Wednesday, November 30, 2016

Grain Marketing, Technology, and Rule of Law

Two new measures make it easier for Chinese farmers to sell their grain. However, the two measures are contradictory. A pilot program adopts computerized systems to streamline the grain-buying process, but most Chinese farmers sell their grain to unlicensed individual grain traders who cannot afford any of this equipment. The story illustrates the tricky challenges Chinese officials must navigate to move a chaotic countryside toward a society governed by laws rather than expediency.

An initiative in Heilongjiang Province requires grain-buying stations to have electronic testing equipment and automated data systems to shorten the time farmers wait for test results and payment for their grain. An electronic unit tests grain for moisture in a few seconds--a procedure that used to take 20 minutes while farmers waited outside. Video cameras let farmers watch lab technicians test their grain to prevent the lab from producing false results to downgrade the grain and pay farmers a lower price--a longstanding method of cheating peasants. Farmers deliver their grain by truck, the license number is recorded and farmers show their ID card. The moisture, variety, grade, test weight, foreign matter, and incidence of mold are measured and entered in the system, the price is determined and payment is made to the farmer's bank account within minutes.
Farmers watch video screen and grain specifications.

In an article describing the system in 2014, a technician with 25 years of experience testing grain remarked, "With the new video surveillance system we cannot tolerate carelessness in our work." The technician continued, "Using the moisture testing equipment completely changes the longstanding practice of lab technicians testing grain using their teeth and their eyes." Officials say the new system for purchasing grain is more transparent and efficient. Most of the grain stations in Heilongjiang buying rice for the minimum purchase price program reportedly have this equipment now.
Grain moisture testing apparatus advertisement. 

This is a nice system, but as it turns out only a minority of farmers actually sell their grain at these depots. Most farmers sell their grain to private traders who come to villages to buy grain door to door, store it temporarily and then sell it on to grain buying stations or processors. These intermediaries make it more convenient for farmers to sell grain, but most of them have been operating illegally because they don't meet the requirements for a license to buy grain. 

A September 14, 2016 regulation issued by China's Grain Bureau makes these grain traders instantly legal by exempting farmers, individual grain traders (粮食经纪人), and traders in retail agricultural markets (农贸市场粮食交易者) from the requirements for a grain-purchasing license that were set in a 2004 regulation. Companies and enterprises--like the grain-buying stations above--are still subject to license requirements.
A grain-buying license issued by the State Administration of Grain

According to an article describing the license waiver, people in the industry estimate that there are 1 million such unlicensed traders, who have all been operating illegally until now. Selling to these traders has become popular because it saves farmers a long trip to the grain station, saves them the cost of hiring a truck, and reduces the need for laborers to load and drive the trucks. A professor at Henan Polytechnic University estimated that 85 percent of grain in his province is sold to these intermediaries. Many of the traders are farmers themselves who use their spare time to buy and sell grain. They store grain in courtyards and rented buildings.

Few of the private traders have licenses. In the Luohe district of Henan Province, a grain bureau official says only 12 of the 150 grain purchasing licenses are held by private individual traders. Shandong's Qihe County has 135 licensed grain buyers, including state-owned and private companies and flour mills, but a grain official estimates there are 700-800 unlicensed individual traders.

Mr. Zhang, a trader in Henan Province, has ten years of experience and buys 500,000 kg of grain annually. Mr. Zhang estimates there are 1000 traders like him in his country, and he never heard of anyone who had a license. Mr. Wang, another Henan trader with 20 years experience, didn't know a license was required to buy grain from farmers.

The licensing requirements are beyond the reach of individual traders. You have to prove you have 30,000 yuan in working capital, 200 metric tons of storage capacity, an official stamp, a legal document showing ownership or a rental contract for facilities, certain testing equipment, and qualified technicians and managers. (It sounds like the traders probably violate other regulations by storing grain in unapproved buildings or constructing warehouses on land designated for farming). Regulations stipulate that official granaries are not to accept grain that was purchased illegally. Violators are to be assessed a fine of five times the value of the grain. Nevertheless, the Henan branch of the China Grain Reserve Corporation (Sinograin) says most grain is delivered to granaries by small traders.

The article explains how an essentially illegal industry was created by quoting a common phrase: "Above there is a policy, below there is a countermeasure." As with many central government policies, the requirement for a grain license is widely ignored by local officials out of expediency. Many even encouraged the individual grain traders because farmers could not market their grain without the traders. A county grain official in Henan said there is not enough labor in the countryside to dry grain, load and haul it to distant grain-buying stations. But as long as the license requirement existed, traders always faced the risk that a zealous local official might order a crackdown.

One trader in Shandong told the reporter he was informed by local officials last year that he could no longer buy grain without a license. The trader made a phone call to a county grain bureau official he knew, and the local officials decided not to enforce the license requirement after all. 

There have been scattered cases where unlicensed grain traders were fined. The rule was mainly enforced to protect local markets from outsiders. In Guangxi Province, traders from Fujian and Zhejiang Provinces were fined for trying to sell rice they had purchased illegally without a license. 
The wife of a grain trader sits on a pile of sub-standard wheat refused by the Sinograin depot. Source: New Capital News.

The lifting of license requirements is applauded by small grain traders. The license waiver contrasts with dairy, hog-slaughter, and feed industries where re-licensing campaigns have shut down thousands of small operators who couldn't meet the requirements. Officials were probably forced to lift the grain license requirement because the small traders are so prevalent, and an entire industry composed of illegal operators just won't do when the country is now supposed to be run by the "rule of law." 

The waiver is probably not the end of the story. A Renmin University professor anticipates that a registration and reporting system will probably be introduced for these traders in the near future. Large-scale full-time grain producers may be more inclined to haul their grain to a distant licensed grain-buying depot equipped with electronic testing, video, and record-keeping equipment. Officials may be counting on the advent of these "new-type" farmers to reduce the need for the army of small grain traders. 

