Wednesday, March 28, 2018

China Subsidizes Buyers and Producers of Corn and Soybeans

Two of China's top grain-producing provinces announced subsidies for buyers of corn and soybeans layered on top of generous subsidies for growers. For some corn, it is possible that three different subsidies could amount to 38 percent of the farm price, and subsidies could add up to nearly half of the purchase price for soybeans.

On March 23, Heilongjiang and Jilin Provinces announced a subsidy for processing plants and feed mills that buy corn and soybeans harvested in the provinces during 2017. The subsidy for corn purchases is 100 yuan per metric ton purchased in Jilin Province and 150 yuan in Heilongjiang. The subsidy for soybeans purchased is a whopping 300 yuan/mt in both provinces.

The corn purchase subsidy is aimed at industrial processors that make starch and alcohol products from corn with at least 100,000 mt of annual capacity and feed mills with at least 50,000 mt of capacity. The soybean subsidy is aimed at companies that make food products from soybeans, such as tofu, soy flour, soy milk, dried tofu, pickled tofu, fermented bean curd, dried bean curd, extruded soy products, fermented soy products, soy-based protein supplements, bean products processing and 13 or more soybean food products like bean sprouts, bean paste, with capacity of 5000 mt or more.

The average purchase price of corn in Heilongjiang is about 1725 yuan/mt, so the 150-yuan corn purchase subsidy equals 8.7% of the purchase price in that province.

The average purchase price of soybeans is 4140 yuan/mt, so the 300-yuan purchase subsidy equals 7.2 percent of the price.

Farmers in Heilongjiang also get producer subsidies of 133.46 yuan per mu for growing corn and 173 yuan/mt for growing soybeans. The payments are awarded based on the actual area planted in these crops (15 mu = 1 hectare of land). Jilin Province also gives these subsidies, but the Jilin Government has not announced the amount.

Let's convert the Heilongjiang producer subsidy payments to yuan/mt. Assuming a corn yield of 400 kg/mu (6000kg/ha), the corn subsidy equals 333.65 yuan/metric ton. That's equal to 19.3 percent of the 1725-yuan/mt purchase price. Assuming a soybean yield of 140 kg/mu (2100kg/ha), the soybean producer subsidy equals 1235.7 yuan/metric ton, which is equal to 29.8 percent of the 4140-yuan/mt purchase price.

We're still not finished. China has a nationwide "support and protection subsidy" for all farmers who plant grain crops. This subsidy consolidates the previous "three subsidies" (direct payment, improved seed subsidy, and general input subsidy). Land planted in corn and soybeans or any other grain crop is eligible for this subsidy. According to government publicity, farmers get a subsidy based on their land holding unless they plant non-grain crops, leave land idle for multiple years, or build structures on the land. "New-type farmers" who rent-in land are eligible to receive the subsidy if they have an agreement specifying whether lessor or lessee receives the subsidy payment.

In theory, the "support and protection" subsidy is supposed to fund land fertility improvements, but an announcement of the subsidy in Heilongjiang makes no mention of this, nor does it mention any conditions for receiving the funds. The announcement proclaims, "If you register your land, then you can get the subsidy!" The announcement also emphasizes that this is separate from (i.e., in addition to) the corn and soybean producer subsidies. Thus, in Heilongjiang a farmer who plants corn on his land should get the support and protection subsidy and the producer subsidy for corn. Same for those who plant soybeans.

In Heilongjiang, the support and protection subsidy is 71.78 yuan/mu this year (Again, Jilin has not announced its subsidy). If corn is planted on the land and the yield is 400 kg/mu, the support and protection subsidy equals 10.4 percent of the current corn price in Heilongjiang. If the land is planted in soybeans, the support and protection subsidy equals 12.4 percent of the current soybean price.

