China: Milk for Well-Off Society

Officials have launched a campaign to promote China's domestic dairy industry as an essential foundation of the country's all-round well-off society. One of five initiatives to revive China's dairy industry, donations of milk to students in poor rural areas were the focus of the kick-off meeting held in Beijing on February 21, 2017.

Vice Minister of Agriculture Yu Kangzhen urged attendees at the meeting to "learn from the guiding spirit" expressed by General Secretary Xi Jinping during his January 24, 2017 inspection of an infant formula factory in Hebei Province. At the inspection, Xi pronounced, "Let the motherland's next generation drink good milk powder; this is of great concern to me."

General Secretary Xi Jinping tours farm supplying milk powder factory



According to the Ministry of Agriculture Press Office, China is in a stage where it is approaching the achievement of an "all-round well-off" (xiaokang) society by 2020, and dairy consumption is one of the important indicators of rising living standards. According to Press Office's account, "A well-off society cannot be without milk, and over a billion Chinese people cannot be without their own dairy industry,"

"Revive the nation's dairy industry; serve the well-off society."

While China's dairy consumption has risen greatly, per capita consumption is still only one-third of the world average and half the Asian average. It was pointed out at the meeting that only 20 million of China's 140 million students in primary and middle school are able to drink milk. The meeting emphasized an initiative to increase school milk donations in poverty-stricken regions.

The campaign will include publicity campaigns to encourage milk consumption. Donated school milk will labeled as part of the "China well-off dairy campaign." Eighteen fluid milk products and three milk powder products valued at 55 million yuan have been chosen for distribution to 110,000 students by various Chinese companies.

This is one of five campaigns to revive the Chinese dairy industry:

1. Pasture and fodder improvement. Expand quality alfalfa production and shift land from producing corn to fodder crops.
2. Raise good cows. Develop healthy farming, including county-wide standardized, scaled-up dairy farm initiatives and efficient, green development.
3. Produce good milk. Upgrade quality and safety systems, develop quality-safety monitoring plans for fresh milk and conduct specialized remediations.
4. Create brands. Form domestic dairy brands and manage the "D20" summit of the top 20 companies.
5. Tell the dairy industry story. Develop the "well-off dairy industry" campaign, revive consumer confidence, promote dairy consumption.

Farm Consolidation Undermined by Falling Grain Prices

As grain prices fall and profits shrink, some of China's new large-scale farmers are walking away from land rental contracts or demanding lower rents.

Corn prices in China were down 20.5% from a year ago in January 2017, according to the latest monthly Situation and Outlook Report from the Ministry of Agriculture. The National Development and Reform Commission has just announced that minimum prices for rice will be reduced in 2017. With shrinking profits and other unanticipated problems, quite a few of China's large-scale tenant farmers are returning their rented farmland to village collectives or asking for lower rents.

An article in the magazine Liaowang (Outlook) describes the situation in several counties of Shandong Province. One farmer in Wucheng County said he lost 16 million yuan growing corn and wheat on 8,749 mu (1,440 acres) of land he rented on a 10-year contract. He gave back the land and will now concentrate on his furniture business in Beijing.

One farmer told Liaowang he refused an offer to rent 800 mu of land from a nearby village because he was certain he would lose money. No one in the village wants to farm, so they are trying to rent out the village's entire allotment of farmland.

A farmer in Shandong's Jining City said he wants to give up farming the large parcel of land he has rented so he can focus on his off-farm job. He's worried neighbors will make fun of him if he leaves the land fallow, so he let other farmers cultivate the land rent-free to avoid embarrassment.

A Wucheng official says his county had six farms of 1000 mu (165 acres) or more in 2015, but only one was left at the end of 2016. The number of farmers with 500-1000 mu fell from 23 to three.

The Liaowang author reports that local officials are worried that rural villagers may become disgruntled if they fail to receive the promised rental proceeds. They also worry that abandonment of land may threaten food security.

"Fight to maintain food grain planting area; prevent large 'landslides,' holding on to food security as the bottom line" was the first directive in the Ministry of Agriculture's instructions for officials on preparation for the 2017 crop-planting season. "Landslides" presumably refers to widespread collapse in grain-planting.

"Villagers feel helpless," according to Liaowang. One villager said the large farmer who rented their land said he would refuse to pay the rent this year if they did not let him out of his contract. "There was nothing we could do," the villager complained.

The farmers had entered into rental contracts several years ago at rents that were based on the high grain prices prevailing at the time. Many farmers interviewed by Liaowang said they had negotiated their rent down by 100-200 yuan/mu because they can't make money if they have to pay high rents.

