Tuesday, January 26, 2016

China Will Liberalize its Corn Market...One of These Days

A Peoples Daily article this week signaled that China will allow its corn price to be determined by market forces. Although there is "consensus" that the corn market needs to be liberalized, nothing concrete was revealed about how or when the reform would take place because the details are "complicated."

The article repeated and amplified remarks made in a January 10 speech by Chen Xiwen, the vice director of China's leading group on rural work. The Peoples Daily article was part of a series explaining the broader strategy of supply-side restructuring that China is pursuing in 2016.

Like the steel and housing sectors, China's grain production has overshot consumption, and a huge unsold inventory has piled up. Chen Xiwen said one of the priorities this year is to prevent this stockpile from growing even bigger.

Different from steel and housing, China has tried to prop up domestic grain prices by limiting  imports of grain and buying up surpluses to protect farmers' incomes. Chen Xiwen explained that China's grain prices are now far higher than prices in the international market. This is due to a policy of raising support prices to cover rising production costs, appreciation of the Chinese currency, and a decline in freight costs since 2009, said Chen.

The loophole in this price-support strategy is the lack of quotas to control imports of commodities that can substitute for corn. The substitutes include barley, sorghum, distillers grains, cassava, and cassava starch. Chen estimates that these substitutes displace about 50 million metric tons of domestic corn--about 20% of China's corn output, he said (this blogger calculates 22% of 2015 production of 224.5 mmt).
Calendar years. *2015 through November.
Substitutes=barley, sorghum, DDGS, cassava, cassava starch.

According to customs statistics through November, imports of corn and its substitutes for the calendar year were over 40 million metric tons, up from about 10 mmt in 2009 (the first year China began importing DDGS). The substitutes are omitted from most balance sheets. If they are added in, China's consumption of grain and related products for feed, starch, and alcohol production looks surprisingly robust over the past two years.

Chen says that holding domestic corn prices above the international price results in a confusing paradox in which grain production grew 12 years in a row, yet imports grew in parallel and grain inventories rose to a record level. He also notes that the production of corn doubled in 15 years while soybean imports grew to 81.7 mmt during 2015. Chen suggests that the increase in corn production overshot demand, and he suggests that corn production would be equal to demand if it were cut.

According to Chen, corn will be liberalized to let market supply and demand determine the price. The government will no longer be the main actor in the corn market--there will be diverse buyers and multiple distribution channels. Farmers need subsidies to ensure they receive reasonable income, Chen said, but the subsidies for farmers will be separated from the price. The government will give them a cash payment instead of holding the price at a high level.

A substantial decline in corn price has already occurred for many farmers, especially those in regions not covered by the temporary reserve price support program. Peoples Daily cites the example of a large-scale farmer in Shandong who received 1680 yuan/metric ton for her corn this year, down from 2100 yuan last year. Chen explains that the government has already reformed the price mechanism for soybeans, cotton, and rapeseed and is experimenting with target price subsidy payments to replace price supports.

While Chen said "everyone" agrees that the corn market must be liberalized, the timing and details of how it would occur are "complicated." Thus, there is no concrete announcement about when this would take place--will it be next month, in May, September, next year, or several years from now? No clues, leaving futures traders and other market participants exposed to a quantum change in corn price at the government's whim (and officials wonder why China's futures market is not used to set global prices...)

Chen and Peoples Daily revealed that they do not really trust markets. Market outcomes are great as long as they don't threaten China's "food security", reduce income of farmers, or result in domination of the market by foreigners. Officials have calculated that there is not enough grain traded in the world to meet China's needs if they were to import more. Therefore, Chen said rice and wheat will continue to have minimum prices since there can be no question of their production falling short of demand. Chen did not address smuggling of rice, the imbalances and distortions that would result when the price of corn falls to half the price of wheat, nor the plight of the rice- and wheat-milling industry which is unable to raise product prices to cover high raw material costs.

