Friday, April 27, 2018

Rice Province Plans to Reduce Crop

China's biggest rice-producing province has announced plans to cut production of the crop as the country copes with a rice glut. This is a reversal of now-forgotten policies aimed at expanding rice production in the same province six years ago.

According to State media, Hunan Province's communist party leadership announced an objective of reducing Hunan's area planted in rice by 3 million mu--equal to 200,000 hectares--during 2018. The province's "number one document" aims to reduce production of double-cropped rice and shift the land into high value specialty crops.

Hunan authorities plan to choose 10 counties for development of vegetable supply bases and another 10 counties will be targeted for development of specialty fruits and tea. A provincial communist party official explained that Hunan plans to focus on building up seven major agricultural industries by 2020: rapeseed, bamboo, grain processing, livestock and poultry, tea, vegetables, and cotton-flax-silk.

The move is part of a supply-side structural adjustment reform to reduce production of low-quality rice as China grapples with a rice surplus. The provincial communist party official said Hunan must shift its cropping structure away from uniform rice production toward a crop mix with higher quality crops based on regional comparative advantage to follow consumer demand, optimize returns for farmers, and build a Hunan provincial brand.

The cut in rice planting is a reversal of rhetoric sounded by Hunan officials ten years ago when they worried that rice producers were leaving their land idle, switching from two crops of rice per year to one, or converting the land to high-value crops. By 2011, officials had rolled out initiatives to revive production of two crops per year by giving out cash awards, ordering village leaders to prevent idling of land, and intervening to transfer idle land to farmers who would grow rice on it. In 2012, a subsidy program was launched to start specialized early rice seedling farms, rice-transplanting companies, and to mechanize transplanting.

According to Hunan statistics, area double-cropped in rice went up from 2010 to 2014, while single-cropped area fell. These were the years when officials were campaigning to revive production of the early rice crop, which is notorious for poor quality and is grown primarily to meet government production targets. The early crop posted the biggest increase in production: an increase of 92,000 hectares (suggesting numbers may have been padded) during 2010-14. The late rice crop rose 52,000 hectares, approximately equal to the 54,000-hectare decline in land where a single rice crop was planted per year.

Changes in Hunan province rice-planting
Double-cropped rice
Early crop
Late crop
Single-crop rice
1000 hectares
2016 area
Source: Hunan statistical yearbooks.

By 2014, it was evident that the campaign to boost early rice production had resulted in excess supplies of rice. The government was the main customer for the early rice crop, in particular. Officials reversed course, began discouraging early rice production, and cut the support price for the crop. From 2014 to 2016, the early rice crop fell by 32,500 hectares and the late crop fell by 35,200 hectares in Hunan, while planting of single-crop rice rose by 32,200 hectares.

Hunan still plants mostly double-cropped rice. In 2016, the province reported planting over 1.4 million hectares each in early and late rice, and 1.2 million hectares in single-season rice. (No data on 2017 rice production in the largest rice-producing province is available today -- two months after the completion of the rice marketing season -- despite China's enthusiasm for "big data" and "market information.")

Presumably, Hunan's 200,000-hectare reduction will reduce the 2.9-million-ha combined area planted in early and late rice crops. Thus, double-cropped area is presumably targeted for about 1.35 million hectares.

Why are Hunan officials announcing this objective of reducing double-cropped rice production in late April, about two months after farmers typically plant the early rice crop?

If they were wrong about early rice six years ago, why should we expect communist officials to correctly guide farmers this time on what they should plant?

Tuesday, April 17, 2018

Soybean Tariffs to Boost State-Owned Companies?

China's big state-owned soybean importers will not be affected much by proposed 25-percent tariffs on U.S. soybeans, according to a Chinese Business Journal article posted on numerous web sites yesterday.

The article appears to be a propaganda piece portraying the possible tariffs as an opportunity to boost the role of state-owned enterprises in China's soybean industry and freeze out multinational grain traders. The lack of named sources and the journalist's stringing together of propaganda memes suggests the article is propaganda masquerading as news for investors.

The reporter notes that three of the top soybean importers are state-owned companies--COFCO, Beidahuang, and Sinograin.

The China Business Journal reporter, writing under an apparent pseudonym, quotes an unnamed employee of an unnamed state-owned enterprise who said that officials from unnamed "government departments" have been asking Chinese companies about their soybean import volume, how much they import from the United States, and what their plans are for purchasing this year.

"The tariffs will have an extremely small effect on us large companies," the state-owned company employee told the reporter, "Because U.S. soybeans are only one-third of our purchases."

"The effect of the soybean tariffs is not extremely large," the article repeated several times in various forms throughout the article.