One leader of a "cooperative" said the land rent went as high as 1200 yuan/mu in 2012 when the corn price was 2.6 yuan/kg. Rents fell to 1000 yuan in 2014 when the corn price fell to 2.2 yuan/kg. Now, with the corn price down to 1.5 yuan/kg, rents are 800 yuan/mu.

The problem is not confined to corn farming. An article on rice farmers says the reduction in rice price just announced seems small, but it could mean large losses for farmers who have 1000 or tens of thousands of mu. On the other hand, small-scale farmers say the price cut will have little impact on their income because they earn most of their money from off-farm jobs. In Jiangxi Province's Gao'an City, farmers say the cut in rice price may reduce their income by 10-20 yuan per mu, but they can easily make that up by working off-farm.

In Hebei Province, one farmer who rented a village's land to raise medicinal crops for herbal medicines disappeared without paying rent. Another farmer discovered that wells and other infrastructure were not adequate to support large-scale farming operations.

In Jilin Province, on the other hand, it is reported that some corn producers are taking advantage of lower rent by expanding the scale of their farms. In this region, land rent peaked at 530 yuan/mu or even 1,000 yuan/mu in 2014, but rent has fallen to 200 yuan/mu this year--about the same as ten years ago. One farmer in Jilin's Gongzhuling City is reportedly expanding his operation from 2,700 hectares last year to 10,000 hectares this year [comment: this seems like an implausibly large farm].

Many villagers are taking their large-farmer tenants to court. An article in 21st Century Business News yesterday reveals that the uptick in farmland transfers has produced a surge of disputes that are being investigated by courts around the country. In many instances, new companies or city-based entrepreneurs found that farming is not as easy or profitable as they thought and defaulted on rental contracts when their farming businesses failed. Belly-up farming schemes include fruit trees, seedlings, plants for herbal medicine, and rural tourism. Minister of Agriculture Han Changfu acknowledged the surge in legal disputes and said more efforts are needed to deal with relations between traditional villagers and new-type farmers, clarify each party's property rights, and effectively avoid and settle land disputes in order to ensure agricultural growth and social stability.

The Liaowang article includes a plea for subsidies to large farmers, including a proposal by local officials for a target price subsidy for grains. The Jilin article praises the province's early efforts to target subsidies to large-scale farmers, including machinery subsidies, loans for maintaining profits from land (土地收益保障贷款), technical services, and subsidies for adoption of no-till farming. The Jilin article did not mention producer subsidies for corn which would bring in a tidy sum of 150,000 yuan ($21,740) for a 1000-mu (165 acre) farm.

Who is entitled to the original grain subsidies introduced in 2004 has become a thorny issue as more land is transferred. In Shandong Province, the "grain" subsidy of 125 yuan/mu is distributed based on area planted in wheat but it has been unclear whether the subsidy goes to the villager who has contract rights to the land or the tiller of the land who rents the operation rights. The Liaowang article reports that one large farmer in Shandong's Linba county is due to pay 900 yuan/mu in rent for his land this year, but his actual cost of land will be reduced this year because he will get the 125-yuan grain subsidy--in the past the subsidy was paid to the villagers with contract rights who rent out the land to him.

The structures built on the land can also be a problem. The farmer who gave up his rented farm in Shandong's Wucheng County gave away the buildings on his land to friends for free.

Once again, Chinese officials are learning that farming is an inherently risky business. Prices do not rise forever. Officials got themselves into a serious mess by trying to build an agricultural pricing system based on an assumption of ever-rising agricultural commodity prices that seized up when global prices started falling several years ago. Now it turns out their plan to pay villagers dividends for "operation rights" to their farmland is based on unrealistic expectations for farming profits. Classical economists explained centuries ago that land rents in farming are determined by farm prices which go up and down. Owners of land--the factor of production with inelastic supply--are always the big winners when farm prices rise and losers when prices fall. Unrealistic expectations for farm profits also exposes a hole in the plan to mortgage operation rights. Bankers will be hesitant to voluntarily make loans securitized by farmland operation rights if the rights are likely to fall in value and have no secondary market.

No chance of privatizing land ownership, though. Minister of Agriculture Han said collective land ownership must remain the foundation of China's countryside.

China Flour Mills Under Pressure

Profit margins for China's flour mills are under pressure from high wheat prices and weak flour prices, according to an analysis last week by Agricultural Futures Net.

The peak season for flour demand around the Chinese new year has now passed, and flour mills have been slow to restart production after the holiday due to slim profits. Some have taken the opportunity to retool machinery.