The small grain traders lack testing equipment and secure storage facilities like those of the state-owned grain stations in Heilongjiang described above. Will these traders get subsidies to buy testing equipment, grain dryers, and modern storage bins? Until they do, the traders will face the risk of having grain rejected when they sell it on to depots; they will be careful when buying from farmers and apply discounts based on eyeball evaluations. 

Monday, November 28, 2016

China corn v. soybeans in charts

China has become a corn-soybean-centered agricultural economy--much like the United States--but with a twist. Instead of rotating the two crops, China's farmers specialized in massive mono-cropping of corn while nearly all of the country's soybeans were imported. Here's the China corn v. soybean story in charts.

China's corn output has grown relentlessly since 1970, and is now the largest single crop produced in the country. The growth accelerated after 2004 when Chinese authorities adopted pro-cereal grain policies. Growth in corn accelerated even faster during 2009-2012 when a "temporary reserve" floor price program guaranteed farmers a minimum price. Production of corn doubled from about 110 million metric tons in 2000 to about 225 million metric tons in 2015. The surge has ended now--with massive stockpiles--and many are projecting a drop in corn output in 2016.

Source: Data from China National Bureau of Statistics.

Soybean output in China was relatively stagnant over that entire period. Chinese journalists like to write alarmist stories about stagnant soybean production but these stories ignore the flip side: soybean production was stagnant because Chinese farmers went all-in on corn.

Most of the increase in corn came from planting more land in the crop, including encroaching on grasslands, wetlands, and erodible hillsides, and pushing the crop further into the frozen north. The area planted in corn increased by 11.8 million hectares (45%) during 2005-15. The 11.8-million-hectare increase represented 6.7% of all the corn area in the world in 2015. Only three countries--United States, China and Brazil--plant more than 11.8 million hectares of corn. The area planted in soybeans fell 3 million hectares (30%) during 2005-15.
Source: China National Bureau of Statistics; projected plantings for 2016 from Ministry of Agriculture.

Relentless growth in China's soybean imports mirrors the country's soaring corn production. China first imported soybeans in 1995 and is projected to import 86 million metric tons in 2016/17. Hypothetically, if China had used the increased corn area (11.8 million hectares) for soybeans instead of corn, it could have produced only 20 mmt of additional soybeans (assuming an average yield of 1700 metric tons per hectare), less than a fourth of the actual volume of soybean imports.
Source: USDA, Production, Distribution and Supply database.

Why did China specialize in corn? Compared with soybeans, corn yields about three times more physical output  per hectare of land. Planting corn helped meet purely quantitative targets for grain self-sufficiency. In China, the gap between corn and soybean yields has widened from 189% in 2000 to 254% in 2015, according to the National Development and Reform Commission's agricultural production cost survey.
Source: data from China National Development and Reform Commission production cost surveys.

Like a helium balloon, ag commodity prices sometimes float upward for extended periods, but they eventually come back down toward the ground. According to a database, the average corn procurement price on November 17, 2016 was 1684 yuan per metric ton. That was about 25 percent lower than the peak level that prevailed from 2011 to 2013 and about the same as the price in 2009.
Source: China Grain Net database (

The National Development and Reform Commission production cost data show that corn was a very profitable crop during the expansion years. Profits are now shrinking as prices fall to more reasonable levels. The increase in labor and land costs has changed the calculus of Chinese farm production. Rural labor and land used to be essentially free goods, but now they are scarce inputs which must be paid to entice them to produce particular crops.

Source: data from China National Development and Reform Commission production cost surveys.

Material inputs--primarily chemical fertilizer, seed, fuel, repairs, etc.--were about a third of the value of corn output per mu of land during the corn boom. The cost of labor reflects mainly imputed costs of family labor--so it is really profit to the farmer and his family. That "cost" rose rapidly as wages for rural migrants soared--it takes larger profits to entice rural people to stay home and farm. The "cost" of land was also an imputed cost when most farmers cultivated their own land and paid no rent. Now the Ministry of Agriculture says one-third of farmland is rented or otherwise transferred--usually with a rental payment. Moreover, rental rates have increased. Since 2014, gross income from corn production has fallen sharply due to the phase-out of the generous "temporary reserve" floor price policy. In 2015, the floor price was cut 10%. This year--2016/17--the policy was eliminated and price has fallen further. Income in northeastern provinces will be supplemented by a corn producer subsidy of about 120 yuan per  mu, but it will offset only part of the decline in gross income since the peak in 2013.

Soybeans have lower expenses per unit of land than corn for labor and material inputs. However, land rent is similar (depending on the location and quality of the land). Like corn costs, soybean production costs have also risen dramatically. The long rally in Chinese prices from 2004 to 2012 helped Chinese farmers cover those costs. In other countries, prices do not go up year-in and year-out to cover rising production costs. Competition from imported soybeans restrained the growth in Chinese soybean prices, so revenue from soybeans did not grow as fast as revenue from corn. When global commodity prices grew soft in 2013, China's soybean prices began to fall. A "temporary reserve" policy to support Chinese soybean prices collapsed in 2014 because processors bought cheaper imported soybeans and let the government buy up domestic soybeans at the floor price. China's soybean prices have also declined in 2016. The target price subsidy should give soybean producers a subsidy that will partly offset the decline in revenue.
Source: data from China National Development and Reform Commission production cost surveys.

Corn and soybean prices seem to be moving down in parallel. Likewise, subsidies to northeastern producers of both crops are roughly offsetting. Most analysts are predicting a modest rebound in soybean production next year, but there is no clear incentive to shift large amounts of area from corn to soybeans. Hence, Chinese officials constantly harp on their supply side structural adjustment program as the main means to reduce surplus, environmentally harmful corn production.

