the industry from medieval peasant-style farming into 21st century "Agricultre 4.0" of wired-up fields, warehouses, trucks, and retail platforms.

On December 15, a ceremony was held in Beijing to launch an alliance to promote wired-up agricultural business in China. The association has the clunky name of "China Agricultural Product Internet of Things Innovation Alliance" (中国农产品物联商务创新联盟) and it consists of government offices, companies, educational and financial institutions engaged in "smart" agriculture and e-commerce.

The "Internet of Things" involves the use of sensors, GPS, gauges, thermometers, and other gadgets in fields, tractors, drones, greenhouses, trucks, and warehouses to collect information on environmental conditions, plants, animals, and produce. The data can be transmitted, stored, compiled and analyzed to apply water and chemicals in precise quantities, adjust temperature, and track products through the whole supply chain. The European term "Agriculture 4.0" is being used in China. The Chinese alliance is marrying "Internet of Things" to rapidly growing e-commerce in food products, envisioning the wiring up of the whole supply chain from farm to consumer.

The alliance's vision statement hits on nearly all of the latest official economic strategies and buzzwords for China's new 13th five-year plan: innovation, agricultural modernization, integration, services, food safety, environment, and poverty alleviation. The alliance focuses on the whole supply chain: farming, processing, storage, transport, commerce, and distribution. The alliance's vision is to "test the environment, control production, and trace quality" through the six stages of the supply chain.

The alliance has a "great dream" for a rural makeover:

  • "New agriculture" that links up the six industries for producing, processing and delivering food
  • "New farmers" represented by "professional farmers" [it's implied that these professional farmers will replace small-scale, part-time, peasant farmers]
  • "New countryside" of fields and orchards integrated with cities.
The "great dream" hits on most of the new official strategies enshrined in the 13th five-year plan. It links up and integrates farming, processing, and service sectors. It replaces uneducated, small-scale, part-time, peasant farmers with large-scale, full-time, educated "professionals." It breaks down barriers between countryside and city and aims to transform the countryside from a poor, dumpy place into a place of scenic beauty. 

The alliance also emphasizes two other priorities: ecology and food safety. 

In typical Chinese style, it aims to engineer ecological balance. To westerners, "organic" and "ecological" convey a vision of nature without human interference. The alliance describes its carefully engineered network of big, capital-intensive farms, computers, and drones as "ecological," "organic," and a "circular economy." The leader of the alliance is the communist party secretary of Daxiangshan Group, a company in Henan's Baofeng county that sells food products from areas purportedly free of pollutants

The alliance appears to be designed to benefit a particular locality in Henan Province. Daxiangshan Group--the featured company--is an amalgamation of companies in Baofeng County, Henan Province. Others at the founding ceremony included the head of "Old Liberated Areas Development" at the National Poverty Alleviation office (many of the areas that were the first to come under communist control in the 1940s are chronically poor). The leader of the "Old Liberated Areas" office from Pingdingshan City in Henan, the director of a high-tech development zone in Baofeng County, the secretary of the Henan Provincial communist party committee, and a professor from Henan University are also featured participants in the alliance. All other participants identified were from official organizations and companies in Beijing. There are model programs to develop Internet of Things for agriculture in Shanghai and Anhui Province but there is no mention of companies or organizations from those localities in this alliance. It's probably entirely coincidental that this association is focused on Henan and Premier Li Keqiang previously served as governor of that province. 
not invited to join the agricultural internet of things alliance.

The Internet of Things intends to guarantee food safety by enabling traceability. By giving every box of vegetables a number and digital code, they can be traced through the whole system. Consumers can find out where their food came from, and problems can potentially be traced back to their source. The government's agency for plant and animal inspection and testing is a participant in the alliance.