The cost of raw materials is up. Flour mills are paying an average of 1.33 yuan/500g for wheat, up from 1.19 yuan/500g last year. Wet weather in parts of China's wheat belt last summer have reduced the supply of good quality wheat in China this year.

Flour prices have not risen to match the rise in wheat prices. Salesmen reportedly have not been getting as many orders as they normally do at this time of year. The competition for customers has led to price wars for flour. The average ex-factory price for flour is reported to be 1.7 yuan/500g in Shandong, Hebei, and Henan Provinces, down from 1.8 yuan/500g a year ago.

Mills also rely on sales of wheat bran--the byproduct of flour-milling. Normally, flour and bran prices move in offsetting directions but recently both prices have fallen. About 80% of bran is used for making pig and poultry feed and the rest is used mostly to grow mushrooms. Feed demand is weak due to the campaign to demolish pig farms to comply with directives to create pig-free zones near cities and environmentally vulnerable bodies of water. The wheat bran ex-factory price is .70-.74 yuan/500g.

The Agricultural Futures Net analysis says China's flour milling industry suffers from severe excess capacity and may be facing a shake-out of small mills.  Large companies with financing and technological advantages are expected to survive while smaller mills may shut down.

China Cuts Rice Prices

China's minimum prices for rice for the 2017/18 crop will be reduced, according to a February 17 announcement by the National Development and Reform Commission. The small reductions, however, will do little to close the 27-percent gap between China and international prices reported by the Ministry of Agriculture for January 2017.

The 2017/18 minimum prices will be 130 yuan/50kg for early long grain rice, 136 yuan/50kg for single-season and late-season long-grain, and 150 yuan/50kg for medium grain rice. The government's grain reserve corporation will purchase rice at these minimum prices if the market price falls below the minimum price level. The minimum prices are announced before spring planting, so these will apply to the early long grain crop harvested in July and the fall crops harvested September-October this year.

The early rice price was reduced 3 yuan/50kg from last year, the middle/late long grain price was reduced 2 yuan/50kg, and the medium grain price was cut 5 yuan/50kg. This is the first time all three prices were cut since the program began in 2005 (last year the early rice price was cut slightly). Prices were raised by roughly two-fold from 2008 to 2013 and held steady until 2016.

According to the Ministry of Agriculture's latest situation and outlook report, January average long grain paddy rice prices in China were slightly higher than the minimum prices for next year. Early long grain averaged 131 yuan/50kg and late long grain rice averaged 138yuan/50kg. The medium grain price averaged 148 yuan/50kg, slightly less than next year's minimum of 150 yuan/50kg.

China rice prices
	2017/18	January 2017 averages
Type of rice	minimum announced	Paddy rice	Milled
	Yuan/50kg	Yuan/50kg	Yuan/50kg
Early long grain	130	131	196
Late long grain	138	138	211
Medium grain	149	149	234
Imported rice			154

Average January 2017 prices from Ministry of Agriculture S&O report. 
Imported rice is Thai 25% broken, C&F, with 1% in-quota tariff.

The price of milled rice is about a third higher than these farm gate paddy rice prices. In January, the average price for milled early long grain rice was 196 yuan/50kg, the average for late long grain was 211 yuan/50kg, and the average price for medium grain milled rice was 234 yuan/50kg. The early long grain price was 27 percent higher than the imported rice price and the late long grain price was 37 percent higher than the price of imported rice. (China's rice imports are predominantly long grain.)

The Ministry reported that China's rice imports for calendar year 2016 totaled 3.56 million metric tons, up 5.5 percent from the previous year. Vietnam supplied 45 percent of the imports, Thailand 27%, and Pakistan 20%. In addition to these legal imports, large volumes of rice are smuggled into the country. China's inspection and quarantine authority reported seizing a record 366,000 metric tons of smuggled rice and other grains last year--five times more than the previous year--due to their "national sword" smuggling crackdown.

Chinese authorities tried to engineer a steady rise in rice prices independent of fluctuations in the international market. The steady increase in minimum prices adjusted to a milled-rice equivalent contrasts with gyrations in Thai and Vietnam prices. When Vietnam and Thai prices dipped in 2012 and 2013, respectively, China kept its minimum prices relatively steady. China's imports of rice exploded when the gap in prices grew to 20-30%. The slightly lower minimum prices just announced for this year's crop will still far exceed Vietnam and Thai export prices unless there is a rebound in global prices. China's support price for medium grain rice also exceeds the California medium grain rice export price by a smaller margin.

China support prices converted to milled equivalent by dividing by .66 and converted to US$.
Thai and Vietnam export prices obtained from FAO-GIEWS database.