Rather than let farmers decide on their own to plant less corn as the price falls, the Ministry of Agriculture has concocted a giant plan to switch corn area to other crops in a "sickle"-shaped region extending from the frozen northeast through the parched northwest and into the mountainous southwest. The plan will begin this year. Officials are exploring land retirement and fallowing programs. Production costs will be reduced by cutting back on chemical fertilizer and pesticide use. Farms are expected to become more competitive by enlarging the scale of their operations, developing services for farmers, and improving seeds and other technologies.

Saturday, January 23, 2016

Non-GMO Soybean Supply Shortfall in China

China is learning that not all soybeans are equal and you have to pay a premium if you want to consume and produce "non-GMO" products. China's shortage of non-GMO soybeans was one of the main topics of discussion at a meeting on the soybean market held by the Ministry of Agriculture during December 2015 in Heilongjiang Province. The area planted in non-GMO soybeans in China has been shrinking year by year while the demand for non-GMO cooking oil, food products, and protein supplements has grown. Meanwhile, the price of imported soybeans--which are predominantly genetically-modified--has been falling.
According to data from the National Grain and Oils Information Center, the price gap between Chinese soybeans for food processing and imported soybeans grew to 1000 yuan per metric ton in mid-2015. The gap narrowed after domestic beans came on the market in the fall, but there is still a roughly 25-percent gap in price. This is a big change from past years when prices were comparable between the two types of beans.

Until recent years, China thought of soybeans and other farm products as generic commodities, but now there are distinct segments in the soybean industry. The dominant portion consists of processing soybeans to make cooking oil which now utilizes imported soybeans almost exclusively. Several smaller segments require use of non-GMO soybeans as raw material: non-GMO cooking oil, food products like tofu, and soybean protein used as ingredients for other foods or nutritional supplements.

China's soybean imports soared to 81.7 million metric tons during the calendar year 2015, a number that China's Economic Daily called a challenge to the country's "protein security." The import volume was up 10.3 million metric tons, despite a slowing economy.

China's own soybean production is shrinking. At the December soybean conference it was estimated that domestic soybean output was about 10 million metric tons in 2015, down 2 mmt from the previous year. Reportedly, some farmers in Hunan Province have switched from cotton to soybeans as cotton prices plunged, but production in northern regions has been declining as farmers switched to corn and rice. A new plan aims to focus on building up a "green" soybean production base in Inner Mongolia in coming years. At the meeting other northeastern provinces cried out for government aid to supply farmers with seeds, to build irrigation facilities, and give support to Heilongjiang's "weak" soybean processing industry.

Falling international prices make it hard for Chinese non-GMO soybeans to command a premium. Despite tight supplies of domestic Chinese beans, their price has been falling, just not as fast as the price of imported soybeans. At the soybean industry conference it was estimated that the food processing industry needs about 10 mmt of soybeans annually, of which an estimated 3 mmt of imported GMO soybeans are used surreptitiously by food processors and the volume was said to be growing steadily. This substitution of cheaper imported beans--called an "open secret" over two years ago--was said to be a chief reason why domestic non-GMO soybeans cannot command a sufficient premium to bring forth a greater supply.

At the industry conference it was said that the soybean-based protein supplement industry has very strict standards that prohibit use of GMO soybeans--because a large portion of their products are exported. GMO soybeans are reportedly easy to obtain at soybean wholesale markets in southern coastal regions. Some operators imported far more soybeans than they could use in order to get letters of credit which they lent out short-term at high interest rates on the gray market. They dumped their excess beans in wholesale markets, contributing to the leakage of imported soybeans into the food processing industry.

advertisement for soybean protein isolate--a "non-GMO soybean product"

Four years ago, the Ministry of Agriculture held a meeting to hail China's soybean industry as a global supplier of non-GMO soybeans and protein products. Exports of soybeans and protein products were booming by 2013, but now they are being undermined by the shortfall. Customs statistics through November 2015 show that China's export volume of soybeans--used for food products in the U.S., Japan, and elsewhere--fell to 121,700 metric tons, down 38 percent from the same period in 2014. China's exports of protein concentrate products totaled 94,000 mt, down 22 percent.