According to the reporter, the U.S. futures price dropped 5.25 percent after China's proposed 25-percent tariff on U.S. soybeans was announced. "But our company is not affected much, because we hedged our soybean purchases," the employee explained.

An investment analyst told the reporter that Brazilian soybeans cannot replace U.S. soybeans if China imposes the tariffs. Brazilian soybean prices are rising as the market anticipates a rush of Chinese buyers to South America who will compete for a limited supply of beans. Brazil already exports more than half of its soybeans, and about three-fourths of those exports already go to China.

The article segues to another propaganda talking point: Brazilian and Chinese State-owned companies can link up to trade soybeans directly, bypassing "ABCD" multinational trading companies. The investment analyst says he went to Brazil where he found that Brazilian companies were eager to learn about matters like Chinese customs clearance, inspection and quarantine so they could export soybeans directly to China without selling through an ABCD intermediary.

A representative of a Brazilian state-owned company said he had come to China to make deals with Chinese state-owned companies for direct trade in soybeans.

The Brazilian said, "We have a small order from a Chinese state-owned company to test the water."

The reporter then moves on to the old complaint that imported soybeans are destroying the Chinese soybean processing industry by depressing prices.

The reporter learned from a multinational grain trading company that the market for domestic Chinese soybeans is very limited. In particular, he said there was virtually no market for soybean meal produced from domestic soybeans because the price is too high.

The article gloms on to the "quality" mantra circulated by officials this year to claim that the "low end" oil and meal products from crushing imported soybeans have little momentum from consumer demand as it shifts to high-end products. Premium products of domestic non-GMO soybeans have better prospects, the journalist suggests.

In fact, the opposite is true. Imported soybean volume grows faster than expected year after year. The Chinese government had to step in to buy extra domestic soybeans produced in northeast China this year because there was not enough demand.

Saturday, April 14, 2018

Food Security AND Quality Promised by China Grain Reserve

China's food security strategy will prioritize quality over pure volume of grain, according to the head of the country's new State Administration of Grain and Commodity Reserves. Authorities will vomit their huge store of sub-par grain reserves into the market, induce farmers to grow high-quality grains consumers want, create a network of labs to test the grains, build grain industry parks housing millers and traders who will profit from premium-priced products, and crack down on corrupt operators in the system.

The grain and commodity reserve administration created by China's recent government realignment was inaugurated April 4, 2018. It will be responsible for managing national strategic reserves of grain, cotton and sugar under the direction of the National Development and Reform Commission. The new bureau takes on responsibilities of the former State Administration of Grain, Ministries of Civil Affairs and Commerce, and National Energy Administration.

In a Peoples Daily interview Zhang Wufeng, the reserve bureau's director (previously communist party secretary of the State Administration of Grain that it replaces), gave assurances that the "food bowls of Chinese people must remain tightly in their own hands" but Zhang also prioritized accelerated disposal of excessive inventories of corn, rice and other commodities to reach "rational" levels as soon as possible.

Zhang observed conflicts arising from changes in Chinese society. On the production side, China has surpluses of some commodities (i.e. corn and rice, although he did not mention them) and deficits of others (soybeans, again not mentioned specifically). Zhang observed that Chinese consumers had transitioned from simply getting enough to eat to "eating well, eating healthy, eating with assurance, and eating with convenience," but he fretted that China lacks supplies of environmentally friendly and high quality foods.

Zhang promised to align the grain reserve system with market demand. He also said adjustment of China's crop mix and rotation of crops and land retirement are necessary. The reserve bureau has no responsibility for crop production, but he promised to scientifically set the minimum prices for wheat and rice, coordinate reserve procurement and sales, and pay more attention to the potential consumption (of what they procure?)

A "China quality grain project" (优质粮食工程) kicked off last October (by Zhang) is the grain reserve bureau's contribution to the national rural revitalization strategy, according to Zhang. This project aims to upgrade the quality of China's grain and edible oils by improving post-production services, establishing a national system of third-party grain-testing organizations, and revamping quality control guidelines for grains, flour, noodles, and edible oils by 2020. The Ministry of Finance allocated 5 billion yuan ($790 million) for the project in 2017. By implementing the "China good grain and oil action plan," Zhang promised to complete "the last kilometer" for quality grain and oils to reach the dining tables of each consumer’s family.

Zhang promised to transform China from a "big" grain-producing country to a "strong" grain-producing country by giving top attention to quality and creating value chains based on deriving profits from quality products. Model cities and counties, specialty industry parks, and leading backbone companies will be components of a modernized grain economy. Zhang pledged that food security will be maintained by coordinating "government and market, the current situation and long-term prospects, production regions and consuming regions, domestic and foreign, security and development."