China support price for medium grain rice converted to milled equivalent by dividing by .66.
Retail price is monthly average reported by China National Bureau of Statistics, converted to US$.
California medium grain export price obtained from FAO-GIEWS database.

China's exports of rice--mainly medium grain--rose 37.6 percent in 2016. However, the export volume of 395,000 metric tons fell far short of imports. Top markets for China's rice exports were South Korea (44 percent), North Korea (11 percent), and Japan (10 percent).

The Ministry of Agriculture's instructions to officials on crop production for 2017 give top priority to keeping the area planted in rice and wheat stable at 800 million mu (53.3 million hectares), with "national food security as the bottom line." The document calls specifically for stabilizing rice area in the northeastern provinces and keeping double-cropped rice area steady in the south. Officials are instructed to implement the minimum price program for rice and wheat, "guide" farmers to make rational decisions on what to plant, and to enforce the new evaluation system for the "governor's grain responsibility system." Another directive to promote "quality rice" describes an initiative to develop early-season rice for processing use (early rice does not taste good and the government has struggled to prevent farmers from abandoning the early rice-planting).

This year officials will begin setting up "functional regions" for rice and other grains. Officials will assemble databases on fields, weather, maps, and set up technical services to concentrate support in the key production regions. Rice blast disease and "two moving rice insects" will be among the problems targeted by disease and pest control technicians. Officials will identify places with suitable conditions for the "high standard field" campaign to upgrade large contiguous areas of rice fields.

There are some environmental concerns related to rice. The MOA guidance calls for "strict control" of well-based irrigation of rice in the northeastern region. It urges officials to "fight" to completely eliminate rice production from the Beijing-Tianjin-Hebei region within three years. The remediation program for rice fields contaminated with heavy metals will continue. A program has identified different soil types used for rice production and identified strategies and pilots for improving soil quality.

High gluten wheat shortfall worsens

China has a serious shortfall of strong-gluten wheat this year, sending prices soaring, according to Grain and Oils News.

China's wheat predominantly has moderate levels of gluten which are suitable for traditional products like steamed bread, but western-style breads require flour with high gluten content. After decades of cajoling farmers to produce more of this type of wheat, it is still in short supply. This year's "central document no. 1" includes a directive to focus on producing high- and low-gluten wheat.

This year the shortfall is worse than normal for two reasons. First, there were widespread quality problems with the 2016 wheat crop due to rains and cloudy weather around harvest time. The weather problems affected the main strong-gluten wheat-producing regions, Henan and Hebei Provinces, Grain and Oils News said. The overall quality of wheat from last year's harvest is low.

A second reason for this year's shortfall is greater demand for high-gluten wheat due to stricter monitoring of flour millers. Authorities are cracking down on the use of a chemical additive that flour mills had used as a dough conditioner to take the place of scarce high-gluten wheat. The additive, azodicarbonamide, has been commonly used by flour mills in China. The country's food additive standard allows azodicarbonamide to be used in flour up to .045 g/kg. Its harmfulness to health is controversial but it has gotten bad publicity around the world and in China. Demand for strong gluten wheat has surged as millers give up use of the additive.

The price of one type of high gluten wheat, Xinmai 26, is up to 1.47 yuan/500g (about $422 per metric ton), according to a mill manager in Henan Province. Yet supplies are still hard to get so the price may be bid up further.

Analysts don't expect the shortage to be alleviated until the new wheat crop is harvested in the summer. So far, conditions for the winter wheat crop are favorable and a good harvest is expected.

Double Down on Corn-Buying Efforts in Jilin Province

Worried about the slow pace of corn purchases, officials in a northeastern China province have ordered local officials and companies to step up corn-buying efforts.

A February 3, 2017 circular issued by the Jilin Provincial government raised concerns that last fall's corn crop is being purchased at a much slower pace than usual. The 15.7 million metric tons of corn purchased as of last month's spring festival was much less than in previous years. Despite great efforts and special measures to ensure that farmers are able to buy this year's corn harvest, the document says there have been declines in price recently, buyers became cautious, and farmers are anxious to sell their corn. There has been a steady increase in unspecified new contradictions, new situations, and pressure on grain marketing.

Each local government and department must pay high attention, clearly recognize the new situation grasp the extreme importance, complexity, and arduousness of grain purchase and sale, and recognize the utmost importance of work on purchase and sale of grain, the document said. The circular calls for adopting "unconventional measures."