2017/18 Subsidies in Heilongjiang Province
Corn (assume yield 400 kg/mu):
  Processor purchase subsidy 150 yuan/tonne 8.70%
  Corn producer subsidy 133.46 yuan/mu 19.30%
  Support and protection subsidy 71.78 yuan/mu 10.40%
Potential total corn subsidy 38.40%
Soybeans (assume yield 140 kg/mu)
  Processor purchase subsidy 300 yuan/tonne 7.20%
  Soybean producer subsidy 173 yuan/mu 29.80%
  Support and protection subsidy 71.78 yuan/mu 12.40%
Potential soybean subsidy 49.40%
note: 15 mu = 1 hectare of land. Processor subsidy available only for corn and soybeans purchased March 23 - April 2018, 2018.

The window for the processor subsidies is relatively short--only corn and soybeans purchased between March 23 and April 30 will be eligible. This subsidy appears to be intended to ensure that leftover corn and soybeans at the end of the marketing season gets purchased before authorities begin auctioning off corn reserves in May--which is expected to push prices downward.

In total, the Heilongjiang government could pay out three subsidies equal to 38 percent of the value of corn and over 49 percent of the value of soybeans for the relatively small volume that receives all three subsidies. It would appear that all corn produced in Heilongjiang should at least be eligible for the producer subsidy and the support and protection subsidy--a total of 29.7 percent of the purchase price. Similarly, all soybeans in Heilongjiang should be eligible for these two subsidies--equal to 42.2 percent of the purchase price.

Farmers nationwide get the support and protection subsidy. But the three northeastern provinces (Heilongjiang, Jilin, and Liaoning) and Inner Mongolia are the only regions that have the producer subsidies for corn and soybeans. So far only Heilongjiang and Jilin have the corn and soybean processor subsidies. Thus, northeastern farmers are the most heavily subsidized farmers in China.

Wednesday, March 21, 2018

China Views on Dumping and Farm Subsidies

Two recent Chinese commentaries reveal commonly-held beliefs about American farm subsidies that are behind Chinese antidumping and countervailing duty investigations of U.S. farm products like chicken, distillers grains, sorghum, and maybe soybeans.

A March 7 article, "Influence of U.S. agricultural subsidies on world agricultural trade" from the State-supported Futures Daily was posted on the Ministry of Commerce's WTO information web site and a number of other Chinese sites. The unidentified author asserted that imports of sorghum from the U.S. "receive subsidies from the U.S. government," which allow them to be exported to China at a price lower than the "normal value," and "there is a significant degree of dumping." The implicit assumption is that the Chinese price is the "normal" value, and any price lower than the Chinese price must be abnormal--the "middle kingdom" is the center of the world, after all.

A March 20 article by a commentator with the nationalist Global Times, "Subsidized American Soybean Exports Seriously Pressure China's Soybean Farmers," says "everyone knows" China must impose strong limits on imports of soybeans from countries that give huge subsidies that create an "unfair advantage." This author recites statistics to show that America dominates the world soybean market, has been increasing soybean production, and is responsible for excess supply in the world.

These claims of U.S. dominance contrast with recent American news media reports fretting about loss of soybean market share to Brazil and China's purported preference for Brazilian soybeans.

The sorghum commentator asserts that the U.S. government boosts farm exports using export credit guarantees, "export expansion plans," and "huge subsidies" for fuel, fertilizer and pesticides. The soybean commentary acknowledges that the U.S. government says its subsidies are a small proportion of farmers' income and comply with WTO rules, but he dismisses these claims and accuses the United States of "sabotaging WTO rules."

A logical fallacy common to Chinese findings of "dumping" is to assert that a correlation of two data items proves that one causes the other. The sorghum author explained that "the price continued to decline as large volumes of U.S. sorghum entered the China market." The Ministry of Commerce's announcement of the sorghum investigation correlated declining Chinese sorghum prices with high imports of U.S. sorghum.

A Ministry of Agriculture report on the 2016/17 sorghum market, however, attributed the decline in Chinese sorghum prices to declining Chinese corn prices. This report observed that Chinese farmers planted 32 percent more sorghum in Heilongjiang Province, 15 percent more in Jilin Province, and 22 percent more in Liaoning Province during 2016 compared to the previous year--at the same time the Ministry of Commerce claimed imports of sorghum were depressing profits for Chinese sorghum farmers.