Meanwhile,customs statistics show that imports of soybeans from Russia--non-GMO beans grown by Chinese farmers over the border--were up to 320,000 metric tons during January-November 2015, a ten-fold increase from the same period in 2014. The average unit value of the Russian beans was reported at $364 per metric ton--or about 2330 yuan--while imported South American soybeans averaged $425 and U.S. beans averaged $453. The low Russian prices are due to the collapse of the Ruble.

Thursday, January 21, 2016

Hogs Rebounding in China? Pick Your Statistic!

Are China's hog producers rebuilding their herds after a two-year decline, or is the industry still in the doldrums? Two different statistics issued by Chinese government agencies provide conflicting answers. You can pick the statistic that fits your point of view.

Most market analysts follow monthly reports on changes in hog inventories issued by China's Ministry of Agriculture (MOA) which indicate a suspiciously constant number of hogs on farms throughout 2015 following a sharp drop late in 2014.
An "official" hog inventory number buried in the National Bureau of Statistics GDP report this week reveals an expansion of 30 million head during the second half of 2015. This follows a 50-million head decline in hog numbers during the first half of 2015. One would have to dig out the numbers from obscure quarterly reports (the hog number was omitted from the third quarter report) in order to discover this apparent bounce in hog numbers. The trajectory of hog numbers has important implications both for the supply of pork and its price during the upcoming peak-consumption season at the Chinese new year as well as the demand for feed.

Should authorities sell some of their frozen pork stockpile during the holidays, or are farmers gearing up to supply hogs during the peak consumption season? Will barns be too depleted of hogs after the holidays to absorb the supply of soybean meal and corn?

There are even bigger discrepancies in measures of pork output. NBS reported that 708 million hogs were slaughtered during 2015, but the Ministry of Agriculture's (this was issued by the Ministry of Commerce until two years ago) monthly report reveals that only 214 million hogs were slaughtered in "above scale" plants during the year. The NBS number of hogs slaughtered has consistently been over three times the "above-scale" slaughter number, and this year the discrepancy widened. If the two slaughter numbers are accurate, it means that the proportion of hogs slaughtered in large, sanitary slaughter plants is actually declining despite crackdowns and withdrawal of licenses of small slaughter facilities over the last few years.
The two slaughter statistics tend to move in the same direction each year, but the NBS number tends to be more optimistic. This year the change in hogs slaughtered was similar for the two statistical series for the first time since 2010, but the percentages differ. The NBS reported a 3.7-percent decline in slaughter, but the slaughterhouse statistics imply a 9-percent decline.

The bottom line is that we really can't discern much about the current trend in China's hog market from these statistics. Nor is there any way to evaluate the quality of these statistics since there is no detailed documentation explaining the methods and samples.

The fog created by conflicting statistics is ironic because a 2009 program to stabilize the hog market called for issuing a whole series of statistics--including the inventory and slaughter numbers--to inform hog producers so they could make better decisions about expanding or contracting their herds. The statistics are reported on an official government web site, but producers seem to still be in the dark about market conditions. The program did not stop an excessive build-up of inventories in 2012 that was followed by a two-year liquidation of sows that may be still underway.

The MOA numbers suggest that sow numbers continued to decline in November and December. One industry analysis calculates that there has been a cumulative decline in sow numbers of 23.7 percent over 27 straight months since August 2013. The 11.8-million decline in sows the analysis calculates suggests a decline in hog output of 140 to 175 million (using a ratio of finished hogs per sow of 12 to 15), yet the NBS numbers show a decline in hogs slaughter from 2013 to 2015 of only 8 million.

The inept statistical work further reveals the futility of Chinese leaders' attempts to improve on free markets by tinkering with stockpiles and other interventions designed to stabilize prices. The 2009 regulation for stabilizing the hog market called for buying up pork during periods of depressed prices and selling it during periods of short supply. Successful market-tinkering like this presumes that government planners have superior information and foresight based on timely and accurate statistics on supply and demand, but their statistics actually shed little light on the situation. How can planners in a Beijing office building have a better feel for the market than the people who are in the market buying and selling on a daily basis?