The document orders local officials and companies to double down on efforts to buy corn by encouraging diverse players to enter the market to buy grain. Officials must fulfill the obligations demanded by the provincial governor food security responsibility system. They should ensure implementation of subsidies for industrial processors and feed mills to buy corn. They should coordinate transportation of grain by rail and enforce the waivers of highway and bridge tolls for grain. Companies should process more, buy more, and build more storage facilities. COFCO's trading company, China aviation grain reserve company, and provincial grain companies are called upon to exercise their social responsibility to buy grain. The provincial branch of Sinograin is instructed to buy more grain when prices are falling and other companies exit the market, and to make large one-time purchases. Officials are instructed to form partnerships with purchasers and make credit available. Officials should arrange for technicians to advise farmers on preventing quality problems, but they should also encourage companies to loosen up quality requirements to allow farmers to sell corn with excessive levels of mold.

Bank Loans and Bulldozers for Agriculture

China is revving up its build-it-and-they-will come economic growth model to overhaul the countryside. China's Central Document No. 1 lays out an elaborate grand-sounding program for supply side structural reform of the countryside, but it boils down to doling out cash to mop up surplus commodities, bulldozing old stuff, pouring concrete, and creating a "market" for uncompetitive seed and farm equipment companies.

The cash sluice gate was opened by the strategic agreement signed between the Agricultural Development Bank of China and the Ministry of Agriculture in September 2016 which pledged to lend no less than 3 trillion yuan ($450 billion) to support agricultural modernization by 2020.

Created from Agricultural Development Bank annual reports, adbc.com.cn

According to the Ministry of Agriculture, the Bank had approved 24.7 billion yuan ($3.5 billion) in loans by the end of December and loans had been disbursed for projects worth 13.55 billion yuan ($2 billion). The Ministry said most of the loans were made to national-level dragon head enterprises for working capital to ensure they had enough funds to buy up crops from last fall's harvest. Companies got 100 million yuan each. The borrowers were given an extended repayment period to relieve them of financial pressure.

Now that the bank has funded the procurement of the fall grain harvest, it will focus on funding the priorities in this year's "Document No. 1", most of which involve bulldozers, pipes, other construction, and funds for loan guarantee companies. The top priority is food security and improving grain quality, and the featured program is "construction of high standard fields" for grain, cotton, oil seeds, and sugar production. This is basically a construction program covering a large contiguous area that levels fields, builds irrigation networks, access roads, levels fields, and builds sheds for tractors, grain dryers and anything else needed.

An airport road financed by the Agricultural Development Bank.

Most of the other priorities in the Document No. 1 are construction projects: agricultural industrial parks, science parks, service centers for land transfer, wholesale markets and warehouses,  and organic farming projects. Other loans will be for farm machinery and seed companies, databases for new "functional grain production areas," smart farming, drones, etc. Most will be funded by loans from the Agricultural Development Bank of China. Grants from the central government to grain-producing counties and other "awards" will help pay the interest.

The bank is branching out to fund a major push for poverty alleviation which aims to move 10 million people out of poverty this year. The program is a combination of physically moving people out of poor areas and starting up industries in poor regions. The bank is also making loans for clearing out shabby houses and constructing apartments to urbanize the rural population.

Since this is a socialist country where there is no private ownership of land, no one can be expected to make investments in it. Therefore, it becomes the government's responsibility to collect the money and make the investments. In practice, the economy becomes a scramble among officials for the funds, and the winners are those with the best connections and the most red envelopes. When the construction binge results in products unneeded by the market, a second round of cash follows to buy up the unneeded commodities and store them.

China Ag Imports Shrank in 2016

China narrowed its foreign trade deficit in agricultural products during 2016, according to figures reported by its Ministry of Agriculture. Data for January-December 2016 show the value of imports was $111.57 billion, down 4.5 percent from the previous year and the value of exports was $72.99 billion, up 3.3 percent. The deficit of $38.58 billion had narrowed by 16.5%, according to the Ministry of Agriculture's estimates.

China agricultural imports and exports, 2016
	Exports	Imports	Net
Value (Billion US dollars)	72.99	111.57	-38.58
Change from previous year (percent)	3.3	-4.5	-16.5

The volume of soybean, wheat and rice imports for January-December 2016 was up, and the volume of pork imports doubled. Imports of corn, cotton, and sugar fell by about a third. Imports of yarn were also down. Imports of substitutes for corn--barley, sorghum, distillers dried grains, and cassava--all fell dramatically. Beef and milk powder imports rose, but lamb/mutton imports were down slightly. China exported 395,000 metric tons of rice (up 37.5%), 113,000 metric tons of wheat (down 7.4%), and 4,000 metric tons of corn (down 63%). Sunflower oil imports surged by 47% while imports of other vegetable oils shrank by double digits. (Other sources show sunflower oil shipments from Ukraine and Russia account for most of the sunflower oil increase).