"Alliances" (联盟) are a new fad being pushed by Chinese officialdom for the 13th five-year plan. Other alliances of food testing labs and family farms have also been announced this year. These are not organizations spontaneously arising from grass roots collaboration; they are carefully crafted and controlled associations of big companies, government organizations, and research institutes whose creation is orchestrated by the communist party. The alliances reflect the strategy of tying together companies and publicly-supported research institutions to promote innovation. The alliance's founding ceremony was hosted by the China Agricultural University's College of Information and Electrical Engineering. Guanghua Foundation, a government vehicle for supporting high-tech, is another participant. A Ministry of Science and Technology official described the agricultural Internet of Things alliance as a community of shared interests for wisdom and innovation. The strategy is intended to address a chronic problem of missing innovation: Chinese companies devote minimal effort to R&D while research institutes and universities pursue theoretical laboratory research with scant concern about practical application. 

Information technology has great appeal for China's mandarins. It appears to offer the means to organize a chaotic economy. Supply chains are much neater and easier to control than the messy webs of small-scale farmers, traders, workshops, and retail vendors that have come to dominate China's food markets. 

The wired-agriculture alliance is called a "convoy," an interesting shift from the popular naval metaphor of an "aircraft carrier." The metaphor implies neatness and organization that contrasts with the chaotic image of Chinese harbors littered with small fishing boats. However, convoys are expensive, inflexible, and require great effort to make a change in course. For this reason, commercial vessels never travel in convoys (unless they're worried about pirates or enemy attacks). The chaotic flexibility of China's microenterprises that popped up as soon as control was loosened during the 1980s may have been the secret of the country's economic success. 

China's mandarins are subconsciously designing an economy that looks a lot like central planning dressed up with technology. A spider web is harder to break than a long chain. Can one-dimensional "chains" produce as strong an economy as multidimensional "webs"? Can synthetically created "associations" function like the grass roots industry associations in other countries they are desgined to mimic? Can information technology overcome the cronyism and organizational dysfunction that are the real problems undermining China's economic growth?

Wednesday, December 23, 2015

State Farms as World-Beating Companies?

To Chinese leaders, a "market economy" does not mean a privatized economy. Rather, they view dysfunctional state-owned institutions as the core of their market economy. Relics of central planning will somehow coexist and intermingle with private firms and act as models of reform that will pull along the rest of the economy. Understanding their obsession with state ownership and bigness explains why China's leaders are plowing billions of dollars into these capital-eaters.

This mindset is evident in the State Council's directive to reform the network of state farms set up during the 1950s. An outsider might expect these anachronistic dinosaurs to be broken up and privatized, but Chinese officials have no intention of abandoning the state farm system. They envision this sprawling system on China's remote frontiers as "models" for its initiatives to "modernize" agriculture, maintain food security, increase external "openness," and create world-beating agribusinesses.

The State Council's document describes the state farm system as "the backbone and representative of the agricultural economy." The document explains that state farms are an "indispensible" component of a distinctively Chinese rural system that also includes rural collectives, household family farms, farming cooperatives. The objective is an amalgam of state, collective, and private ownership with state ownership as the main component. Officials plan to establish a "multi-channel investment mechanism with government investment at the core."

The support for state farms also reflects a mindset among Chinese leaders that equates size with power. The state farms are located in remote areas where land is relatively abundant, so they are larger and more mechanized than most Chinese farms. Leaders think the larger size of state farms gives them a leg up in modernizing agriculture that will pull along the rest of the country's farms.

The State Farm system itself is a confusing amalgam of huge Soviet-style farms, family farms operated by former employees or their descendants who lease land from the state farm, agribusiness companies, and residential communities. To make it more confusing, some are run by the central government, others by provincial and local governments. The plan for reform is far-reaching and bewildering in its scope, but the core ideas are to be the vanguard in modernizing agriculture by mechanizing farms, improving infrastructure, and adopting new technology; creating conglomerates of farming, processing, trading businesses; and reforming the division of responsibilities between the state farms and local governments regarding housing and welfare of their employees.