Don't plan on conducting your own survey, because the government will probably arrest you for creating "confusion" in the market by providing an alternative to its official statistics.

Monday, January 18, 2016

China to Transform Agriculture by Spending Billions

Chinese authorities have pledged to spend billions of dollars this year to transform agriculture. They plan to fine-tune grain subsidies to encourage structural change in farming, boost farm productivity, and protect the environment. Officials say structural adjustment in agriculture is an "urgent task" for this year.

The planned spending was summarized in a Zhongguo Caixin Bao article December 30, 2015. The biggest expenditures are on programs that have been in existence for a number of years, but they will be tweaked to focus on supporting new types of farms and making farming more productive and environmentally sustainable. Several new smaller programs are being introduced to accomplish these goals.

China's planned expenditures for "agricultural transformation" in 2016
Program Million US dollars
20% of General input subsidy earmarked for "new-type" farms 3,344
Pilot programs steer "three subsidies" toward land fertility improvements 18,688
Subsidy for farm machinery purchases 3,688
Construct high standard fields 6,531
"Modern agriculture" industry development fund 3,181
Structural adjustment of crops 47
Integrate primary, secondary, tertiary sectors in 9 provinces 156
Support for farmer cooperatives 313
Agricultural services pilot programs 156
Agricultural extension 406
Popularization of ag technology 156
Rectification of soil contaminated with heavy metals 234
Governance of underground aquifers 1,078
"Grain for green" land retirement 781
National forest protection 3,047
Wetland protection 250
Source: Zhongguo Caijing Bao; figures converted to U.S. dollars using exchange rate of 6.4 RMB/$.

The biggest chunk of money China spends on agricultural support is the "three subsidies"--a direct payment to grain farmers, improved seed subsidy, and general input subsidy that began in 2004. This year, authorities will begin streamlining and re-targeting these subsidies to reduce the number of separate payments, shift payments toward farmers who rent land from others, and earmark payments for improvements in land fertility.

This year 20% of the "general input subsidy" funds ($3.3 billion based on last year's funding for the general input subsidy) will be set aside for "new-style" farms--farmers who rent in land from neighbors, "family farms," cooperative farms, and farms run by agribusiness companies. These funds will be added to pilot programs for assisting these types of farms and any increase in grain subsidies this year will also be set  aside for these farms.

The remaining 80% of the input subsidy plus direct payments to grain farmers and seed subsidies would total $18.7 billion based on the 2015 budget. In 2016, pilot counties for reforming these subsidies will be chosen from five provinces: Anhui, Shandong, Sichuan, Hunan, and Zhejiang. The pilot programs will consolidate the three subsidies into a single "support and protection subsidy" and use the  funds for activities to improve land fertility and support of large-scale farms.

Subsidies for purchase of farm machinery were also initiated in 2004 and funds have increased 11-fold since then to $3.7 billion in 2016. Officials say they have spent 143.5 billion yuan (over $22 billion) since 2004 to subsidize machinery purchases. The subsidy pays buyers a rebate or discount on a wide variety of equipment. This year's subsidies will support the initiative to strengthen links between farming, processing and distribution and could include processing and milling equipment, milking machines, automated feeders, greenhouses, drones for spraying pesticides, as well as tractors and combines. This year's focus is on equipment needed in key links of grain, cotton, and oilseed industries as well as livestock, aquaculture, vegetables and fruit sectors.

Another big chunk is $6.5 billion to be spent on upgrading contiguous fields, irrigation facilities, and road infrastructure. Water-saving irrigation and management of underground aquifers are major priorities. Chinese authorities say they have spent over $32 billion over the past five years to create 7.2 million hectares of high-yielding fields.Local governments in China will be encouraged to allocate funds earned from renting out state-owned land to "general agricultural development", and authorities will experiment with share-holding investment funds and other methods to attract private investment in farming projects.

