Tuesday, March 29, 2016

China Lurches Toward Corn Market Reform

China will end its "temporary reserve" price support program for corn, allow corn prices to be set by market forces, and give corn producers subsidy payments this year according to information dribbling out from Chinese officials this week. 

The move is expected to allow corn prices in China to drop to parity with international prices and choke off the country's two-year-old import boom for corn substitutes that include sorghum, barley, distillers grain, and cassava. This will add more downward pressure to a global bear market for grains.

The corn market liberalization was not unexpected, but the announcement was tentative and confusing, probably a reflection of the controversy over the plan that has raged behind the scenes. Last summer many market watchers speculated that a liberalization would be announced in September 2015. Instead, the temporary reserve was retained and the price was cut by 10%. The central no. 1 document issued in January 2016 singled out the corn market for reform, and a speech in March promised an announcement after the "two meetings" this month. 

Despite the months of anticipation, officials seem to have been unprepared to announce the new program. Much like last year's botched monetary policy, the new corn policy information dribbled out in a series of low profile announcements that confused observers. The corn market reform was first announced March 25 by a TV station in Inner Mongolia. Over the weekend there were rumors and microblog postings speculating about the veracity of the news. On March 28, an office director of the National Development and Reform Commission announced the corn market reform at a press briefing. This announcement was reported by several grain market news sites, but not by official news media. 

Officials were forced into action as they watched China's corn supply and demand grow further and further out of sync and financial commitments soared. High corn prices quietly sucked growing amounts of domestic corn into government reserves. The of corn volume stockpiled at the support price has grown progressively from 30 mmt in 2012/13 to 69 mmt in 2013/14, 83 mmt in 2014/15 and 103 mmt (so far) in 2015/15. The NDRC official announcing the corn market reform said consumption of corn was only 175 mmt last year while production was 224.58 mmt. Market analysts in China estimate that the corn inventory has reached 250 mmt--more than last year's output. Economist Cheng Guoqiang estimated the annual carrying cost of the corn reserves at 63 billion yuan (nearly $10 billion)

No concrete details have been announced about the new corn policy. The NDRC said that any enterprise will be able to enter the market and purchase corn. Farmers will sell corn in an open market and the price will be determined by supply and demand. However, if there are signs that farmers are having a hard time selling their corn, some designated enterprises will receive subsidies to buy up corn. 

Farmers will receive subsidy payments based on the amount of corn they actually plant. The central government will allocate funds to provinces that have a comparative advantage in corn (probably the northeast), and the provinces will implement the subsidy programs.

The corn announcement is much like last year's abandonment of the temporary reserve for rapeseed which was announced with minimal publicity at harvest time. Prices plummeted as the harvest began. Provinces were ordered to give rapeseed subsidies but none appear to have materialized. Provinces have also been responsible for cotton subsidies during the last two years but only a few have announced them. 

The prospective corn subsidy will need to be designed and implemented in a matter of months--a major challenge considering that corn is China's leading crop. Farmers will have to plant their crops this spring having no idea what price or subsidy they will get. One of the obstacles preventing liberalization of the corn market is that no workable subsidy program is ready to be put in place. Officials have been cautiously experimenting with a target price subsidy for cotton and soybeans for two years, and hoped that the experiments would prove successful enough that similar subsidies could be used for corn, rice and wheat. Instead, provincial officials will have to rush to put in place untested subsidy methods. The new subsidy could be quite large. In a speech this week, Cheng Guoqiang speculated that the subsidy could be 200 yuan per mu--about double the subsidies received for wheat ad rice--based on a 400 yuan-per-ton subsidy.

The tentative nature of the announcement probably reflects behind-the-scenes clashes over the reform. The decline in corn price will almost certainly impact farmers' incomes and perhaps reduce their inclination to plant corn--the move is being described as a "supply side reform." Officials were probably forced to make a decision as they watched the corn market spin out of control. And with spring planting approaching, officials needed to give farmers some kind of signal on what to plant this year. 