China imports of main commodities, 2016
Commodity	Import volume	Change from prev.yr.
	1000 metric tons	Percent
Wheat	3,412	13.5
Corn	3,168	-33.0
Rice	3,562	5.5
Barley	5,005	-53.4
Sorghum	6,648	-37.9
Distillers dried grains	3,067	-55.0
Cassava	7,704	-17.8
Cotton	1,240	-29.5
Yarn (cotton substitute)	1,968	-16.1
Sugar	3,062	-36.8
Soybeans	83,913	2.7
Rapeseed/canola	3,566	-20.2
Other oilseeds	2,050	na
Palm oil	4,478	-24.2
Rapeseed oil	700	-14.1
Sunflower oil	957	47.0
Soybean oil	560	-31.5
Pork	1,620	110.0
Swine offal	1,491	82.5
Beef	580	22.4
Lamb/mutton	220	-1.3
Milk powder	846	15.2

The Ministry gave only a partial accounting of the value of imports and exports by category. Oilseeds and livestock were the two largest agricultural import categories by value, but together they accounted for 54 percent of the total import value. The value of oilseed imports declined, reflecting lower prices. The largest agricultural export item reported was vegetables, but their $14.7 billion value accounted for only 20% of the total agricultural export value. Vegetable export value was up 11%. Fruit was the second-leading export item listed, yet China's fruit imports were also significant. The value of fruit imports was roughly equal to the value of grain imports last year.

China agricultural import and export value, 2016
Category	Imports		Exports
	Billion dollars	Change (%)	Billion dollars	Change (%)
Oilseeds	37.0	-3.5	1.4	-3.0
Vegetables	0.5	2.0	14.7	11.0
Fruit	5.8	-1.0	7.1	3.6
Cereal grains	5.7	-39.2	0.5	13.6
Livestock	23.4	14.5	5.6	-4.2
Edible oils	5.1	-15.5
Cotton	1.8	-34.7
Sugar	1.2	-34.0

China MOA S&D Estimates (Feb 2017)

The Ministry of Agriculture's China Agricultural Supply and Demand Estimates for February 2017 made only slight changes for the 2016/17 market year.

The estimate of China's corn imports for 2016/17 was cut to 800,000 metric tons, down from 1 million metric tons last month. The CASDE has shaved their estimate of corn imports from 2.4 million metric tons estimated in July and August last summer to 1 million metric tons November-January, and now 800,000 metric tons. The report's authors attribute the lower import number to China's corn prices gradually falling in line with international prices after elimination of the temporary reserve policy. CASDE says the price of imported corn with 1% tariff for arrival in southern China was 1700 yuan per metric ton in January 2017, which they say exceeds the cost of domestic corn by 120 yuan. They expect the price of imported corn to be in the 1650-1750 yuan per metric ton range during 2016/17. The average wholesale price in production regions is estimated at 1500-1650 yuan.

Estimated industrial processing of corn for 2016/17 was raised by 500,000 metric tons due to higher rates of production than expected. Total consumption of corn is estimated at 211.22 million metric tons. Production is estimated at 215.33 mmt (lower than the National Bureau of Statistics estimate of 219.55 mmt). CASDE estimates that production of corn will outpace production and inventories will rise by 4.4 million metric tons during 2016/17.

China corn supply and demand (Ministry of Ag, Feb 2017)
Item	Unit	2015/16	2016/17 Jan	2016/17 Feb
Planted area	1000 ha	38,117	36,026	36,026
Harvested area	1000 ha	38,117	36,021	36,021
Yield	Kg/ha	5,892	5,978	5,978
Production	MMT	224.58	215.33	215.33
Imports	MMT	3.2	1.0	0.8
Consumption	MMT	194.09	210.72	211.22
--Food	MMT	7.65	7.82	7.82
--Feed	MMT	121.01	133.53	133.53
--Industrial use	MMT	54.17	57.75	58.25
--Seed	MMT	1.66	1.61	1.61
Loss and other	MMT	9.56	10.01	10.01
Exports	MMT	0.01	0.5	0.5
Surplus	MMT	33.73	5.11	4.41

The soybean yield for 2016/17 was raised by 10 kg to 1758 kg per ha due to good growing conditions in eastern Heilongjiang Province that offset reduced yields due to drought in some other areas. Soybean production was estimated at 12.57 million metric tons for 2016/17. The output of high quality soybeans was lower than expected; more poor quality soybeans were used directly as feed. Imports of soybeans are estimated at 85.5 million metric tons.