Thursday, November 24, 2016

China Corn Supplies Tight on Weather, Logistics

Corn prices in China are stable or rising, despite the elimination of the temporary reserve price floor policy. Chinese news media say cold, damp weather across corn-producing provinces and logistics bottlenecks are the main factors causing tight corn supplies in the first months of the corn-marketing season.

China's Grain Bureau says that a cumulative total of 19.55 mmt of corn from the 2016 crop had been procured in 11 major producing provinces as of November 20. The volume is 2 mmt less than at the same time last year. The corn-procurement season runs until April 30, so it's still early. (Last year, a total of 172.66 mmt was procured by April 30, so there could be another 150 mmt yet to be sold by farmers.)

Snow and cold temperatures across the northeast have made it difficult to dry corn and present possible mold problems. In Heilongjiang Province, a shortage of rail cars slowed the transportation of corn to ports in Liaoning for shipment to southern provinces. Reportedly, this problem is being addressed as Harbin's rail bureau makes more rail cars available. Some roads in Heilongjiang have been closed by heavy snowfall. Subsidies for northeastern processors is increasing demand for corn.

Foggy, damp weather in the Huang-Huai Rivers region of northern China also prevented corn from drying properly. Large amounts of corn in this region also are affected by mold, so supplies are tight. Feed mills need to replenish inventories as the peak meat consumption season at the lunar new year approaches.

The flow of corn to southern provinces is constricted by the above factors. Feed mills in the southern provinces need to hold larger inventories than those in producing areas, so there is keen competition for limited supplies and prices are rising in southern ports of Shanghai, Fujian, and Guangdong Provinces.

During the week of November 14-20, procurement prices for corn in Heilongjiang province ranged from 1200 to 1500 yuan/metric ton. In Jilin prices were 1400-1570 yuan/mt, Inner Mongolia 1420-1710 yuan/mt, and in Liaoining 1500-1780 yuan/mt. Prices at ports in Liaoning Province for shipment to southern provinces are 1750-1780 yuan/mt. Prices at ports in Fujian and Guangdong are 1960-1980 yuan/mt.

Corn futures at the Dalian exchange for January and May 2017 contracts have followed a V-pattern since the corn harvest began in September. Prices fell from about 1450 yuan to 1400 yuan during September 2016. Prices then rebounded during October and early November. The price for the January 2017 contract rose to over 1620 yuan in early November, and fell to 1592 yuan on November 24. The May 2017 contract rose to 1558 yuan in early November and was at 1543 yuan November 24. The spread between the two prices suggests that traders expect prices will fall in the spring after the peak consumption season is completed, farmers finish their sales of the new corn crop, and authorities try to re-start their sales of corn from reserves.

Tuesday, November 22, 2016

China Prepares for Outbound Ag Investment

China is gearing up for more outbound investment in agriculture and scientific cooperation.

China's five-year plan for the rural economy includes four paragraphs on "coordinated utilization of domestic and foreign markets and resources" tucked away among the ambitious initiatives for a makeover of the countryside. The paragraphs have diverse objectives to project China's influence abroad along the "new silk road," create world-beating agribusiness companies to supply China's food needs, gain more control over the flow of imports, and boost China's exports of horticultural crops and aquaculture products.

China wants to have more and better international cooperation with everybody in agricultural science to get the best technology and project its influence in the developing world. The plan calls for "deepening" cooperation with "neighboring countries," Africa, Latin America, and central and eastern Europe--with a focus on the "One Belt One Road" countries--and "strengthening" cooperation with developed countries in North America, Western Europe and Oceania. China hopes to play a more active role through engagement with international organizations, actively participating in setting international rules and standards.

The plan hopes to help agricultural companies “go global,” fostering a set of multinational grain trading, marketing and agricultural enterprise conglomerates that are internationally competitive and well-known brands. Big, well-funded companies will be chosen to act as models for outbound investment, including companies in the Ministry of agriculture's industrialized leading enterprise program (virtually all major agribusiness companies), and enterprises affiliated with the state farm system (like Bright Foods, Beidahuang, and Jiusan). The plan encourages Chinese enterprises to establish agricultural production, processing, storage and transportation bases outside the country’s borders to create global agricultural industry chains. The plan encourages alliances and ventures with international agricultural enterprises to promote "production capacity cooperation" in areas such as agricultural machinery and equipment, pesticides, and fertilizer. Another strategy is to build overseas "agricultural cooperation parks" where conditions are ripe and where they can play a strong demonstration role.

The plan has several measures to boost China's exports of fruit, vegetable products, tea, aquaproducts and products with special features and high value. It encourages multinational agricultural e-commerce and creation of agricultural export exchange platforms. "Green" and organic fruit and vegetable production and export bases will be constructed in border regions.

Authorities also want to get a grip on the flow of agricultural imports. They promise to encourage imports of items that are in short supply in China while using trade remedy and compensation measures to shield domestic industries whose survival is threatened by import competition. The plan calls for "improving" the mix of global suppliers, diversifying sources of imports, and establishing stable suppliers of imports. Officials hope to collect more information, do more analysis of imports, and issue "early warnings." Inspection and quarantine measures will be improved and authorities will crack down on smuggling of agricultural products into China.

China aspires to "bring in" as well as "go out" in agriculture. China will try to attract inbound foreign investment to key areas like livestock, poultry, aquaculture processing, manufacturing agricultural machinery and equipment, and agricultural environmental protection. China plans to establish a complete foreign investment access and security management system, gradually adopting a management model of “before entry, national treatment, clear negative list”. Interestingly, China still hopes to get preferential loans from international financial organizations (e.g. World Bank, Asian Development Bank) despite having massive amounts of capital in its own banks and having started up its own competitor for the World Bank. According to the plan, China also aspires to get grants and aid from foreign governments for its major national agricultural development strategies.

