Sunday, February 28, 2016

China's Failed Oilseed Revival Plan

The Jiangsu agricultural commission estimates that the province's rapeseed area will plunge from last year's 7 million mu to just 3 million mu this year. Experts say the province's rapeseed area can't fall any further--it is now limited to small plots in the backyards of farmhouses where farmers grow it for their own use.

Promoting rapeseed production was once a core objective of a 2007 plan to revive China's oilseed industry. Alarmed over the growing dependence on imported soybeans, Chinese officials formulated a plan to boost production of rapeseed, peanuts and other oilseeds. The plan included a dozen subsidies and support measures (listed at the end of this post) aimed at encouraging production, improving yields, producing seeds that yield more oil, giving loans to Chinese companies to build processing facilities and "guiding" companies to establish contracting relationships with "production bases" of farmers. The 2007 plan aimed to boost domestic output 14% by 2010. Statistics say production jumped in the first year but then remained stagnant while imports tripled in the 8 years after the plan was launched. During 2015 China imported nearly 88 million metric tons of soybeans, rapeseed, sesame and other oilseeds.

Oilseeds include soybeans, rapeseed, peanuts, sunflowers, sesame, and others. 
Chart does not include China's 10-12 mmt annual imports of edible oils. 

China's oilseed production has probably declined more than statistics indicate. The revival plan gave local officials incentives to over-report oilseed production in order to qualify for new seed subsidies and financial aid for major oilseed-producing counties. The one-time boost in production reported in the first  year after the plan was introduced was probably bogus, as local officials rushed to demonstrate success and competed to get subsidy funds. In recent years crop tours surmised that rapeseed production is far below official figures. During 2014, official statistics say China produced a record 14.7 mmt of rapeseed, yet grain bureau statistics say the volume of rapeseed purchased from farmers had shrunk to 1.9 mmt that year.

Chinese analyses generally agree that the "temporary reserve" price support programs caused problems for China's soybean and rapeseed production by boosting prices above the price of imports. The temporary reserves for soybeans and rapeseed were introduced in 2008--the year after the oilseed plan was launched. The soybean temporary reserve was derisively called a "subsidy for foreign soybean farmers" because raising the price of Chinese soybeans simply encouraged processors to import even more. Raising rapeseed prices resulted in a bloated stockpile of oil made from the seeds purchased at high prices. The price support program for soybeans was abandoned in 2014 and the rapeseed price support was abandoned last year (in 2015). The plunge in prices that ensued is the main factor discouraging rapeseed production this year.

Authorities accumulated an estimated 5 million tons of rapeseed oil made from seeds purchased through the price support program. They are now trying desperately to auction off the rapeseed oil. The oil offered last week had been in storage 4 to 6 years. Among the offerings was 2300 tons of oil produced over 6 years ago in 2009, and someone actually bought 1000 tons of it. (Chinese consumers, any concerns about what the companies are going to do with six-year-old cooking oil?)

While the government is selling rancid vegetable oil, it is tightening its requirements for imported rapeseed. The proposed 1% limit on foreign matter is less than the 3% limit tolerated for domestic rapeseed purchased by the now-defunct temporary reserve. Chinese officials first raised "concerns" about black leg fungus in Canadian rapeseed (canola) shipments in 2009 and have revived the purported concerns after years of consultations with Canadian counterparts. Chinese analysts have frequently referred to the black leg fungus "concern" as a policy to limit imports.

Another miscalculation in the oilseed revival plan was an expectation that giving Chinese companies money to build processing plants would reduce reliance on imported oilseeds and dilute the purported control of multinationals over the oilseed sector. According to a 2013 article in China's Economic Daily, "The most fundamental reason for imports of rapeseed is the rapid expansion of production capacity." The new facilities added even more capacity that had to be utilized, which led to even more imported oilseeds to keep the new Chinese factories churning. Economic Daily explained that the government subsidized expansion of rapeseed processing capacity in 2009, but limited the facilities to provinces where there was no rapeseed produced. However, expansion occurred all over the country and capacity shot up to 50 mmt, about four times the amount of rapeseed produced in China.

In past decades China was able to expand production of everything, but now officials are coming to grips with the reality of resource scarcity. In the 1970s there was so much inefficiency that production of everything could be expanded by correcting misallocations of resources and importing modern technology. The easy growth is over now and choices have to be made.

Support measures in the 2007 oilseed revival plan:
  • There were new subsidies for improved varieties of rapeseed and a pilot program for peanut seed subsidies in a few counties. These were added to a soybean seed subsidy that began in 2002. 
  • Major oilseed-producing counties became eligible to get transfer payments from the government like those received by grain-producing counties. 
  • An "oilseed production base" construction fund was launched
  • Crop insurance was offered for oilseeds
  • Reserves for oilseeds and edible oils were initiated
  • price support programs were introduced for soybeans and rapeseed in 2008. 
  • A program to subsidize mechanization of rapeseed production was launched. 
  • Oilseed companies received "guidance" to convince them to form close relations with "production bases" of farmers, signing production and marketing contracts with them.
  • Research and innovation in oilseed breeding and research was earmarked for upgrades
  • Oilseed farmers were to receive extension advice on new techniques like close-planting of soybeans, no-till rapeseed, and peanuts grown under plastic mulch. 
  • Futures markets for oilseeds were to be targeted for development. 
  • The oilseed industry was to receive support--mainly earmarked subsidized loans to expand production capacity of domestic companies


Godfree Roberts said...

That's odd. The Chinese Customs Administration reports that in 2015 imports of edible vegetable oils were down by 36% in quantity and 43% in value.

Can you resolve this?

dimsums said...

The statistics cited in this comment are for January-April.
China's imports of edible oils for the entire year of 2015 totaled over 10 million tons, slightly higher than 2014. China has consistently imported about 10-11 million tons of edible oils since 2007, mostly palm oil which is a cheap type of oil used in food processing and mixed with other types to cut costs.
The Chinese industry mainly imports raw oilseeds and processes them into oils. The left over meal from soybeans--which constitutes nearly 80% of the volume of the soybeans--are a critical source of protein for China's livestock industry.