A core strategy of the reform is to form groups or conglomerates of "large, internationally competitive agricultural businesses." Various state farms, processing companies, and auxiliaries like seed and breeding operations are expected to band together in conglomerates as joint ventures or through merger and acquisition. Officials call for new approaches to raising capital and shareholding. The conglomerates will get help listing on stock markets. State ownership of companies is supposed to form a strong core for the company that will attract private investment, ultimately creating companies with dual public and private ownership.

State farms have geopolitical importance because they are concentrated in remote border areas. In explaining why the state farm system is so important the State Council document points to the "increasingly complex" challenge of "maintaining harmony and stability on the frontier." They were set up during the 1950s to supply army units protecting outposts of Chinese colonialism w in contested regions of Manchuria, Central Asia, and Southeast Asia. Their formal name is "reclamation farms" because they were established in remote, barren parts of the country with harsh climates that would remain uncultivated in other countries. The state farms began as military outposts and later became islands of ethnic Han Chinese settlement in regions that were historically populated by other nationalities.

With land gobbled up by development in the core regions of China, these colonial outposts are now viewed as key suppliers of grain, cotton, sugar, natural rubber, and dairy. They are also the main recipients of China's giant farm subsidies. The lion's share of massive corn and rice stockpiles procured to support prices are held in Heilongjiang Province--the main bastion of the state farm system on the Russian border. On the troubled Central Asian border, the Xinjiang Production corps is the main producer of cotton. Xinjiang holds most of the massive cotton stockpile and is the only region where the generous "target price" subsidy for cotton operates. Similarly, the sugar industry associated with state farms on the border with Southeast Asia has accumulated stockpiles and subsidies.

The government subsidizes or otherwise orchestrates the shipment of commodities out of these border regions to the core regions of China, but there is campaign to create grain processing and livestock industries to utilize the grain glut in Heilongjiang and a textile industry to use up Xinjiang's cotton--subsidized industries to process subsidized commodities. Developing agricultural processing is another thrust of the state farm reform program.

The state farms are now expected to take the lead in moving outside China's borders. The reform document explains that state farms will take leadership in China's new strategy of greater external openness. Their proximity to the border makes the state farms key players in the "going out" and "one belt, one road" strategies. Farmers from Heilongjiang Province's state farms have been growing crops across the border in Russia for a number of years. Beidahuang, a company associated with the province's state farms, has invested in Latin America. The Tianjin state farm company is engaged in investment in Bulgarian corn and oilseeds. Several years ago, a deal was announced for the Xinjiang Production Corps to install high-tech water-saving irrigation technology in Ukraine. State farm entities have been operating rubber plantations in Indonesia for years.

With intensive cultivation on China's side and mostly barren land 
on the Russian side, state farms are taking the initiative to grow crops in Russia.

Like all large organizations in China, the state farm system is riddled with inefficiency and dysfunction. In an interview, China's Minister of Agriculture acknowledged that reform of the state farm system is a complex systemic project and a heavy task with great challenges. In view of the "great difficulties," said the Minister, the state farm system cannot carry out the reform on their own. The Minister exhorted all levels of communist party organization and government to put a priority on state farm reforms. There will be a blizzard of plans formulated, and the Minister calls for more organization, coordination and implementation.  Notably, the Minister calls for Financial departments at each level of government to spend more money to meet the needs of state farms.

Monday, December 14, 2015

China Ag Officials Call for Fewer Pigs Near Polluted Waterways

Agricultural officials in China issued instructions to cut back on the number of hogs in the parts of the heavily industrialized Pearl River delta where the number of pigs is beyond the land's carrying capacity. Local officials are urged to designate districts where pigs are banned, induce farms to properly treat waste, and utilize the waste for fertilizing crops.

The pronouncement was part of a guiding opinion on adjusting the regional layout of hog farms in five major watersheds where there are concerns that pig manure and urine are causing water pollution problems. Besides the Pearl River delta in eastern Guangdong Province, the other regions included the Yangtze River delta (Shanghai, southern Jiangsu, Zhejiang), middle Yangtze River (Hubei, Hunan, Jiangxi), the Huai River region in 29 counties of Shandong and Jiangsu, and the Danjiangkou Reservoir in northern Hubei and Henan (the starting point for the south-north water transfer which has been plagued by pollution). The document was issued November 26, 2015.