Several articles on the Ministry of Agriculture web site this week indicate that "international cooperation" is the flavor of the month. On November 16, the Chinese Academy of Agricultural Sciences held a meeting to launch a "Global Agricultural Big Data Information Services Alliance". The alliance members are research institutes, universities, and agribusiness enterprises. The main function appears to be to act as a clearinghouse and think tank to collect information on agricultural science and technology around the world that Chinese agribusiness companies can use for their overseas investments and international cooperation projects, with emphasis on the "One Belt, One Road" strategy.

An Overseas Agricultural Research Center will be the "wings" that provide science, technology and information for agricultural companies "going global" to take off. The center says it has developed remote sensing to estimate crop yields in key countries, and issues information through the center's web site, a Wechat public account and publications called “overseas agriculture observer” and “agricultural science and technology cutting edge and policy advice.” It has supplied over 20 advisory reports to the Ministries of Agriculture, Science and Technology, and Finance, and the National Development and Reform Commission.

On November 14, the Tropical Science Institute held a meeting to form networks of scientific experts on tropical agriculture to support Chinese companies sharing technology with "One Belt, One Road" countries. Strategies include setting up agricultural demonstration parks overseas and "external cooperation experimental areas" to disseminate tropical agriculture technology, share personnel and set up industrial incubators. Target countries are in Southeast Asia, Africa, South Asia, and South Sea islands. Crops include rubber, woody oil crops, cassava, sugar, and sisal. The meeting held in Hainan was attended by 14 companies working in Colombia, Philippines, Vietnam, Cambodia, Laos, and Sri Lanka, and 12 research institutes.

The 13th Five-year Plan for China's grain industry calls for fostering "a certain number" of large multinational grain conglomerates. The government will encourage and support grain enterprises to develop diverse forms of multinational businesses engaged in large scale production, marketing and processing of rice, corn, soybean and palm oil in countries along the "One Road, One Belt."

Monday, November 21, 2016

Video Surveillance to Prevent Rural Land Grabs in Beijing

Beijing municipality is taking extreme measures to crack down on illegal conversion of land designated for agriculture, including the installation of video cameras to keep an eye on the land.

According to Beijing Evening News, the Beijing planning and land management commission has announced a multi-channel system for monitoring rural collective land use to prevent illegal construction on land designated for agricultural use. The channels include a telephone hot line, reporting violations to local or higher-level authorities, inspections by land management officials, inspection of satellite imagery, filing petitions, and a network of remote video surveillance. The video system, begun in June this year, reportedly covers 90 percent of Beijing municipality's cultivated land. The system is described as a "watching from heaven, inspections on the ground, online management" clue discovery system.

An explanation of the system posted by the Land Ministry in 2013 said wireless cameras connected to the "Internet of things" will have a surveillance radius of 1.5 km, allowing them to watch 7 square kilometers.
 Video surveillance of agricultural fields in Beijing.

In September 2015, a local land management official was interviewed about the rural land video surveillance system but he didn't provide any concrete details about how it would work. The main questions were about how officials planned to protect the privacy of individuals and what other methods were planned for reporting illegal land use.

Maintaining the agricultural land base at 1.8 billion mu (nearly 300 million acres) is one of the objectives set in China's 13th five-year plan for agriculture and the countryside. Local authorities are required to designated permanent agricultural land that cannot be converted to urban uses or roads. Converting such land is lucrative as cities spill out into the countryside. In Beijing, hundreds of villages are being swallowed by new housing estates, industrial parks, and shopping centers.

Beijing authorities also announced three typical cases of illegal land use to hold up as examples. Below are satellite images of each of the three villages where violations occurred.
The first was in Double Tree village of Chaoyang District where 12.4 mu (about 2 acres) of land was used to build unapproved office buildings and a warehouse. A penalty of 249,055.80 yuan ($40,000) was assessed in January 2016 and has been paid. The image of Double Tree village above shows new housing estates and industrial buildings adjacent to the village houses. A new subway line is under construction about a kilometer to the south. The green space appears to be covered mostly in trees with little or no agricultural fields. There is a livestock farm.
At Goose House Village in Beijing's Daxing District, a Mr. Li constructed an office building and other structures without approval on 9.63 mu (about 1.5 acres) of rented land. Mr. Li was fined 64,000 yuan (over $10,000). The image of Goose House village shows tightly-packed houses, industrial buildings, a steel market, a half-dozen supermarkets, a large parking lot, parks, but no significant farm land is visible.

An illegal building was constructed in Dagantang Village in Tongzhou District, but no details were provided. This village is in a more rural area and appears to be surrounded by farms, but the land appears to be mainly planted in horticultural crops and trees. There is little evidence of grain production around the village--the main purpose of the land protection system is to prevent grain production from falling.

Saturday, November 19, 2016

Grain Stranded in Government Reserves

An economist with China's Development Research Center who spoke at a China Grain and Food Security Summit in Beijing on November 13 observed a link between China's huge grain reserves and excessive imports. The economist, Li Wei, reported that China now has nearly 560 million metric tons (mmt) of grain inventories, which he says is a record-high amount. He thinks less than half of this reserve level--200-250 mmt--would be adequate for China's needs.

Li estimates that China is also importing excess volumes of grain, prompted by China's high grain prices. Noting that China imported 130 mmt of grain during 2015, Li calculates the actual deficit between China's consumption and production of grain is just 30 mmt. Thus, Li concludes that China imported 100 mmt of grain more than it needed last year. The main prescription he offered was the "supply side structural adjustment" policy that will switch area from corn to other crops.

Chinese authorities put a priority on disposing of their record-high grain reserves this year, but little of the grain offered for sale at auctions actually sold. An Economic Observer journalist visited grain exchanges in three provinces to explore why the de-stocking of reserves has been so slow.