This announcement does not mean a move to laissez faire economics in China. An official from the central communist party's rural work committee said the next step would be to make improvements in the grain reserve system. The government will retain and improve the minimum price programs for rice and wheat.  

Saturday, March 26, 2016

Five-Year Plan to Transform Agriculture in China

China's 13th Five-Year Plan includes a complete makeover for the country's agriculture. The plan intends to demolish walls between city and countryside and stop pillaging the environment, but it retains inherent contradictions that will ultimately cement the control of China's mandarins over the food supply.

The outline of the sprawling, ambitious plan published March 17, 2016 lays out China's vision for becoming a more mature, self-sustaining economy, and to actively participate in global affairs while maintaining national security. This document consists of a series of aspirations, strategies, and policy initiatives that are rattled off without explanation. Detailed plans for specific sectors will come later. The contents have been laid out in speeches and other documents over the past three years, so there are no big surprises. Most initiatives are already underway.

Four of the plan's 80 chapters focus on agriculture. According to the plan, hordes of peasants cultivating tiny plots with hoes and water buffalo will become a part of China's past. In their place will be "professional farmers" who grow crops as a business on "appropriate scale" parcels of land, using tractors, data-driven management, and high-tech irrigation systems.

The section titled "Pushing forward agricultural modernization" contains four main emphases:
  • restructuring the mix of commodities and the regional layout of farming
  • adopting commercial business models in agriculture
  • utilizing machinery, equipment, information technology, and improving seeds
  • boosting government support for agriculture and making policy measures more effective.
Other components of the plan have relevance for agriculture. China hopes to speed up the conversion of rural people to bona fide city people, address chronic rural poverty (in large part by moving people out of desolate places), play a more active and assertive role in the world economy, participate in global "economic governance," pursue its "one belt, one road" strategy to project influence abroad, and develop designated regional belts within the country.

Reflecting President Xi's obsession with the issue, food security is the first topic taken up in the agriculture section. The plan recites the mantra of "basically self-sufficient in cereals, absolutely secure in food grains."  The first food security measure mentioned is a campaign to designate "permanent farmland" that will be protected from development around cities and transportation networks. A new measure is a proposal to set up protected production regions that specialize in major commodities. A related proposal to set up a regional compensation system for grain-producing areas has been around for nearly ten years and never seems to get implemented.

China will allow imports to play a role in the food supply, but the stream of imports will be tightly controlled. The plan suggests setting up an agricultural trade adjustment mechanism--an element of plans going back to a "white paper" on grains 20 years ago. Food supplies will be ensured by allowing imports of commodities that are in short supply, and by expanding and improving the menu of supplying countries. Exports of commodities in which China has a comparative advantage will be expanded. China will set up overseas bases for producing, processing, and storing farm commodities, and officials will nurture internationally competitive multinational agribusiness enterprises. China will expand areas for international cooperation in agriculture and engage in multilateral cooperation in agricultural technology. 

The plan calls for raising production capacity without sacrificing the environment. Instead of applying ever-greater amounts of inputs, now technology will be used to boost productivity, low-yielding fields are being upgraded, and resources will be used more efficiently by concentrating production of commodities in regions with comparative advantage. For example, the Statistics Bureau recently celebrated the concentration of 62% of cotton production in Xinjiang as a successful example of shifting production to its most efficient region. 

The plan endorses "environmentally friendly" and "green production." It pledges to work on shrinking underground aquifers, clean up soil polluted with heavy metals and remediate ecologically degraded regions. Several regions with water shortages are earmarked for help: southern Xinjiang, the Hexi corridor in Gansu, and Baicheng in Jilin Province. The plan pledges to protect the black soil in the northeastern provinces. 