The soybean commentator asserts that imports of U.S. soybeans caused a decline in Chinese soybean production. In fact, the decline in Chinese soybean production was due to Chinese farmers' corn-planting mania generated by a high corn price guaranteed by the Chinese government that made corn much more profitable than soybeans. While the soybean commentator celebrates the long history of soybean-planting in China, under communist authorities soybeans have always been a minor crop because plans and policies favored grains that have higher yields per hectare.

Thirty-eight years ago, a USDA report on China's agricultural market situation commented: "China will again attempt to expand soybean production in 1980, although past efforts have had little success." Stagnant soybean production in China is nothing new.

The sorghum author asserts that the United States became the leading agricultural exporter using a "low price plus high subsidy" strategy. To prove this, the Chinese writer cites USDA estimates of farm production costs and returns for 1975 to 2014 for six major commodities which show that costs exceeded revenues in most years. Although "farmers couldn't make money from the market, they were able to maintain their income by receiving subsidies from the government," the Chinese author concluded.

It's true that farmers in the United States make money in some years and lose money in other years, but the losses are not as pervasive, nor as big as the Chinese author concludes from scanning the USDA estimates. He does not understand that the USDA's cost estimates include a large proportion of imputed "opportunity costs"--the market value of family labor and land owned by the farm family. Cash expenses for many farms are less than the full "economic costs" in the USDA accounts.

USDA estimates of cash income for the farm sector as a whole show that government payments equal about 2-to-3 percent of gross income for farms. The net cash income for U.S. farmers peaked at $135 billion in 2012 and 2013 and is forecast to be just $92 billion in 2018. Direct payments from the government did not make up for the decline in income--in fact, payments from the government fell from $11 in 2013 to an expected $9.2 billion in 2018.
 Source: data from

Most U.S. farmers and their spouses work at off-farm jobs to make ends meet and to get health insurance coverage. USDA estimates show that farming families receive about 80 percent of their income from nonfarm sources. Moreover, Chinese critics do not understand that American farmers are business-men and -women who invest and borrow hundreds of thousands or millions of dollars and spend years buying and renting land to build up a viable farming operation.

Chinese critics also implicitly presume that countries should be self-sufficient. The sorghum essayist notes that "commodity surpluses are the main feature of U.S. agriculture, so the industry is extremely reliant on exporting." The soybean commentator criticizes the United States for producing more soybeans than are needed by the U.S. market, creating "surpluses" in the world market. Why wouldn't a country with a large endowment of highly productive farmland export commodities to densely populated countries?

Chinese critics overstate the dominance of U.S. commodities. High world prices during 2007-08 and 2011-12 encouraged farmers all over the world to produce more cotton (India), corn (Ukraine), and soybeans (Brazil). Brazil's expansion of soybean production--mostly to sell to China--is the dominant source of recent growth in soybean supplies. Brazil accounted for nearly half of China's soybean imports last year.

A few Chinese writers understand U.S. farm programs better than most Americans. In a November 2017 Farmers Daily essay, Ke Bingsheng, an agricultural economist and president of China Agriculture University, explained that U.S. farm subsidies are constantly evolving and being revised. Prof. Ke explained that the 2014 Farm Bill had hundreds of pages and is incomprehensible even to those who understand all the English words. He warned readers that they could arrive at erroneous interpretations if they don't understand the historical background of U.S. policies.

Prof. Ke recalls lessons he learned about American farm policy from conversation with USDA officials during a trip to the United States. More open discussion and interaction like Prof. Ke has engaged in would help dispel mistaken presumptions that result in both sides talking past each other on these issues.

Tuesday, March 13, 2018

Can Africa Get Chinese Guidance on Agricultural Development?

At a March 7 press conference two African journalists asked China's Minister of Agriculture what Africa can learn from China about agricultural development.

The Minister assured the journalists that China is a good friend to Africa and hopes for even more cooperation in agriculture. His answer focused on China's technical aid to Africa: opening rice-growing demonstration centers in Africa, sending numerous technicians to Africa, and training thousands of African technicians and officials in China. He celebrated China's success in addressing its food security problems and noted that Africa still has a food security problem.