Glum officials at the three exchanges told the reporter that the sales volume had been disappointing this year. The exchange in Heilongjiang Province sold a total of 2.21 mmt of grain by September 13, but that was only 10% of the volume they planned to sell. From 2012 to 2015, Heilongjiang had auctioned an average of 6 mmt annually. In Hubei, the exchange sold 2.28 mmt--more grain than was produced in the province last year--but an official described the auction results as disappointing, especially for rice. In Hunan, a leading rice-producing province, tens of millions of tons of grain have been offered, but trade has been negligible. 

An official at the Hunan grain exchange says the peak period for grain auctions was during January 6-8 last year, when over 200,000 metric tons of rice was sold. The official explained that the reason for that auction's popularity was a policy that offered buyers 84 tons of import quota for every 100 tons of rice they bought at the reserve auction. That policy has now been abandoned, the official said. Since then, sales have been slow.

Nationwide, a total of 37,568,750 metric tons of wheat from reserves was offered on exchanges from June through September, but only 108,000 metric tons was sold. Last year at the same time, 1.6% of wheat offered was successfully auctioned.

Officials told Economic Observer that the main obstacle to selling off grain reserves is a cost-plus (顺价销售) policy for pricing that was put in place during 1998 to minimize the government's subsidies for the grain reserve system. The pricing policy requires that prices for sales of grain reserves be set to recover the purchase price of the grain plus interest and storage costs. When market prices fall, the price that recovers the cost of procuring the grain is too high to attract buyers and the grain goes unsold. Hence, during periods of falling prices grain goes into reserves (as the government buys up grain to slow the decline in price) but old grain doesn't come out because no one is interested in paying the high price.

Experts told the Economic Observer reporter there are three structural contradictions that prevent destocking of grain reserves: 

First, the reporter was told that new grain sells faster than old grain. An official from the Hubei grain exchange said that nearly all of the 650,000 metric tons of rice sold this year was produced in 2015. Only 23,400 metric tons from 2014 sold, and "not a single grain" of 2013 rice sold.  National wheat auctions on November 8 offered wheat produced in each year from 2009 to 2015 (except 2011 when the government did not buy wheat). Forty percent of the newest wheat from 2015 sold, but only 5.5% of 2014 wheat sold. None of the 10,000 tons of wheat produced in 2009 and 2010 on offer was sold.

Second, high quality grain sells but common grain doesn't. In Hubei, an official explained that rice from several districts known for high quality rice sold at auctions. Interest in Hunan's rice may have been hurt by widespread cadmium contamination in that province. 

Third, insiders told Economic Observer that sale of central reserves is hamstrung by bureaucratic rules. In contrast, local officials have greater discretion and flexibility on rules governing reserve management which helps them sell off local reserves. A Hubei official told Economic Observer that the provincial government bought up a portion of the 2015 wheat crop that was damaged by wet weather. The province auctioned 150,000 metric tons of this wheat between December and March at a price of about 1.1 yuan per 500g that "kept losses to a minimum." The official told the Economic Observer reporter that, "If this wheat was sold according to the plan of central reserves the losses would have been much greater."

The grain exchange officials gave Economic Observer recommendations for speeding up the de-stocking of grain reserves. They endorsed continuation of the minimum purchase price policy for wheat and rice, but suggested reducing the minimum price when there is downward pressure on market prices. They also recommended eliminating the cost-plus pricing for sales of grain reserves, allowing the sale price for auctions to align with market prices. (They did not give any suggestions on who should cover the losses on grain sold below cost.)

The officials also recommended allowing commercial banks to engage in lending for the purchase of grain for reserves. The officials said that another provincial program to purchase of off-quality wheat this year in Hubei and other provinces was slowed by the lack of financing. The officials say that commercial banks are eager to enter the grain-reserve lending business because risk is low and the interest rate is good, but the Agricultural Development Bank of China is the only lender now authorized for such business. The officials say grain-purchasing would be enlivened by allowing commercial lenders to participate.

Several officials told Economic Observer that more responsibility for managing central grain reserves should be devolved to local authorities who have more flexibility. They suggested that the central government send money to the local government and let them handle the business of buying and selling grain.

Finally, the officials said farmers must be encouraged to plant quality grain that is in line with market demand. In their view, the area planted in high-quality grain has atrophied in recent years because the minimum price purchase policy does not offer incentives to produce such grain. The mismatch between the quality of grain produced and market demand contributed to the "high inventory contradiction."

Tuesday, November 15, 2016

Ag Census Faces Challenges

China will conduct its third agricultural census in January 2017. This may be the largest statistical activity ever and one of the most challenging. The first modern agricultural census was conducted in 1997 and resulted in major revisions of land and livestock statistics. A second census in 2007 received less fanfare. Officials insist it was accurate but there were allegations of shoddy work and village officials filling out questionnaires in their offices with made-up numbers.

The agricultural census is conducted by recruiting thousands of local officials, teachers, and other temporary enumerators who fan out across the countryside to administer six different questionnaires to farmers, companies, village and town officials. Statisticians hope to find out who lives in the countryside, what they do, how much land they have and what they plant on it, what machinery and animals they have on hand, and take an inventory of rural land use and infrastructure. The census will be conducted in early 2017 and will ask about the situation as of December 31, 2016. It will provide the first-ever comprehensive profile of "new-type" commercial farmers and land transfers. The census will provide a snapshot of a fast-changing countryside, and take an inventory of land and livestock that is critical to re-calibrating annual estimates of crop production, meat and dairy output.
Statistics Bureau director guides agricultural census-taker. Source: National Bureau of Statistics.