Creating a system to develop and disseminate agricultural technology is another measure intended to increase production capacity. This plan focuses mainly on seeds: improving the "research environment" at key laboratories, developing breeding and propagation bases, a new "variety upgrade action plan," and nurturing seed companies with integrated breeding and propagation capacity. Varieties compatible with mechanization are singled out for development. While Chinese officials appear to be obsessed with the seed industry, there is no mention of livestock breeding. 

Linkages and integration are themes of the plan. It calls for rotating crops, linking up feed and forage crops with livestock, and strengthening linkages between farming, processing, and marketing. The plan endorses "multifunctional agriculture", including rural tourism, agricultural sightseeing, and giving city people agricultural experiences. 

The plan hopes for agriculture to become "smart." Information technology will be integrated into production, management and marketing. Regional "Internet of things" projects will forge ahead. Internet companies will be encouraged to set up information technology linkages in agriculture. 

Food safety is once again a theme, as it has been for 15 years or so. The plan calls for establishing a complete traceability system and identifies residues of veterinary drugs and pesticides and standards for additives in agricultural products as specific issues to work on. An internet-based platform for food safety information is viewed as a beneficial tool. A campaign to develop food safety testing and supervision capacity at the county level is endorsed. 

The most adventurous part of the plan is the overhaul of the agricultural business system that will nurture diverse types of "appropriate scale" farming. "Family farms"--defined elsewhere as farms big enough to be operated with the labor of a husband and wife--are to be the foundation of the system, but other forms of cooperatives, unions of farmers, farming trusts, and company-operated farms will be tried out. This is based on orderly and stable land transfer mechanisms. 

The new-type farms will need development of ancillary institutions to support them. Recognizing the inadequacy of the extension system in China, the support include a mainly privatized service system that includes technical advice as well as e-commerce. However, the system of supply and marketing cooperatives set up in the 1950s to supply inputs to communes is tagged for reform (again).

While the plan endorses moving toward greater market orientation, it also expects to keep its farmers on a steady IV-drip of subsidies in order to ensure their profitability. The plan calls for setting up a mechanism that ensures that the government's spending on agriculture continually increases. In a tacit acknowledgment that the decade-old subsidy payments for farmers have become largely inert and an administrative burden, the plan says the "three subsidies" will be consolidated into a single payment, made to operate more effectively, and tilted toward the new types of farms. The plan says China will expand "green box" subsidies that are not limited by WTO rules and make improvements and adjustments in "amber box" subsidies.

The minimum price policy will remain in place for rice and wheat, but it will be improved. The corn price mechanism and the corn reserve system will be improved. A subsidy for corn growers will be introduced. The plan urges "deepening" the target price subsidy reform for cotton and soybeans, and it endorses exploration of price insurance pilots. The level of grain reserves will be "scientifically determined", and officials will figure out how to inject reserves into the market in a better way. "Smart" grain storage will be built, and officials will entice farms, processors, and other diverse operators to hold reserves of farm commodities. 

Financial services to facilitate lending and risk management also get attention from the plan. Again, there is a call for reforming a 60-year-old holdover from collective agriculture--rural credit cooperatives--as well as initiatives to experiment with new forms of financing--rural mutual savings banks. Officials hope to entice all kinds of banks to participate in financing agriculture. They hope to establish a national loan guarantee system in which local governments capitalize companies that guarantee bank loans for farmers. Other recent innovations endorsed in the plan are "insurance + futures" and weather index futures pilots.

This plan has great significance in its aspiration to de-compartmentalize the Chinese economy. If successful, walls between city and countryside will come down. Agriculture will no longer be a subsistence activity that mainly feeds peasants. The countryside will no longer be a reservoir of unskilled laborers and food that can be tapped when needed by cities and industry. Integration of agriculture, the countryside, and rural people with the rest of the economy is long overdue.

However, the plan retains important contradictions. The obsession with self-sufficiency in rice and wheat reflects an outdated view of China's food system. Officials think agricultural profits need to be higher, but in fact Chinese net returns per acre of land are already sky-high compared with other countries. The incompatible objectives of maintaining "food security," raising returns to farmers, and sustainable development will inevitably conflict, demanding a cascade of subsidies, regulations, and an ever-greater role for officials. 