Farmers Daily explains that the five regions include 133 counties that produced 97 million hogs in 2014, 13 percent of the national total. These are key hog-producing regions, but they are also important watersheds with extensive networks of rivers and lakes. Many of the hog farms fail to properly treat the waste produced by the pigs--estimated at seven times the daily waste produced by humans. Only 40 percent of the waste is utilized (for biogas, to fertilize crops and feed fish), 10 percentage points less than the national average. The waste is frequently dumped into waterways, contributing to China's serious water pollution.

The five regions generated varying degrees of concern:

  • The Pearl River region has the most serious problems. The number of pigs in the region was declared to be beyond the carrying capacity of the land. 
  • The Yangtze Delta has "not a lot of room" for further development.
  • The regions around the middle reaches of the Yangtze River are near their carrying capacity.
  • In the Danjiangkou Reservoir region, hogs are "overall in balance with the land's carrying capacity."
  • The Huai River watershed has some room for further development.

The Pearl River region is known as China's leading manufacturing hub, but it is also a major pork-producing area. The troublesome districts include 16 counties in territory that radiates out from Guangzhou and Foshan down to the coastal areas of Jiangmen and Zhuhai and the Huangpu, Dongguan, Conghua, and Zengcheng districts east of the Pearl River.

According to a report from Shenzhen's Yangcheng Daily, an investigation team from the China Livestock Industry Association visited Jiangmen and Foshan during August and found that most pollution caused by livestock came from pigs. On average, a pig generates 2.2 kg of manure and 2.9 kg of urine daily. The team found that environmental controls were generally weak. News media in the region often carried reports of dead pigs floating in waterways. It was estimated that 40-50,000 pigs die of disease in Foshan each year. Most carcasses are buried, polluting the soil, and "some" farms dump them directly in water ways. The investigation found that some farms aren't interested in paying for waste treatment facilities; the penalties cost less than the investment in equipment.

The new rectification campaign has several measures. Local authorities are urged to designate districts where hog farms will be banned, limited, or permitted. Farms should be closed or moved out of districts where they are banned. Farms will be pressured or incentivized to treat manure and use it to make methane gas and utilize the residual as organic fertilizer. It was recommended that a fund be set up to give awards or subsidies to farms that fully treat and utilize pig waste. Another proposal is to lure private investors to start businesses that will collect dried manure and distribute it as fertilizer. Officials are encouraged to formulate plans to integrate livestock and crop production. The scale of farms will be increased--presumably on the assumption that small farms are less likely to invest in manure collection and treatment.

This new push to clean up hog pollution is driven by the embarrassment of the incident of thousands of dead pigs floating in Shanghai's Huangpu River in 2013. However, the idea has been around for at least a decade. For about ten years, news media have cited Guangdong's Dongguan as a locality that banned pigs, yet it is one of the districts targeted in the latest campaign. Jiaxing in Zhejiang Province--in the Yangtze River delta--was the source of Shanghai's dead pigs, but Jiaxing had a plan exactly like the new MOA recommendation to designate districts where pig farms were banned or limited near roads, canals, rivers, and in tourist areas. Jiaxing's plan was drawn up in 2011 for the 12th five-year plan and it listed a series of previous regulations and initiatives to clean up pig pollution going back to 2002.

Environmental clean-up seems to be an iterative process in China. Officials issue orders and plans that are mostly for show and are roundly ignored by everyone until the next embarrassing incident. Then they get a little more serious until the next crisis. Eventually there are improvements but they are incremental. China does seem to be getting serious about cleaning up the pig industry. Numerous localities say they have designated pig-ban areas and shut down farms this year.

The new decree implies higher regulatory compliance costs for farms. It also implies moving hog farming further into the hinterland, thus geographically decoupling hog production from where it is consumed. Shipping pork from Sichuan to Shenzhen is probably more expensive than shipping it from North America or Europe.