Another $3.2 billion will be allocated for "modern agricultural development." Revised regulations for this program issued in 2013 indicate that these funds are like a block grant to local governments which can use the money for building irrigation infrastructure or just about any other agricultural industry development considered to be in the local area's comparative advantage, including pig- and dairy-raising communities, aquaculture, apple and orange orchard construction, vegetables, and flowers. The modern agriculture funds will be steered toward diverse new-style farm operators.

A relatively modest $47 million is earmarked for "structural adjustment" of crops, which supports the initiative to replace corn acreage with more sustainable small grains and fodder crops like alfalfa. Authorities plan to break up massive mono-cropping of corn and rice by encouraging crop rotations of corn, soybeans, and spring wheat in varying combinations for different regions. This initiative is intended to both alleviate chronic excess supply of corn and improve sustainability of cropping patterns.

Another thrust of the transformation is to integrate the different components of agricultural industry. $156 million is budgeted to support integration of farming with processing and distribution sectors. This funding will be focused mainly on wheat and rice production, milling, and distribution in twelve pilot provinces, including Shandong, Henan, and Ningxia.

Farmer cooperatives will get over $300 million in aid as part of the initiative to develop new types of farming arrangements. Thirty percent will be earmarked for pilot programs in 12 provinces, including Chongqing and Jiangsu, where local authorities can experiment with mechanisms to attract private investment. Another $156 million will be spent on developing private-sector services for farmers in 13 provinces.

Local agricultural extension stations will get over $400 million to stabilize extension teams (i.e. pay their salaries) and disseminate new technologies. Another $156 million is budgeted for disseminating new technologies. Officials say they have spent $750 million over the last five years to improve production in dry areas of northern China. However, the landscape is now inundated with scraps of plastic applied to fields to conserve moisture in the soil. This year there will be an emphasis on recycling plastic film to clean up this "white pollution."

Cleaning up environmental problems is another thrust of the agricultural transformation in China. In 2016, $234 million will be allocated to clean up soil contaminated with heavy metals, with a focus on Hunan Province where some rice growing areas are contaminated with cadmium.

Chinese authorities are trying to reverse the depletion of underground aquifers in dry areas of northern China where crops rely on irrigation. A pilot region that began with 48 counties in Hebei Province during 2014 will be expanded to 63 counties and get over $1 billion in funding.

A new round of "grain for green" will pay local authorities and farmers to retire cropland on steep slopes and grasslands with $781 million budgeted this year. The program is dovetailed with antipoverty and environmental initiatives this year by focusing funds on impoverished regions and areas with slopes of 25 degrees or more which are "seriously polluted" (probably referring to mining wastes). The funds finance planting of trees and grass and grants to farmers.

China plans to spend over $3 billion this year on protecting forests. The focus will be on cutting back commercial use of state-owned forests in northeastern provinces and Inner Mongolia. Like the agricultural extension spending, a large part of this will finance employee salaries and benefits. Finally, $250 billion will be spent on wetland protection. The soybean "target price" program has been adjusted this year to withhold subsidies from farmers who illegally grow soybeans on land designated as forest, wetlands, or grasslands.

This sounds like a lot of money, and it is. When the government is the owner of the land, it also becomes responsible for making long-term investments in it. Officials hope these subsidies will attract and leverage private investment.
Investment in China's agriculture has picked up in recent years. Valued at the official exchange rate, investment doubled from about 10 billion dollars in 2010 to over $25 billion in 2014. By comparison, the planned government spending described in this article totals over $40 billion.

Why is China spending so much? When no one really owns the land, farmers who cultivate the land have little incentive to invest in it. Moreover, Chinese farm prices are the highest in the world and expected to fall. Why would farmers invest in an asset that produces output that is expected to fall in price?

The United States also encourages agricultural investment mainly through favorable tax treatment, not so much through direct subsidies for land improvements, buildings, and equipment purchases. USDA statistics show U.S. farm investment is also growing and remains ahead of China's. U.S. farm investment (excluding operator dwellings) grew from $25 billion in 2010 to $45 billion in 2014.