China soybean supply and demand (Ministry of Ag, Feb 2017)
Item	Unit	2015/16	2016/17 Jan	2016/17 Feb
Planted area	1000 ha	6,590	7,156	7,156
Harvested area	1000 ha	6,590	7,150	7,150
Yield	Kg/ha	1,762	1,748	1758
Production	MMT	11.61	12.5	12.57
Imports	MMT	83.23	85.31	85.31
Consumption	MMT	96.67	99.77	99.87
--Crushing	MMT	82.89	85.50	85.50
--Food	MMT	10.35	11.18	11.18
--Seed	MMT	0.54	0.61	0.61
Loss and other	MMT	2.89	2.48	2.58
Exports	MMT	0.11	0.20	0.2
Surplus	MMT	-1.96	-2.16	-2.19

Cotton production and import estimates are also unchanged. Cotton production is estimated at 4.72 mmt, a little lower than the National Bureau of Statistics estimate of 5.4 mmt. Imports are estimated to be 900,000 metric tons, slightly more than the tariff rate quota. Cotton consumption was raised to 7.59 mmt due to improved global economic conditions since the third quarter of 2016 that is expected to raise demand for textile exports. The ending cotton inventory will be drawn down by year 2 million metric tons during 2016/17 to 9.13 million metric tons, but still more than year's consumption.

China cotton supply and demand (Ministry of Ag, Feb 2017)
Item	Unit	2015/16	2016/17 Jan	2016/17 Feb
Begin inventory	MMT	12.8	11.11	11.11
Planted area	1000 ha	3,267	3,100	3,100
Yield	Kg/ha	1,510	1,523	1,523
Production	MMT	4.93	4.72	4.72
Imports	MMT	0.96	0.90	0.90
Consumption	MMT	7.56	7.54	7.59
Exports	MMT	0.02	0.01	0.02
End Inventory	MMT	11.11	9.18	9.13

Soybean oil production was raised slightly by 10,000 mt.

China edible oils supply and demand (Min Agriculture, Feb 2017)
Item	Unit	2015/16	2016/17 Jan	2016/17 Feb
Production	MMT	25.3	25.85	25.89
--Soy oil	MMT	14.74	15.16	15.17
--Rapeseed oil	MMT	5.6	5.61	5.61
--Peanut oil	MMT	3.01	3.18	3.18
Imports	MMT	5.81	5.65	5.6
--Palm oil	MMT	3.39	3.3	3.25
--Rapeseed oil	MMT	0.77	0.8	0.75
--Soy oil	MMT	0.59	0.58	0.58
Consumption	MMT	31.17	31.41	31.43
--Urban	MMT	20.41	20.8	21.4
--Rural	MMT	10.76	10.61	10.03
Exports	MMT	0.11	0.13	0.13
Surplus	MMT	-0.17	-0.04	-0.07

China sugar supply and demand (Ministry of Ag, Feb 2017)
Item	Unit	2015/16	2016/17
Planted area	1000 ha	1423	1433
--sugar cane	1000 ha	1295	1270
--sugar beets	1000 ha	128	163
Yield
--sugar cane	MT/ha	60.3	60
--sugar beets	MT/ha	53.85	52.5
Sugar output	MMT	8.7	9.9
--sugar cane	MMT	7.85	8.85
--sugar beets	MMT	0.85	1.05
Imports	MMT	3.73	3.5
Consumption	MMT	15.2	15
Exports	MMT	0.15	0.07
Surplus	MMT	-2.92	-1.67

China's Farm Policy Math

According China's Grain and Oils News, the Heilongjiang Branch of China's Grain Reserve Corporation procured 35 million metric tons of grain in 2016. This branch claims to now have an inventory of 150 million metric tons of grain reserves purchased on the government's behalf.

The Heilongjiang grain reserve company brags that its purchases of grain raised incomes for farmers by 10 billion yuan ($1.45 billion). Wow! However, the company reports that the subsidies distributed to granaries last year to cover the cost of storing the grain was 11.5 billion yuan ($1.67 billion). So...it cost 11.5 billion yuan to raise farmers' income by 10 billion yuan.

This doesn't count the shrinking book value of the grain, nor losses due to spoilage. Market prices for corn in Heilongjiang are now 1300-1400 yuan/mt, much lower than the support price for corn of 2220 yuan/metric ton they would have paid for corn in 2013 and 2014, and about 600-700 yuan less than the 2000 yuan they would have paid in 2015/16. Rice prices have been more or less flat. If they ever sell this grain they will not cover the cost of purchasing it.

Nor do they count the cost of corruption. Last August, 15 officials from Heilongjiang's Sinograin branch were convicted of receiving bribes. According to court documents, the communist party secretary got 1.96 million yuan, US$88,000, and two gold bars. This individual was also in charge of the granary at Lindian in Heilongjiang when it burned down in 2013, one of the biggest scandals ever in China's grain bureaucracy.