Last month a meeting to publicize the agricultural census was held in Jilin Province, where Director of the National Bureau of Statistics Ning Jizhe met with enumerators and rural families and stressed that this is a key period in which careful preparations must be made for the census which is only two months away. Reading between the lines in Ning's comments, we can deduce daunting problems that could undermine the census. Below are direct translations of comments made by Ning followed by an interpretation of what he really means, in italics.

"Agricultural census leadership groups and statistical organizations at each level must strengthen their sense of responsibility and urgency, making serious preparations for the work, strictly adhering to the national unified work deployment, unified time preparation, and unified procedures, ensuring that all types of preparation work is done in a timely manner." [what he means: "Look guys, this is an important job. We know agriculture and village roads are not your priority, but will you please take this seriously and not just go through the motions, treating it as just another pesky demand from Beijing? Follow the procedures we give you; don't just do it in a way that's convenient for you and don't make it up as you go along."]

"...completely implement the party’s 18th sixth plenum, rightly unified under Xi jinping’s core party central committee, sticking to a strict governance system, conducting the census according to law." [what he means: "No more 'the hills are high and the emperor is far away.' The Communist Party discipline inspectors are watching you!"]

"Implement the census in the spirit of the 18th Party Congress, motivating personnel and energizing the activity to produce solid work, truthful, reliable statistics, delivering satisfactory questionnaires to the Central Party Committee and State Council." [what he means: "This data is ultimately for your communist party leaders, not for the general public, not for businessmen, market analysts, or even for local officials like you. Nevertheless, we want you to actually do the work and tell us the truth, not just go through the motions or fake the data, because the party leaders need to know what's going on out there."]

"...Do a good job in legal enforcement inspection work, firmly resisting all kinds of intervention in census data." [what he means: "Don't let local officials massage or fake the numbers to show success of programs or to get subsidies. If your county got millions in subsidies for machinery, grain, or animals that don't exist, don't be tempted to inflate the numbers to pretend that they actually do exist."]

"conduct the census using a scientific program, strengthening quality control in the entire work process; expend effort to minimize errors, ensure that truthful, reliable data is collected." [what he means: "Collect the data the way we tell you to do it. If everyone uses their own methods, the data will be meaningless. Measure fields with a tape measure in meters and hectares; don't use a bamboo pole or pace it off to measure the field; don't measure fields on hillsides or river bottoms differently from fields in valleys. Make sure everyone actually turns in their village's forms. Check your work and correct errors when you find them."]

"...make every effort to raise the quality of the census by engaging in on-the-ground data collection." [what he means: "Don't just sit in your office and fill out the forms. Go out to the village and actually interview people, measure fields, make sure things and animals reported on questionnaires actually exist. We know it's time-consuming and troublesome, but we'd like to know what's really going on out there, not just what you think we want to hear."

"Fully ensure expenses can be paid for each kind of census work, especially taking into account local actualities, adopting effective measures, ensuring work subsidies for census personnel and leaders; strictly regulating use of census funds with careful planning and thrift." [what he means: "Do not steal the money we send you to conduct the census. Remember to buy batteries for the electronic gizmos you're using to enter the data. Pay the enumerators; don't use the money for banquets, cars, or trips to Macao.  In some places, the enumerators will work for a few dollars, but in other places they have higher expectations. If you pay people in Shanghai 20 kuai per day to administer census questionnaires, they will probably just sit at home and fill them out at random."]

"Provincial and municipal agricultural census offices must pay close attention and give strong direction." [what he means: "We know you have better things to do in provincial capitals and city offices than count farms. We know you avoid the countryside unless you're sightseeing or visiting granny. But we need you to keep an eye on the county and township officials who are actually collecting the data. They can get up to all kinds of mischief.]

"County and township offices must take responsibility for selecting quality personnel...having capable census enumerators, leaders, strengthening training appropriate to the needs of the census work." [what he means: "Local officials, don't just hire your relatives or illiterate old people to administer questionnaires. Try to find people with some education, like teachers or nurses, who can count and won't blow off the work to focus on their stock-trading or real estate investments. Give them proper training so they know how to fill out the forms and turn on the PDAs."]

"Improve census on-site efficiency. In the countryside today many people, including migrant workers, the elderly and children have a hard time completing the survey. Give preparatory training before officially taking the survey through QQ, microblogs, email and other methods. Let migrant workers fully understand the census period, the contents and requirements, to bear the tasks and responsibilities, related work and support for the broader targets of the census." [what he means: "It's hard to do any kind of survey in the countryside these days because no one is home except old people and kids. A lot of these people don't know how to fill out the questionnaire, so give them some advance warning and instructions. Let people know when the census will be conducted so they can try to be at home. People working away from their village need some encouragement to talk to the enumerators and answer the questions."]

Let's all wish comrade Ning the best and hope we get some accurate statistics on China's rapidly-changing countryside.

Tuesday, November 8, 2016

China MOA S&D Estimates (Nov 2016)

China's Ministry of Agriculture's (MOA) November China Agricultural Supply and Demand Estimates report raised its estimate of the country's 2016/17 corn crop by 1.15 million metric tons (mmt), reflecting a higher yield compared with October's estimate. They attribute the higher yield to a frost that came 5-10 days later than usual in northeastern provinces. Imports for 2016/17 were reduced to 1 mmt this month as MOA determined that the drop in Chinese corn prices had rendered imported corn uncompetitive. Industrial use was increased by 500,000 metric tons due to subsidies for corn processors in northeastern provinces. Loss was increased by 200,000 metric tons as a result of rain and snow in the northeast that degraded quality of some corn.