The investment priorities of farmers in the United States and China are mirror images: Chinese farmers invest mainly in building their houses--a much more secure asset than their land--and they invest little in their farms. U.S. farmers invest far more in machinery, equipment, land improvements, buildings, and livestock than they do in their houses.

Thursday, January 14, 2016

China's Grain Stockpile Gets Out of Hand

China's top rural policy advisor estimated that China has 500 million metric tons of grain reserves. Chen Xiwen made the estimate at a January 10, 2016 economic outlook meeting held by the State Council.
[errata, Jan 26: After reading the speech carefully, dimsums has discovered that news media misinterpreted Chen's speech. He said grain inventories are at a record but did not give an inventory number.]

The director of China's grain bureau acknowledged that grain reserves are at a record level which he describes as "unreasonable."  He said southern rice storage is full, northeastern inventories remain at a high level, and there is a clear surplus of corn and rice. Grain purchase and storage will face "unprecedented conflicts" during 2016, the grain bureau director said. More storage space will be built, private storage will be rented, inventories will be released through various channels, and inventories will be shifted from one province to another. The director called for sticking to market-oriented reform, warning that going back to old approaches would make it "hard to cross the threshold" and give China a greater test.

Heilongjiang Province alone claims to have over 100 million tons of grain in storage--mostly corn and rice. But this is portrayed as a good thing because farmers like selling their grain to facilities with modern warehouses, fancy testing equipment, and a room where farmers can take a nap.

Noting that China imported about 120 million metric tons (mmt) of grain and soybeans during 2015, Chen Xiwen complained that the structure of the country's crop supply is not aligned with demand. Chen acknowledged that China boosted prices above global prices from 2008 until now in order to increase the income of farmers. He says this was necessary because otherwise China could not have narrowed the gap between urban and rural income and there was no other way for farmers to get higher incomes.

View of granary in Heilongjiang Province from Google earth. 

To illustrate the perversity of China's grain and oilseed market, Chen would have done better to compare the 120-mmt import number with the 175 mmt of grain China's grain reserve corporation reported purchasing for policy purposes during 2015. This was a record volume and roughly a fourth of all grain produced in China. Only 18.5 mmt of grain was successfully auctioned off from reserves during the year, and 3 mmt was shifted from one province to another. This follows purchases of 123 mmt during 2014. Facing a lack of space, Sinograin has built 11.5 mmt of new storage space with 16.8 billion yuan (about $2.6 billion) of investment from the government. Chinese authorities are cramming a fourth of the country's own grain harvest into warehouses while the country simultaneously imports huge amounts of grain and oilseeds from the international market.

China may have nearly a year's corn supply in storage, according an analysis by China's Grain and Oils News. Based on data from Sinograin, China's grain reserve corporation, there was 152 million metric tons (mmt) of corn remaining in the "temporary reserve" after last year's auctions of reserves were completed in October 2015. From November 1 to January 5, an additional 58 mmt of corn was purchased for the "temporary reserve" as proceeded at a surprisingly fast pace. That leaves a cumulative total of 210 mmt in the temporary reserve as of January 2016. approximately equal to a year's production of corn. (The Grain and Oils News author appears to have transposed digits in reporting the total as 201 mmt.)

The Grain Oils News analysis breaks out the and region of the corn reserve. The carry-in stocks included 83 mmt from 2014/15, 58.2 mmt from 2013/14, and 10.7 mmt from 2012/13. The 58.3 purchased from the 2015 crops will grow as the buying season continues through April 1, 2016.
Source: Data from China's Grain Reserve Corporation. 

The corn was all purchased in northeastern provinces. Nearly 90 mmt was purchased in Heilongjiang Province, 64.5 mmt in Jilin Province, 34 mmt in Inner Mongolia, and 21.2 mmt in Liaoning Province. An estimated 20.8 mmt of the northeastern corn had been shifted from the northeast to other provinces, so 189.7 mmt is held in the northeast, according to the analysis. 