A critical bottleneck is the intent to maintain tight control over land and banking, two critical components of a modern agricultural economy. That tight control along with the intended flood of subsidies will maintain the role of rural officials as the main players in the agricultural economy and create juicy opportunities to for corruption and business opportunities based on their decision-making power over land use, bank loans, and government funds for construction projects. 

Officials view themselves as directors of the play who are somehow more wise and virtuous than the rest of the population, but that view is ill-founded. Officials made a disastrous miscalculation on agricultural price supports that will cost billions to unwind and result in millions of tons of food waste. At the National Peoples Congress, a professor of socialism from Guangxi complained about rampant corruption of rural officials, including the skimming of subsidy funds.

"Collective ownership" of farmland is purportedly to protect peasants, but in reality it protects and enriches the fiefdoms of government officials. It would be instructive if someone were allowed to find out how many of the 2 million or so new-type farms are controlled by government officials and their cronies.

Monday, March 21, 2016

Corn Processor Subsidy in Jilin Province

China's Jilin Province has announced a subsidy of 150 yuan (about $23) per metric ton for corn used by industrial processing enterprises. Recipients must use corn procured from Jilin Province for their own use between January and June 2016.

The March 17, 2016 document was issued by the provincial finance department, provincial grain bureau and Jilin's information and industry department. Many grain industry web sites posted an article on the document, but not the Jilin grain bureau that issued it. The article includes an image of the document, but there don't seem to be any electronic versions of the document.

The Jilin subsidy was announced nearly two months after a document issued by several central government departments encouraged local authorities, companies and banks to take measures to dispose of excessive grain stockpiles. The announcement comes in mid-March with just over three months left in the six-month window for collecting the subsidy.

Sunday, March 20, 2016

China Exports Corn to Tajikistan

A 200-metric-ton shipment of corn was sent from China's Henan Province to Tajikistan in what appears to be a deal orchestrated to both promote the "one road-one belt" push into Central Asia and address the overstock of corn in China.

China has some of the world's highest corn prices, but no mention is made of the price paid by the Tajiks.

The shipment of corn is described as a demonstration project in a propaganda article posted on numerous news sites in China. The corn reportedly originated with a farmers "cooperative" in Henan's Taikang County. A Henan seed company supplied the farmers with seeds and inputs, and then bought the corn back for export to fulfill an agreement with Tajikistan (the company's web site features a photo of its leaders signing an agreement with a central asian country). The corn was inspected at an inspection and quarantine facility in Luohe City and then transferred to the Zhengzhou-Europe railroad for shipment to Tajikistan.

The project reflects priorities in the 13th five-year plan for nurturing new-type farms and hooking them up with trading companies. In explaining the rationale for the demonstration project, the local government in Taikang cites a series of documents promoting agricultural modernization and farmer cooperatives in the region. Local authorities selected 19 "family farmers" to act as models for agricultural modernization.

The article emphasizes that the corn shipment is aimed at addressing the difficulty of Henan farmers in selling crops and disposing of excessive grain inventories to boost farmers' incomes. A provincial agricultural official speaking at the National Peoples Congress earlier this month explained that although the province produces a lot of output, the quality is not high, farmers lack reliable markets, and the province's agriculture suffers from "surplus production disease."

This is described as the first shipment of agricultural commodities from Henan to Central Asia. According to the article, the agricultural sales to Tajikistan will be followed by sales of manufactured items.

China Rice Smuggling Estimated at 2 million tons

Despite a series of anti-smuggling campaigns, China's smuggled rice imports reached 2 million metric tons (mmt) during 2015, according to estimates by a Chinese grain industry newspaper.