Authorities will continue to intervene in markets through "macro control" using central government reserves as "ballast stones" and local reserves as "the first line of defense." Zhang promises to nurture state-owned enterprises--through mixed ownership--while supporting small and medium enterprises in the grain market. The reserve bureau will speed up development of a national electronic grain exchange platform and brokering grain trade between grain-producing provinces and grain-deficit provinces.

Finally, Zhang sends a message to corrupt granary operators by promising to demand grain "quality" and "honesty" from both government and industry through strict party governance, high standards for cadres, and concentrated action plans featuring "great investigation, quick correction, strict law enforcement" to root out "hidden risks." A hot line has been set up for the public to report malfeasance in the grain marketing and storage system.

Wednesday, April 11, 2018

Spring GMO Seed Crackdown in China

With spring planting approaching, Chinese provinces are cracking down on illegal trading, testing, and planting of genetically modified seeds.

A March notice issued by Heilongjiang authorities warned farmers not to buy illegal GMO seeds sold as "pest-resistant or weed-resistant," offered free testing for seeds they already have, and urged farmers to report any merchants selling illegal GMO seeds.

On March 29, Heilongjiang Province officials promised to go to fields with rapid-testing kits to check for genetically modified corn and soybeans.

On April 9, Shandong, another of the biggest agricultural provinces, announced its campaign to crack down on organizations doing research on GMO crops, trials, production, marketing, processing, and imports of genetically modified material.

The same day, Inner Mongolia officials said they will focus on illegal sale and falsely labeled GMO seeds for corn, rapeseed, soybeans, sunflowers, and potatoes.

China allows research organizations to experiment and conduct trials of genetically modified seeds as long as they are approved and reported to the Ministry of Agriculture and closely controlled and monitored. But no genetically modified grain or oilseed crops have been approved for commercial planting in China.

In February China's Ministry of Agriculture reported that they caught seven companies conducting trials of genetically modified corn that were either unreported or illegal during 2017. Da Bei Nong Ltd. Co (aka DBN) was caught growing 8 kinds of GMO corn in unreported intermediate trials on a test plot in Heilongjiang covering over an acre of land. (In 2016, a DBN executive pleaded guilty to stealing corn seeds from test plots in the United States and sending them back to China in popcorn jars.)  Another Beijing seed company was also caught growing 8 kinds of GMO corn on about 1.8 acres in Heilongjiang. Five other companies and a company associated with Jiangsu's Academy of Agricultural Sciences were caught growing small amounts of GMO corn ranging from 5 to 150 stalks in a seed-breeding area in Hainan Province. All the trials were suspended and material destroyed.

According to one article, the Ministry of Agriculture's report alarmed many Chinese consumers who worried that genetically modified corn is already in the country's food system.

The provincial crackdowns are probably intended to assure consumers that authorities are tightly regulating GMOs, as they have promised to do many times. However, the crackdowns also suggest that there are already significant quantities of illegal GMO seeds sold and planted in China.

Sunday, April 8, 2018

MOFCOM: Peoples Republic of Shoppers

The blizzard of tariffs and trade rhetoric is overshadowing China's "new concept" of opening its economy to give its consumers access to better quality products. China's Commerce Minister Zhong Shan finished off a March 11, 2018 press conference dominated by questions about trade conflicts with a discourse on how MOFCOM plans to push ahead with plans to "give city and rural people more abundant choices, much more convenient services, and a more comfortable experience" by upgrading shopping opportunities for Chinese consumers and giving them access to imported high quality products. 

The initiative to shift China's drivers of growth from investment and exports to consumer demand was introduced by Xi Jinping at the October 2017 "19th Party Congress." The idea has been dressed up with the awkward Maoist slogan "Change in the Main Social Contradictions," and propaganda organs have explained how meeting consumer demands for quality and comfort fit neatly into China's historical progress toward a communist society.

Minister Zhong explained that 400 million of China's 1.4 billion people have entered the "middle class," and the main problem ("contradiction") has shifted to satisfying peoples' desire for a better life [from the 1950s-era problem of developing industry and modernizing agriculture in a "backward" country, according to the Peoples Daily]. Zhong cited the estimated $200-billion of overseas shopping done by Chinese citizens as evidence that China's economy does not supply the high quality products its consumers want. "Foreign purchases reflect the insufficient supply of quality products in the country and their high price," Minister Zhong said.

MOFCOM will work on initiatives to innovate in product marketing and distribution, expand consumption, and increase effective supply in three areas of work.

First, establish domestic platforms for consumption. Pedestrian malls for shopping will be developed to make cities more livable and to serve as a "beautiful calling card" for cities. Community shopping networks of convenience stores, food markets and other outlets should provide a commercial network of daily shopping within 15 minutes of residences. In the countryside, a network of market towns with shops and services will be part of a makeover of the countryside. E-commerce will be greatly developed, with integration of "online" and "offline" commerce.