A corn market analysis by Funeng Futures emphasizes that the corn price is detached from domestic supply and demand and from the international price due to government price-intervention and an import quota that makes it hard for private companies to buy cheaper corn from the international market. The "temporary reserve" price support policy for corn is expected to continue into next year because the government does not want to let farm income drop too much, and there are still problems to be ironed out with the target price policy being piloted for cotton and soybeans. In view of estimated production costs, industry people expect the reserve price for corn to be cut to about 1850 yuan per metric ton for 2016/17. That would be down from 2000 yuan for 2015/16 and 2240-2260 yuan for 2014/15. 

The Ministry of Agriculture plans to cut corn production in 2016 through its structural adjustment program which will convert corn area to more sustainable crops in a "sickle"-shaped belt from the northeastern Russian border through the northwestern periphery down to the southwest. This will address what Funeng Futures describes as a corn market that has had excess supply for many years.

Wednesday, January 13, 2016

Soybean Target Price Subsidy Adjusted in Heilongjiang

Much like their ham-handed approach to financial markets, authorities in China are also in a quandary about how to deal with volatile agricultural markets. Chinese authorities are pinning their hopes on a "target price" subsidy method that was abandoned decades ago by the United States. They have revealed little about experiments with the program on a trial basis since 2014, but indications are that this approach is fraught with problems and clearly not ready to be rolled out on a large scale to other crops.

The target price program calculates the difference between the local market price and a "target" set by authorities. When the market price is less than the target, the government makes a cash payment to each farmer based on his/her land area planted in soybeans. The subsidy was 60 yuan per mu (approximately $57 per acre) in Heilongjiang Province last year (2014/15). While it sounds simple on paper, the program is much harder to implement in practice.

The Heilongjiang Province price bureau announced tighter restrictions on land that is eligible for the target price subsidy during the second year of the pilot program. The subsidy can only be collected if farmers have planted soybeans on land that has been approved by authorities with a valid rental or lease contract. Soybeans cannot be planted on wetlands, land designated for forestry or grassland use, or land enrolled in the "grain for green" land retirement program, or on land that was "reclaimed" for agriculture without official permission. The new requirements suggest that farmers have been planting soybeans where they are not supposed to.

(Heilongjiang Province has a long history of hiding and misreporting land to higher authorities--until the 1990s they hid taxable land to reduce their tax liabiliity; they then began reporting so-called "black land" when it became eligible for subsidies ten years ago.)

In September 2015, local officials in Heilongjiang were ordered to fan out into the countryside to verify soybean area reported by villages as eligible for the "target price" subsidy. One town reported that officials visited every village leader and accountant, and met with individual farmers to verify the 1013 mu (167 acres) of soybean area reported in their jurisdiction. (The whole town's soybean area is less than a single farmer's soybean acreage in the United States.) Officials recorded the names of every farmer and the names of people they rented their land from. Village leaders were warned not to withhold or falsify land-holdings and they were told only to claim land that has been legally planted in soybeans.

There is also legal ambiguity over who is entitled to collect the subsidy--the actual farmer or his/her landlord. A local court in Heilongjiang settled such a dispute over target price subsidies in November by forcing the farmers and their landlords to split the subsidy payment.

There have been similar concerns about the target price subsidy pilot for cotton in Xinjiang Autonomous Region. Authorities tightened up restrictions on planting cotton on ineligible land and simplifying the convoluted formula that distributed funds in three separate tranches. There was a report that cotton warehouses and farmers used a strategem to artificially depress the market price which inflated the subsidy payment and allowed the purchasers to save money. The cotton market remains in disarray despite the plunge in market prices.

Chinese authorities hope the "target price" subsidy can replace market-distorting support prices as their primary means of subsidizing farmers. While they insist that the target price pilots for soybeans and cotton have been generally successful, they acknowledge that there are high operational costs and other unspecified problems to be ironed out. Despite relatively generous subsidies, cotton and soybean production in China both plunged during the first year of the target price trials.

Support prices have thrown Chinese ag markets into turmoil and are being abandoned one by one, but the target price policy is clearly not ready to roll out more widely. Note that the rapeseed price support was quietly abandoned in 2015 with no subsidy to replace it. Neither is the target price subsidy ready to be rolled out for producers of corn--China's largest single crop. Yet the corn market is in turmoil, urgently in need of reform and can't wait another year or two to refine a new subsidy policy.