China's Grain and Oils News deduced the smuggled volume by comparing export statistics from Vietnam and Burma which far exceed China's officially-reported imports of rice from those countries. The article doesn't explain why exporters selling to smugglers would report the sales to customs officials. There seem to be several typographical errors in the article, but the estimate of 2 mmt seems to be in line with reality.

Adding the estimated 2 mmt of smuggled rice to official imports of 3.35 mmt recorded by customs statistics brings China's total imports to 5.35 mmt. Subtracting China's rice exports of 280,000 metric tons still leaves the net import volume--smuggled and legal--at over 5 million metric tons.

Grain and Oils News asserts that the imports have a severe impact on the Chinese rice market even though the 5 mmt of rice is equal to only 4 percent of the country's annual rice consumption. The article also raises concern that the 4-percent share of imports is close to infringing on national "food security." The article worries that the government can no longer control the market by buying and selling reserves.

The government has purchased over 30 mmt of rice to support prices each of the last three years at the same time imports of rice have been increasing. The government has had difficulty selling off the reserves due to downward pressure on prices exerted by imports. During 2015, the Chinese government offered 88 mmt of rice reserves for auction, but only 5 mmt found buyers.

China's rice market is actually not as large as production statistics make it appear because most rice produced is kept on farms for farmers' own use. According to Grain Bureau statistics for the 2014/15 market year, only 86.5 mmt of rough rice was purchased by all types of enterprises (see table), less than half of the National Bureau of Statistics' 206.5-mmt estimate of rice production (the difference reflects rice used by farmers themselves and possibly an overestimate of production by the Statistics Bureau). Of the 86.5 mmt rice purchased, 32.3 mmt was stockpiled in reserves under the minimum price program, so it has not entered the market. Deducting the rice stored in reserves and adding the 5 mmt of old rice auctioned during 2015 leaves 59.2 mmt of Chinese rice that actually entered the market, about a fourth of the crop.

China rice purchased by all types of enterprises (2014/15):
Type of rice Million metric tons
Early indica rice 8.5
Middle-late indica rice 38.2
Japonica rice 39.8
Total rice purchased: 86.5
- purchased for reserves -32.3
+ auctioned from reserves 5.0
Purchased for consumption 59.2
Milled equivalent (x .65) 38.5
Estimated imports (milled) 5.0

That means imported rice has more than 4 percent of the commercial rice market in China. Assuming a milling rate of 65%, the 59.2 mmt of rough rice equals 38.2 mmt of milled domestic rice that entered the market. Compared with this number, the estimated 5-mmt of imported rice is 13 percent of the rice traded commercially in the Chinese market. That's a lot more than the 4% share estimated by Grain and Oils News.

The numbers are similar for 2015/16. Although the statistics bureau reported a larger rice crop of 208.25 mmt for 2015/16, the latest procurement numbers reported by the Grain Bureau on February 15, 2016 showed that volume of rice procured was down about 1 mmt from the previous year.

Grain and Oils News concluded that smuggling of rice into China is still "rampant" despite over two years of anti-smuggling programs. A "green wind" program targeting smuggling of agricultural products launched in 2014 has seized 210,000 metric tons of smuggled rice, which Grain and Oils News notes is only 10 percent of annual smuggling volume. A "five major campaigns" initiative was deployed in 2015, and this year there is a new program ("sword over the door to the country"). A sweep of markets by customs officials and police in Chongqing, Kunming, Changsha, and Guiyang during March 2016 claims to have broken up seven rice-smuggling gangs.

The paper calls for more crackdowns on smuggling to protect the income of Chinese farmers, preserve national food security, and to restore "order" to the Chinese rice market. What more can China do to crack down on smuggling than it has done over the last two-plus years? The main recommendation by Grain and Oils News is to implement a strict traceability system in China's rice industry, but the source of rice is already commonly faked. The final recommendation is to raise the productivity of Chinese rice to make it more competitive.

Sunday, March 13, 2016

Request for China Corn Starch Export Subsidy

A Chinese corn processing industry executive submitted a recommendation to the National Peoples Congress urging the government to de-stock corn reserves and to subsidize exports of his industry's products.