China's Ag Minister said he was eager to share China's rural development experience, but he was vague and equivocal on exactly what advice or guidance China could give to African countries. His response boiled down to an admission that China has no transferable formula for agricultural development. China's experience is peculiar to its own circumstances.

If they were listening to the rest of the press conference, the African journalists might have deduced that China's approach to agricultural development has resulted in huge, festering problems that the leadership is now trying to correct: high production costs, low productivity, backward technology, environmental devastation, a food safety crisis, and "hollow villages" composed of empty houses.

The main focus of the Minister's press conference last week was a giant "rural revitalization" experiment aimed at dealing with the above problems and stimulating growth in agriculture, the one sector of China's economy that is lagging behind and stagnant--the so-called "short board"--starved of investment for decades. 

The Minister did not mention the slogan "cities like Europe, countryside like Africa" that many Chinese people have used to describe the neglected countryside. Turning dilapidated, trash-strewn villages into a "beautiful countryside" is now one of the pillars of China's rural revitalization.

The African guests could learn from what the Minister didn't say.

The Minister did not mention that China's experience shows that technology is less important in developing a strong agricultural sector than are institutions such as land ownership, administrative structures, laws clarifying and protecting property rights, controls on marketing and prices, and the incentives they create.

Beginning in the 1950s, China's farm output stagnated or declined every time leaders tried to force peasants into farming collectives. Agriculture revived every time officials tolerated private plots, individual livestock-raising, and free markets. China's agricultural output finally took off after 1978 when land was contracted out to individual families.

China's Minister of Agriculture did not mention that Chinese agricultural output likewise suffered each time Chinese leaders tried to monopolize purchases of grain, shut down free markets, and set low prices to extract funds from farmers. China's farm production only began to show sustained growth when free markets were reintroduced for good and prices were liberalized. Chinese communists have embraced the doctrine of the market playing a decisive role in resource allocation in their agricultural strategy.

A major subject of the Minister's press conference last week was discussion of how to dispose of a huge glut of grain created by another attempt at government price-setting. This took the form of minimum prices and "temporary reserves" that pushed Chinese grain, cotton, and soybean prices out of kilter with world prices during the most recent decade and resulted in huge expense, wasteful accumulation of massive grain reserves and record imports of grain.

The Minister dismissed an African reporter's query about reports of "plastic rice" (bits of pvc plastic mixed with rice) and how the safety of rice exports to Africa can be assured. China's search for a means of guaranteeing food safety and upgrading the poor quality of its food is another preoccupation of the current "rural revitalization" initiative. For decades, China's rural system rewarded only increases in physical output and numerical targets, which induced farmers to maximize output without regard to quality. Cleaning up poisonous "cadmium rice" was one of the projects mentioned in the press conference.

Neither did the Minister discuss the devastating impacts of subsidizing chemical fertilizer, plastic sheeting, pumping water from underground aquifers at minimal cost, indiscriminate use of pesticides and animal antibiotics, neglecting soil fertility and ignoring disposal of animal manure and other wastes. "Green" development is another core idea of China's rural revitalization to reverse the dire consequences of vague property rights that allow producers to ignore the costs their production imposes on other members of society and future generations.

Monday, March 12, 2018

China's Corn Market Tight?

At a March 7 press conference, China's Minister of Agriculture warned farmers not to "blindly" expand planting of corn this spring, pointing out that government reserves are still high and international prices are still relatively low. Other analysts attribute a suddenly-tight corn market to rapid disposal of corn stockpiles.

Minister Han Changfu advised listeners that China's strategy in agriculture is to let the market have a decisive role in resource allocation. He then ordered farmers not to respond to recent increases in market prices that are prompting them to expand corn planting this spring. Minister Han warned that an expansion of corn-planting--especially in regions that don't have a comparative advantage in growing corn--would reverse the Ministry's "supply side structural adjustment" designed to reduce excess corn production capacity. Minister Han urged farmers to continue the structural adjustment by planting crops that are "demanded by the market."