Sunday, December 13, 2015

Uprooting China's Traditional Farms in the 13th Five-year Plan

China's 13th five-year plan (2016-2020) calls for an ambitious makeover of the countryside which involves moving more small-scale peasant farmers into cities, fostering new types of scaled-up farmers to replace them, and modernizing agriculture by consolidating small plots of land, mechanization, improving advisory services, and upgrading unproductive fields.

Sounding like a millenarian cult, Xi Jinping and his acolytes promise that the long-awaited "relatively well-off society" is in sight and the 13th five-year plan period will be a "decisive" period for attaining it. The plan contains a number of objectives to ensure that everyone is wealthy, healthy and happy by 2020. Addressing rural poverty is one of the core objectives.

An essay in Peoples Daily last month by Minister of Agriculture Han Changfu emphasized the need to accelerate the transformation of agriculture from traditional to modern modes of production. This entails moving to larger-scale operations, treating agriculture like a business rather than a lifestyle, transitioning from relying on inputs to produce output to relying on technology, and paying more attention to environmental impacts of production.

Minister Han's essay alternates between optimism about progress in "agricultural modernization" and gloom about atrophy of Chinese farming, environmental degradation, and massive disequilibrium in agricultural markets. Minister Han cites three prominent problems: environmental and resource constraints; serious imbalances in agriculture, and the low quality of agricultural output. Han says environmental resources have "flashed the red light" in the form of serious pollution of soil and water, shrinking aquifers, and declining soil fertility. Water is being moved from the south to produce crops in the north which are used to supply food and feed demand in the south. Chinese prices are out of alignment with world prices, prompting big domestic surpluses while imports flood in. Manure produced by livestock is unutilized. Farms, processing, and distribution are out of sync. Farming has become a stagnant part-time activity and the farming population is aging. While the overall rate for compliance with food safety standards is 96%, Han worries there are "hidden dangers" in some areas.

Han estimates that China will a grain deficit of 100 mmt by 2020--so it is urgent to raise production capacity. Achieving food security is another objective attributed personally to Xi Jinping--"Chinese bowls must remain firmly in their own hands at all times and bowls must be filled mainly with Chinese food."

Officials plan a sort of enclosure movement with capitalist Chinese characteristics. The vision is to move villagers into cities and give them shares in village farmland, houses, and collective businesses that will pay them dividends in perpetuity. That will free up village land to be consolidated into farms that are commercially-viable. Those who stay behind in the village will become specialized farmers, and their income will go up as they farm on a commercially-viable scale. Calculations typically assume that farmers can net about 200 yuan per mu which would give them a decent income of 40,000 yuan on a holding of 200 mu.

Minister Han reports that 30% of contracted land had been transferred to new-type farm operators nationwide (at the end of 2014). There are 870,000 "family farms" and 1.28 million farmer cooperatives.

An anecdote in the Ministry of Agriculture's October 2015 situation and outlook report reveals that the large farms are not faring well because they are paying big rents while farm prices are falling. In Handan, Hebei Province, it was reported that common farmers earned a net profit of 300 yuan per mu from growing corn in 2015. However, large-scale farmers lost money after deducting the expense of renting land. In Henan, the return from corn is 133 yuan per mu, but it flips to a net loss of 500-yuan-per-mu after deducting rental expense. The MOA analysts recommend that the government give out subsidies in combination with initiatives to transfer land to large farmers. In one area, farmers have been selling their corn to traders at 1460 yuan per metric ton, 640 yuan less than last year. Concerned that land rents are set without consideration of grain prices, the MOA analysts also suggested that the government announce its support price for corn in the fall (a year ahead of the harvest?), when rental agreements are made for the following year.

Minister Han calls new-type farm operators the "leading force" in agricultural modernization and he calls for establishing a support system for them that includes advisory services, stable land-transfer relations, expanding methods of cooperation, exploring contract production, and management services.