Monday, January 4, 2016

China Imports Ag Commodity Deflation

China imported farm commodities at a robust pace during 2015 as Chinese buyers took advantage of bargains on the international market. With imported commodities as much as 40-percent cheaper than Chinese commodities, mills and processors are eager to buy imports even though Chinese markets are swimming in excess supply.

Customs statistics for January through November 2015 reported by China's Ministry of Agriculture show that the volume of imports of most major commodities increased by double-digit percentages last year. Cereal grain imports for the first 11 months of 2015 totaled 30 million metric tons (mmt), 79-percent more than the same period in 2014. However, the value of those imports increased only 49 percent because prices fell.

Barley and sorghum accounted for about two-thirds of the cereal grain imports. These two commodities are imported as substitutes for expensive Chinese corn. Barley imports were up 120 percent and sorghum imports were up 90 percent from 2014. Corn imports more than doubled but reached only 4.6 mmt due to quota limits on imports. Imports of two other substitutes for corn--distillers grains and cassava--also increased. Wheat imports were down 5 percent but rice imports were up 32 percent.

Oilseeds--mainly soybeans--are by far the biggest component of agricultural imports, about a third of the value of agricultural imports. The volume of oilseed imports--mainly soybeans--was up 14 percent but their value decreased by 13 percent from 2014, reflecting lower prices for soybeans and a decrease in rapeseed imports.

While China's leaders fret about imports of grains, the value of meat and dairy imports--$18.5 billion--was about double the value of grain imports. The volume of pork imports was up 34 percent, swine offal imports were steady. Pork and swine offal imports were each about 700,000 metric tons. Beef imports were up 48 percent. However, milk powder imports were down 32 percent and sheep meat imports were down 28 percent.

Cotton imports were down 36 percent as domestic prices fell and import quotas were cut last year. However, textile companies imported yarn which is not restricted by a quota. Imports of yarn increased 19 percent.

Overall agricultural imports totaled $105.8 billion, but the value was down 5 percent from the year before--again due to lower prices in 2015. That total is roughly equal to 10 percent of the value-added of China's domestic agricultural output. Agricultural exports were about $63 billion and were down about 7 percent. The net trade deficit was $43 billion. The numbers for the full calendar year will be somewhat larger after December data comes in.

Meanwhile, the Chinese government is holding large stocks of most commodities. The government is unable to offload the inventories because market prices have fallen below the acquisition prices and authorities are not allowed to sell at a loss.

In summary, China is actually sopping up excess demand in most global commodity markets--with a few prominent exceptions--by importing while also holding massive inventories. Global prices would be even lower if China were to dump its inventories and stop importing. The drop in cotton and dairy imports reflects a draw-down of inventories for those commodities. However, China is still accumulating corn and rice inventories. Chinese authorities don't want to see lower ag prices because maintaining farmer income growth is a big priority.

China Ag imports Jan-Nov 2015, (million metric tons)
Imports (mmt) %Change from 2014
Cereals 30.6 78.7
  Wheat 2.8 -5.5
  Corn 4.6 130.0
  Rice 3.0 32.1
  Barley 10.3 120.0
  Sorghum 9.8 89.6
Distillers grains 6.4 18.8
Cassava 8.7 10.5
Cotton 1.5 -35.8
Yarn 2.2 19.7
Sugar 4.3 39.1
Oilseeds 78.0 14.0
  Soybeans 72.6 15.4
  Rapeseed 4.2 -9.6
Edible oils 7.5 4.6
  Palm oil 5.2 11.2
  Rapeseed oil 0.7 -8.9
  Sunflower oil 0.5 27.0
  Soy oil 0.8 -26.7
Pork 0.7 34.2
Swine offal 0.7 -0.8
Beef 0.4 48.2
Sheep meat 0.2 -22.1
Milk powder 0.7 -32.8