China corn supply and demand (Ministry of Ag, November 2016)
Item Unit 2015/16 2016/17 Nov. Change from Oct
Planted area 1000 ha 38,117 36,026
Harvested area 1000 ha 38,117 35,990
Yield Kg/ha 5892 5935 +32
Production MMT 224.58 213.6 +1.15
Imports MMT 3.2 1.0 -0.8
Consumption MMT 194.05 210.27 +0.7
--Food MMT 7.65 7.72
--Feed MMT 121.01 133.48
--Industrial use MMT 54.17 57.45 +0.5
--Seed MMT 1.66 1.61
Loss and other MMT 9.56 10.01 +0.2
Exports MMT 0.01 0.5
Surplus MMT 33.72 3.83 -0.35

The MOA has whittled down its estimate of the 2016/17 corn surplus from about 10 mmt in July-August to just 3.8 mmt this month. Production and import estimates have been scaled back, and consumption has been boosted.

There were few changes in MOA's balance sheets for other major commodities. MOA's estimate of soybean imports was raised by 1.8 mmt to 85.31 mmt. That increase is slightly larger than the increase in soybean crushing estimated for 2016/17. MOA explains that increased swine inventories will spur the larger crush due to increased demand for protein meal. However, MOA says slower 2.5-percent growth in soybean imports is due to stricter environmental protection which is causing swine numbers to decline in some southern provinces.

China soybean supply and demand (Ministry of Ag, November 2016)
Item Unit 2015/16 2016/17 Nov. Change from Oct
Planted area 1000 ha 6,590 7156
Harvested area 1000 ha 6,590 7150
Yield Kg/ha 1,762 1748
Production MMT 11.61 12.5
Imports MMT 81.42 85.31 +1.81
Consumption MMT 94.76 99.72 +1.52
--Crushing MMT 81.00 85.50 +1.50
--Food MMT 10.35 11.18
--Seed MMT 0.54 0.56
Loss and other MMT 2.87 2.48 +0.02
Exports MMT 0.11 0.20
Surplus MMT -1.84 -2.11 +0.29

There was only a slight reduction in cotton stocks in the November balance sheet compared with last month. Modest imports, declining production and nearly steady consumption will reduce cotton stocks from 11.1 mmt to 9.27 mmt over the course of 2016/17.

China cotton supply and demand (Ministry of Ag, November 2016)
Item Unit 2015/16 2016/17 Nov. Change from Oct
Begin inventory MMT 12.8 11.11 -0.02
Planted area 1000 ha 33 31
Yield Kg/ha 1,510 1526 -18
Production MMT 4.93 4.73 -0.05
Imports MMT 0.96 0.97
Consumption MMT 7.54 7.52
Exports MMT 0.02 0.02
End Inventory MMT 11.13 9.27 -0.08

China edible oils supply and demand (Ministry of Agriculture, November 2016)
Item Unit 2015/16 2016/17 Nov. Change from Oct
Production MMT 25.03 25.81 +0.48
--Soy oil MMT 14.44 15.17 +0.29
--Rapeseed oil MMT 5.63 5.55 +0.18
--Peanut oil MMT 3.01 3.18 +0.02
Imports MMT 5.58 5.5 +0.10
--Palm oil MMT 3.42 3.2
--Rapeseed oil MMT 0.74 0.75
--Soy oil MMT 0.65 0.58
Consumption MMT 31.17 31.38
--Urban MMT 20.41 20.55
--Rural MMT 10.76 10.83
Exports MMT 0.11 0.13
Surplus MMT -0.66 -0.19 +0.58

China sugar supply and demand (Ministry of Ag, November 2016)
Item Unit 2015/16 2016/17 Nov. Change from Oct
Planted area 1000 ha 1435 1433
--sugar cane 1000 ha 1301 1270
--sugar beets 1000 ha 134 163
Yield MT/ha 54.38 56.25 +1.87
--sugar cane MT/ha 60.75 60
--sugar beets MT/ha 48 52.5 +3.75
Sugar output MMT 8.7 9.9
--sugar cane MMT 7.85 8.85
--sugar beets MMT 0.85 1.05
Imports MMT 3.5 3.5
Consumption MMT 15.2 15.1
Exports MMT 0.16 0.07
Surplus MMT -3.16 -1.77 -1.67

Sunday, November 6, 2016

Stockpiling Forces Wheat Price Increase

Chinese wheat prices rose during October due to an artificial shortage created by a policy that channels large volumes of grain into government warehouses where it remains for years until it becomes rat food.

A local Henan Province wheat trader told Futures Daily that a surge in wheat prices that began in September has market participants puzzled. Normally, the price starts to fall when the government finishes purchasing wheat for reserves on September 30, but this year the price started climbing in October. The price rally has been unexpectedly robust. The rising prices have prompted traders to increase their purchases. Flour mills have shifted from a wait-and-see approach to a more aggressive buying strategy.

Futures Daily reports that a flour mill in Xinxiang of Henan Province posted new purchase prices for wheat from various regions that ranged from 2580 to 2620 yuan/mt. The notice reminded traders to cover trucks with tarpaulins to keep wheat dry since the region has had rain and fog that has raised moisture levels in wheat.

According to, wheat purchase prices rose at rates of 3-to-9 percent during October 2016 in various parts of China's wheat belt. The average price at the end of October was 2553 yuan per metric ton, equal to about $378 per metric ton--more than double the Gulf of Mexico FOB price for U.S. red wheat.

Wet weather and the government's floor price stockpiling program have combined to create a tight supply of milling-quality wheat in the Chinese market. A large portion of the 2016 wheat harvest was degraded in quality by wet weather that caused sprouting and fungus on the grain. Much of it was used by feed mills, and there were programs to buy up the substandard wheat in Anhui and Jiangsu Provinces. The government bought up a large volume of the milling-quality wheat for its reserves to prevent the price from falling below the minimum level set for this year. This left less wheat available for commercial buyers this fall.