Authorities are working on overhauling the grain subsidy system to consolidate the blizzard of subsidy into fewer payments. The direct payment for grain producers, seed subsidy, and general input subsidy will be combined into a single payment. Twenty percent of the general input subsidy funds will be designated for subsidies for scaled-up farms.

The low rate of fixed asset investment is an obstacle to agricultural growth in China. The plan calls for continued increases in investment but offers only the same tired solutions of government-financed irrigation ditch construction and "model" high-yielding farms. These programs only reach a fraction of all farms. They are expected to inspire other farmers to make similar investments but the investments aren't viable for farmers who don't get subsidies given to the "model" farms. Farmers are not inclined to invest in land they don't own and bankers won't make loans to farmers with no land to use as collateral.

The plan calls for more external openness in agriculture, but this means foreign trade that is controlled by Chinese entities. It calls for strengthening control of imports and exports and getting a grip on the scale and rhythm of imports and exports of agricultural commodities. The plan advocates "seizing the opportunity" of the one belt, one road strategy and fostering development of large, internationally competitive agricultural business conglomerates.

Thursday, December 10, 2015

China Struggles to Support Grain Prices

China's corn glut is getting worse after its farmers produced another record crop. With demand still tepid, the government is buying up the surplus to make sure farmers are able to sell their grain.

China's National Bureau of Statistics announced that the 2015 corn crop totaled 224.58 million metric tons, 4 percent more than last year. As corn production moved skyward, it widened its lead over rice as the nation's leading crop.

In some areas, farmers have had difficulty selling their grain, but Chinese propaganda organs have been trumpeting the government's efforts to buy up corn.

According to the Jilin Province grain bureau, the government moved up its "temporary reserve" purchases a month earlier to November 1 in order to buy corn before it turned moldy.

The Heilongjiang Province grain bureau said it bought 23.5 mmt of corn for the temporary reserve and 11.5 mmt of rice at minimum prices during November. These "policy-type" grain purchases accounted for 77 percent of the grain procured in the province.

During October and November 2015, the government's Agricultural Development Bank issued loans totaling 122 billion yuan ($19 billion) to purchase 45.3 mmt of fall-harvested grain (corn, rice)--up 16.3 mmt from the same period last year. According to the article, the Bank's large loans reflect the dominance of government purchases in the market. Loans for policy-type purchases are twice as high this year, while loans for market-type purchases dropped 60 percent.

Farmers Daily was pleased to announce that farmers in Shandong Province were having no problem selling their grain. They attributed it to the large number of processors and feed mills in the province and to the temporary reserve policy in northeastern provinces that is sucking corn into government granaries. In Shandong the government has started taking measures to help farmers store grain on-farm. In Zhucheng, 11,000 model farmers got subsidies to pay for three-fourths of the cost of steel storage bins. Large-scale farmers got approval to put drying and storage units on land designated for crop production.

Farmers Daily said there was little business at grain depots during November because Shandong farmers sold their grain immediately after harvest in October so they could get back to their jobs in factories and construction sites.

After plummeting during September and October, corn prices bounced back in early November as the temporary reserve purchase program began. However, prices were still below their September level and below the 2000-yuan "temporary reserve" price floor. This past week the market appears to have become confused with prices dropping sharply in some places and rising in others.

Corn prices, select locations in China, 2015
Heilongjiang Jilin Henan Shandong Hebei
Date Zhaodong Gongzhuling Zhoukou Zaozhuang Shijiazhuang
Yuan per metric ton
1-Sep 2080-2110 2190-2200 1920-1930 2100-2110 2090-2110
21-Sep 2020-2050 2070-2080 1880-1890 2020-2040 2040-2060
21-Oct 1700-1740 1800-1820 1560-1580 1710-1730 1720-1740
29-Oct 1680-1720 1800-1840 1580-1600 1670-1690 1720-1740
3-Nov 1710-1750 1800-1840 1580-1600 1750-1770 1720-1740
6-Nov 1720-1760 1800-1840 1600-1640 1810-1830 1720-1740
10-Nov 1740-1780 1830-1870 1600-1640 1850-1870 1720-1740
25-Nov 1810-1850 1890-1930 1860-1900 1890-1900 1840-1860
4-Dec 1810-1850 1940-1960 1800-1840 1890-1900 1840-1860
10-Dec 1800-1840 1960-1980 1740-1780 1790-1800 1760-1780

Corn prices are much higher in corn-deficit regions of southern China: 2200-2240 yuan in Zhejiang Province and Shanghai; 2240-2260 yuan in Hubei and Hunan, 2260 yuan in Jiangxi; 2100-2150 in Sichuan; 2160 yuan in Chongqing; and 2320 yuan in Kunming.