China's Grain Supply Side Reform

Chinese President Xi Jinping decreed at last December's "rural work meeting" that "supply side reform" will be the slogan guiding rural policy in 2017. "Supply side reform" is a catch-all for fixing everything: overhauling the countryside by moving rural people into cities and consolidating farms, attacking pockets of rural poverty by moving people out and creating new industries, improving the agricultural product structure and making farming more profitable and competitive using "the two hands of government and the market."

One of the many targets of supply side reform is China's grain industry, which is suffering from one of the biggest mismatches of supply and demand ever created. In an interview with the official Xinhua News Service last month, the deputy director of China's State Administration of Grain pronounced that 2017 will be a key year for reform of the grain industry.

While celebrating the massive 43-percent increase in grain production achieved during 2003-2016, the official fretted over "structural contradictions" that are evident in the grain sector. He said corn and rice are clearly in excess supply, there is a shortage of high- and low-gluten types of wheat, and China has a huge deficit of soybeans. Now China is contending with growing pressure from "high inventories, high imports, and high costs" -- "urgent problems" that have created "huge financial burdens and waste of resources," the official said.

The geographic locus of grain production has shifted from its traditional concentration in the south to areas of northern China where the growing season is shorter and water supplies are limited. The geographic separation of grain production from final demand means that more grain needs to be stored and transported, but the official complained that China's grain distribution costs are twice as high as those in developed countries.

Disposing of corn reserves will be the top line priority for China's grain industry in 2017 (as it was last year). Specific measures include expanding fuel ethanol production, exploring other measures to use up corn, and more support for corn processors. The official promises to "coordinate departments to encourage more exports of processed grain products," "get a grip on imports," and crack down on smuggling of grain. Grain departments in coastal provinces will "guide" local companies to purchase more grain from grain-producing provinces. China hopes to speed up sales of grain from reserves through auctions, encourage a wider variety of companies to purchase grain, and encourage farmers and companies to store more grain. The surplus of grain notwithstanding, grain-producing areas will increase their grain production capacity.

The grain official pointed out that China has added much infrastructure for grain distribution and storage but the mechanisms for allocating resources are not effective. While China insulated itself from fluctuations in the global market, its price-formation mechanism needs improvement, resource allocation is distorted, and the grain industry is plagued by "high inventories, high imports, and high costs," the official said.

The grain industry plans to become more competitive by "deepening" reform of state-owned industry and consolidating grain companies. The official does not explain how competitiveness will be improved by combining small inefficient provincial grain companies to make bigger ones. A "mixed" ownership plan aims to attract private investors to put money into state-owned companies whose main advantages are their size and their pipeline to loans from state-owned banks.

The official promises China will build on the elimination of the floor price program for corn by investigating unspecified "improvements" in the minimum price programs for wheat and rice. The comments seem to endorse moving from a price system that rewards pure volume of production to one that gives farmers incentive to produce the high quality grain that is now demanded in China. The official calls for a marketing system that satisfies demands for safe food: stronger safety and quality assurance that prevents problems of excessive pesticide residues, heavy metal contamination, and spoilage.

A December article in China's Business Reference News probed more deeply into the grain policy angle of supply side reform. The minimum price policies for wheat and rice are expected to continue, but the "tough battle" will be for corn and soybeans. Disposing of corn inventories--reserves equal a year's supply according to Business Reference News--will be one of the toughest parts of supply side reform, the article speculates.

According to the National Development and Reform Commission, the new policy is to allow market forces to set the price for corn while giving subsidy payments to producers in the key corn-producing regions. Business Reference News reveals that the path forward for soybean policy, however, is not settled. The third year of the trial "target price" subsidy for soybeans is being completed in 2016/17, and there is disagreement about the policy's effectiveness. Some observers deem the target price pilot to have failed because soybeans are still not as profitable as corn. Others say it's still too early to tell. An official with a soybean industry association in the northeastern provinces endorses the target price as a "non-distorting" policy that he asserts is in the WTO's "green box". He urges government officials to consider keeping the program, especially since there is nothing else to replace it.

The Minister of Agriculture urged local agricultural officials to push structural adjustment of crop-planting in a February 4 meeting kicking off preparations for spring planting. He told local officials to "fight" for a 10-million-mu (667,000 ha) reduction in corn area planted this year--about 1.8 percent of the area planted last year. The Minister encouraged more planting  of soybeans and fodder crops, including corn for silage to support cattle and sheep production. Combining livestock and feed production is a major thrust of this year's work.