The Ministry's March China Agricultural Supply and Demand Estimates reported that the price for corn has been rising as supplies of new corn get tight. The March report increased its estimate of 2017/18 corn consumption by 1.5 million metric tons to 224 mmt to reflect the tighter market conditions. This reflected an increase in industrial use of corn to 64.8 mmt. Industrial processors are restarting production after the Lantern Festival holiday and adding to inventories, the MOA report said. Auctions of government corn reserves are due to resume--perhaps later this month--which MOA says will relieve upward pressure on prices.

The MOA report shows a -6.72 mmt deficit between supply and demand for 2017/18. However, MOA warns that the corn market still faces pressure from high inventories which will prevent prices from rising too much. MOA expects the wholesale price of corn in production regions to remain in the 1600-1700 yuan/mt range.

An analysis by futures market analysts says China's corn market has already shifted from surplus to shortage and estimates a supply-demand deficit of -48 mmt for 2017/18. These analysts think China's corn stockpile could be cut nearly in half from its 2016 peak after a further 60-mmt sales of corn reserves this year.

Their estimates are based on corn auction results: 57 mmt auctioned during 2016/17 less 21-mmt new corn procured for reserves equals a net decline of 36 mmt. However, they think 20-mmt of this injection of corn was carried over into 2017/18 as commercial inventories. That means they think the supply-demand deficit for 2016/17 was -16 mmt.

These analysts see a much bigger S&D deficit for 2017/18 of -48 mmt which they attribute to: a decline in production, a decline in imports of sorghum imports, and an increase in industrial use. It's not clear how they got this number. 

The analysts estimate that lower corn prices have increased capacity utilization of corn processors by 10-15 percentage points. Moreover, they estimate that 6.8 mmt of new processing capacity was brought on line during 2017, and 12 mmt more is planned for 2018. China's National Grain and Oils Center is more bullish than MOA on industrial use of corn, estimating a 14-mmt increase to 68 mmt in 2016/17 and a further 10-mmt increase in 2017/18 to 78 mmt.

These analysts estimate that imports of corn, sorghum, barley, DDGS, and cassava replaced 16.5 mmt of corn during 2016/17, 5 mmt less than the previous year. They think the antidumping investigation will further reduce imports of U.S. sorghum this year by 2.5 mmt.

Tuesday, March 6, 2018

In China, "Democratic life" = President-for-life

Illustrating the country's slide into Orwellian totalitarianism, China's communist party has been holding "democratic life meetings" that are the antithesis of democracy: attendees pledge loyalty to the undisputed leadership of Xi Jinping and repent of any ideological deviation from Xi's thoughts.

A central "democratic life meeting" for the Politburo was held by Comrade Xi on December 25-26, 2017 to study "Xi Jinping's Thought for Socialism With Chinese Characteristics in a New Era." The Politburo pledged to preserve the centralized authority of Comrade Xi Jinping as core leader of the central communist party committee and to fully implement each item decided by the 19th party congress.

The December meeting is a model for lower levels of the communist party. On February 2 the communist party organization of China's Ministry of Agriculture held a "democratic life meeting" chaired by the Minister of Agriculture and Party Secretary Han Changfu where attendees made the same pledge of fealty to Comrade Xi's centralized authority and to study and implement his thoughts. The "democratic life" meetings demand unity of thought, constant display of party loyalty, honesty, and clear direction. At the Ministry of Agriculture meeting, party members resolved to rely on Xi's thought to direct work on rural affairs and agriculture.

The "democratic" meetings also serve as a means of ensuring complete devotion and ideological purity. In an echo of China's "cultural revolution" era, the Ministry's meeting demanded that attendees seed out problems, engage in self criticism, and criticize each other. Officials were ordered to dig deep to examine ideological roots, criticize others to really help them, "don't hide or avoid," and reach unity through criticism.

According to a Chinese-language Wikipedia page, the "democratic life meetings" are internal meetings for dialogue and self-criticism that date back to at least 1990. Xi Jinping revived the meetings in 2013 as part of his anticorruption campaign.

Now, it seems, "democracy" means pledging complete loyalty to a "President-for-life" and helping comrades root out any doubts they may have about totalitarian rule and a personality cult.