While authorities have pledged to let prices reflect market forces, they can't let corn prices fall enough to equilibrate supply and demand. First, they worry that farmers might abandon corn planting in huge numbers, leaving China with a big deficit in the future. Officials quote Xi Jinping's assertion that Chinese bowls must be filled mainly with Chinese food and officials warn that there must be no relaxation on food security concerns. Second, narrowing the urban-rural income gap is a key objective of the 13th five-year plan. Officials say the cherished "well-off society" maybe achieved by 2020 and brag about the miniscule narrowing of the urban-rural gap. Thus, they can't afford to allow grain prices to fall to lose ground on this objective either.

Wednesday, December 2, 2015

Cadres Chastised for Farm Subsidy Fraud

A posting on a Hubei Province web site chastises local officials for fraudulently claiming grain subsidies. According to the posting, exaggeration and falsification of subsidy claims are common despite strict regulations governing the distribution of subsidies for grain farmers.

According to the post, cadres faked records to collect extra subsidies. About $1 million in "grain" subsidies were claimed for fields of watermelons. In ten townships, officials padded the land area reported up to the province to collect about $2 million in extra subsidies (the payments are based on area planted in grain in Hubei). Local cadres falsely reported 1150 mu of fish ponds as rice paddies and fabricated 320 mu of rapeseed plantings. Administrators, fish pond attendants, and government office workers all applied for grain subsidies.

The post complains that the subsidies were meant to benefit farmers but instead became "free food coveted by many" as cadres discovered "loopholes" in the subsidy system. The faking of reports and padded numbers arise from a "mistaken understanding" and this "shocks" the general public, said the author of the posting.

The perpetrators are local officials in agricultural and financial departments who file false reports and supervise the reporting and distribution of subsidies. The author of the post says that disciplinary departments are tracking down the falsified subsidies and calls for a system to uncover such problems.
An illustration from an investigation of subsidy reforms
"The State" offers a money bag labeled "subsidy".

Subsidy fraud is not unique to Hubei, nor to grain (nor to China). The Internet has numerous complaints about subsidies. One recent commentary questions who really benefits from the subsidies. Machinery and seed subsidies benefit merchants and officials who get bribes to include products of favored companies on the subsidy-eligibility list. Farmer cooperatives are started by local officials to reap the subsidies and tax breaks. Subsidies are routinely collected for idle fields. Last year, the agricultural bureau chiefs of half the counties in Hainan Province were accused of illegally collecting 100 million yuan intended for vegetable greenhouse subsidies. In another case in Hubei Province five years ago, eight communist party officials from a county supervision office and several townships were prosecuted for using subsidy funds to pay for roads and other facilities. In other places, officials threaten to reduce the amount of land they report to the county for collecting subsidies if the villagers fail to pay fees for water and health insurance.

The widespread corruption among local officials grabbing subsidies undermines one of the chief original aims of the subsidy program. The Ministry of Finance conducted a survey during the first year of the subsidy program in 2004 concluded that subsidies improved the communist party's image among the rural populace. Although the amount of the subsidies was not large, the survey team said the subsidy program showed that "...the party and the government had not forgotten the common people who plant grain...[and] implementing the program had actually broadened the sincere support for the party among the peasants."

Writing ten years later, the Hubei Province post says the behavior of local officials "shocks to general public." The writer accuses some local officials of lacking a sense of "law and order" and frets about lack of supervision in the subsidy process.