China's wheat production is down slightly in 2016--estimated at 128 million metric tons (mmt) versus 2015's record crop of 130 mmt. Purchases of the winter wheat crop harvested in May-June  totaled 78.5 mmt by September 30, up 9.5 mmt from the previous year. Most of the increased buying reflected larger purchases by the government's reserve corporation to maintain the minimum price of wheat. Purchases at the minimum price totaled 28.5 mmt, 22% of the wheat crop but 36% of all wheat purchases.

China wheat production and marketing 2015/16 and 2016/17 (million metric tons)

2015/16 2016/17 Change
Production 130.2 128.0 -2.2
Purchased as of September 30:

--All buyers 69.0 78.5 +9.5
--Government intervention purchases at minimum price 20.8 28.5 +7.7

The government is the leading customer for China's wheat. Only 50 mmt (128 mmt - 78.5 mmt) of wheat was purchased by buyers other than government reserves, and a significant portion of that was purchased by feed mills, leaving less than 40% of the crop available for flour mills.

China's grain reserve corporation--also known as Sinograin--stores the wheat until it can be sold at a higher price. With little wheat available, the market supply relies on auctions of wheat from the government's reserves.

A trader in Shandong Province's Heze district told Futures Daily, "We can't find any bulk wheat supplies in Henan or Shaanxi, and supplies are tight in Shandong and Hebei."

The Chinese government's minimum price program guarantees there will be no decline in China's wheat price. The interest and holding costs of the government reserves are subsidized, so there is no incentive to sell wheat. On October 21, the National Development Reform Commission announced that the minimum price program for wheat will continue for the 2017 crop and the price will be the same as in 2016.

China has eliminated floor price programs for other commodities--except rice.With prices for other crops, like cotton, rapeseed, corn, and soybeans falling, the guaranteed minimum price for wheat is attractive for Chinese farmers. Reportedly, winter wheat planting this fall was stable. Also, spring wheat in northeastern provinces is one of the crops targeted for increases in the structural adjustment program. Thus, another big Chinese wheat crop is assured in 2017/18 even though global supplies are already abundant. Some market commentators worry that China will have a surplus of wheat when the new crop comes on the market next year. Authorities will likely need to purchase large volumes of wheat again next year to maintain the minimum price.

On November 1, authorities offered 2.8 mmt of wheat from reserves for auction, but only 473,000 metric tons sold at prices ranging from 2200 to 2520 yuan per metric ton. Most of the wheat was from 2012, 2013, and 2014, but some was from 2009 and 2010. On November 2, an auction of 48,817 tons of wheat held in reserves since 2010 in Henan Province found no buyers. The Nov. 2 wheat was grade 4 and 5, advertised as surpassing the limit on mycotoxins and 50%-75% poor kernels.

China is able to maintain its policy of ratcheting prices upward because authorities limit wheat imports with a quota system. Since imported wheat at lower prices is not accessible to most flour mills, they are forced to buy old, degraded wheat from reserves at high prices.

Wednesday, November 2, 2016

China Poultry Seeks Rebound

Years of breakneck growth have given way to a four-year funk for China's chicken industry. Industry leaders are looking to jump-start growth by reassuring consumers of product safety and quality, vertically integrating, and developing independent breeding capacity. During the first half of 2016, the major publicly-listed chicken companies all reported big increases in profits, suggesting the industry may be ready to turn the corner.

Like many food industries in China, the chicken industry has been under a cloud of food safety rumors. Last month, a broiler chicken alliance of 36 companies gathered at a publicity meeting to take a pledge to uphold food safety to show the industry's cohesion and restore consumer confidence, according to the alliance's president. Since 2012, the industry has been hit by a series of incidents that sowed fears of chicken. These included the so-called "instant chicken" rumors, human illnesses resulting from H7N9 infections that were believed to be associated with live poultry markets, and the Fuxin company incident.
Broiler chicken industry alliance members recite safety pledge.

The latest campaign emphasizes food safety, animal welfare, environmental protection, and worker rights. Many of the companies are investing in huge industrialized management projects that integrate breeding, incubators, feed mills, farming, slaughter and processing. Bringing all these activities under a single company's control is expected to make products traceable and give consumers confidence in the safety of products. Chicken alliance members pledged to reduce use of antibiotics, eliminate illegal substances and additives, produce to national standards, prevent selling of dead chickens, use environmentally friendly practices, and look out for workers rights.

The president of the alliance fretted that China's poultry industry is still not very strong even though it has become the world's second-largest and has been a leader in introducing industrialized farming and processing to the country. The poultry industry is emerging from a three-year downturn going back to 2013 when companies lost over 100 billion yuan during the H7N9 virus scare, according to the chicken alliance president.

The chicken alliance president emphasized the need to change consumers' mistaken thinking about the poultry industry and to promote consumption. Poultry now accounts for about 20% of China's meat consumption, but that share is still low compared with Europe and the United States. The alliance aims to increase per capita consumption from 7 kg now to 12 kg in five years, and reach the developed-country average in 10-15 years.

Another article last month attributed tepid consumer demand to a slow-down in growth of "foreign fast food" which is the main channel for chicken sales in China. The article also cited the return of rural migrants to their home towns. This leaves cafeterias in schools, factories, and offices as the main drivers of growth. A Ministry of Agriculture projection expects 1.9% annual growth in chicken consumption over the next ten years, a little more than half the growth rate during the last decade.

China's ban on poultry imports from the United States and France has restricted the renewal of grandparent breeding flocks since last year. Commentators view this as having a possible silver lining by cutting back on excess capacity in parent-stock propagation farms and spurring domestic breeding. The global poultry breeding industry is dominated by a handful of companies with a century of experience that makes it hard for China to catch up. Several Chinese companies have made progress in developing their own breeds, and China's poultry genetic improvement plan aims to develop 2-3 globally competitive broiler breeds by 2025.