The request was made on March 10 by Tong Yi, the general manager of COFCO's Jilin management center and a "grass roots" representative to the Congress. Mr. Tong reckoned that China's policy reserves of corn surpassed 250 million metric tons (mmt) at the end of February, with an estimated annual cost of 50 billion yuan ($7.7 billion) for interest and storage. He noted that 70 mmt of corn is at or beyond its 3-year maximum storage period and faces serious risk of degradation.

Mr. Tong said the 88 mmt of corn reported "temporary reserve" purchases from the 2015 harvest by February 29 represented 90% of the northeast region's production. He complained that corn processors in the northeastern region lost their competitive advantage of cheap raw materials as prices in the northeast became de-linked from prices in other regions. According to Tong, processors in Hebei Province are paying 1650 yuan/mt for corn, but the price in the northeast is 1950 yuan/mt.

Mr. Tong estimated that the northeastern region of China has 40 mmt of industrial corn processing capacity, but less than 50% is being utilized. He said the national capacity utilization rate is 70%. Northeastern processors either pay more for corn or can't get any at all.

Tong didn't explain how the processors managed to maintain even near-50% capacity utilization with 90% of the region's corn supposedly locked up in warehouses. He did note that some corn from other regions had been shipped in to the northeast to take advantage of the high prices there.

Tong said the temporary reserve policy has had positive results by protecting farmers' returns and maintaining food security. He called for the government to begin releasing corn reserves as soon as possible, presumably before the end of the temporary reserve purchasing period which runs through April 30.

Mr. Tong asked for a revival of a policy that refunds value-added tax (VAT) payments for exports of corn products, with no expiration date so that processors can make export plans with reasonable expectations. Tong said the subsidy would encourage companies to export and help use up record-high corn inventories.

In 2015, China's State Council gave a 13% VAT refund for exports of products made from corn and several other agricultural products that was effective from January 1 to December 31, 2015.  The 2015 rebate covered corn starch, by-products from starch production, monosodium glutamate, non-denatured alcohol, by-products of wheat-milling, and pine nuts. The 13% export subsidy apparently didn't give much help to China's starch exports much,  but there was a clear boost in exports of monosodium glutamate and corn starch by-products while the VAT rebate was in effect during 2015 (see chart).

Thursday, March 10, 2016

Cotton Subsidies High, Production Falling

Cotton farmers in China's Xinjiang Autonomous Region will receive subsidies of 500 yuan per mu (about $468 per acre) for the 2015 crop, up from 440 yuan last year. The subsidy is as high as 540 yuan in southern Xinjiang.

The "target price" subsidy in Xinjiang will be mostly distributed according to the amount farmers sold by the end of January 2016 at a rate of 1.99 yuan/kg. Some special cotton got a higher subsidy of  2.58 yuan/kg. Farmers in southern Xinjiang got a subsidy of 141.75 yuan/mu.

Only a few other provinces have announced their cotton subsidy for this year.
A survey of 5000 cotton farmers conducted in January by the national cotton technical monitoring project reported that all the farmers received subsidies last year for the 2014 crop. The average subsidy received was 349 yuan/mu (491 yuan/mu in Xinjiang and 170 yuan in nine other provinces). The subsidy was equal to 23 percent of the gross value of farmers' production per mu, yet they still reported a net loss.

According to official statistics, cotton planting was down 10% in 2015 and output fell 9.3%. Cotton production is down 18% since 2012. Some industry people think production has fallen faster than official statistics indicate.

This year, Shandong farmers say the subsidy doesn't make up for the loss in revenue from falling prices. A November survey indicated Shandong farmers intend to plant 7.1% less cotton this year. That comes after a 34% decrease last year. Henan's planting intentions are down 8.9%.

The National Bureau of Statistics reports that 62.5% of cotton production is now produced in Xinjiang.