Second, promote consumption and reduce costs to consumers by broadening access to the market, reducing tariffs on imported cars and some daily consumer products, opening the market to telecommunications, medical, education, elderly care services.

Third, improve consumer confidence in products they buy through rectifications and consolidation of the Internet and rural markets and by establishing a traceability system for agricultural products.

Tariffs announced last week on items such as imported pork, cherries, apples, grapes, plums, cranberries, pistachios, almonds, and macadamia nuts go in the opposite direction by cutting off Chinese consumers from high quality products.

Sunday, April 1, 2018

China's Soybean Retaliation: No Good Options

Official China has been mum on its intent to strike back against U.S. soybeans in the trade war brewing between the two countries. While online commentators in China agree that soybeans are the logical target for retaliatory tariffs, several have concluded that the impact on Chinese buyers and consumers makes this an undesirable option.

Last week, former Minister of Finance Lou Jiwei recommended striking back first at American soybeans, then cars, then aircraft, in remarks at an economic forum in Zhejiang Province last week.

A more developed argument for targeting U.S. soybeans appeared in a March 30 Global Times column by Cheng Guoqiang, Professor at Tongji University in Shanghai and former long-time researcher/advisor on farm trade for the State Council's Development Research Center. Cheng advocates "necessary countermeasures" against U.S. soybeans in accord with WTO rules to "defend China's national interest," "defend the spirit of WTO," and to counter "protectionist" U.S. measures that "show contempt for the multilateral trading system."

Cheng argues that retaliation against soybeans will have the greatest impact since they are the no. 2 U.S. export to China, with 2017 sales valued at $14 billion. Soybeans account for 58% of U.S. agricultural exports to China and 11% of all U.S. exports to China. He points out that U.S. soybean farmers rely heavily on exports, with 44% of production exported and 62% of those exports going to China last year.

Cheng claims that soybeans are politically strategic because production is concentrated in Midwestern States that were critical to President Trump's victory in the 2016 election. Cheng thinks pressure from these agricultural states will bring Trump to the bargaining table.

As the northern hemisphere begins its planting season, Cheng claims that clamping down on U.S. soybeans could encourage farmers in the Black Sea region and other areas to plant more soybeans and reach their "suppressed" potential as soybean suppliers. He suggests that South American producers could also receive a "signal" to produce even more.

Several other essays on the topic appearing last week briefly recounted the same arguments for targeting soybeans and puzzled over why soybeans were not included in the initial list of U.S. products China has targeted for retaliation:
These commentaries drilled deeper into the data about soybean trade and production than Dr. Cheng did, and each arrived at conclusions like "The Intellectual's" statement: "China and American soybeans are inseparable" ["中国离不开美国大豆"].

Each commentator recounts the meteoric growth of China's soybean imports--from 300,000 metric tons in 1995 to 96 million metric tons (mmt) in 2017. Imports grew 14 percent during 2017. China now consumes nearly a third of the world's soybeans and produces only 4 percent. "The Intellectual" commented that, "Soybeans are indispensable to China." Chinese people cannot maintain their much-improved living standards without imported soybeans, he wrote. 

China imports an estimated 85 percent of the soybeans it consumes, according to the "striking back" authors."The Intellectual" explains that the extreme reliance on imports came about due to a strategic choice to focus limited land resources on producing high-yielding cereal grains. Wheat, corn and rice yield 3 times as much grain per acre as soybeans, "so soybeans had to be the victim" as China sought to meet food security targets, "The Intellectual" explained. 

With China's current soybean yield of 1.8 metric tons per hectare, it would need 53 million hectares of farmland to grow the 97 mmt of soybeans the country imported during 2017. China currently plants about 7 million hectares of soybeans and 35 million hectares of corn. China says it has 135 million hectares of cultivated land in total.  

China imports such a large share of the world's soybeans that there would be nowhere else for China to fill its soybean deficit if it stopped buying U.S. soybeans. Last year China's imports equaled 64 percent of the 151 mmt of soybeans traded in world markets. While China is the world's biggest buyer, it has little bargaining power because there are only two major supplying countries. The "striking back" authors reported that Brazil supplied 53 percent of China's soybean imports and the United States supplied 35 percent last year. Argentina is the third supplier with a 7 percent share. "Our country basically has to choose between importing from Brazil and the United States," the "striking back" authors commented. 

There is no other supplier that could fill China's deficit if U.S. soybeans were limited. China's growing demand has already prompted a huge increase in Brazilian production that has reduced reliance on the United States. Blogger Shi Hanbing argues that Brazil already supplies half of China's soybean imports and has reached its limit as a supplier. Moreover, he points to USDA reports that say both Brazil and Argentina are expected to have diminished soybean harvests this year, shrinking potential soybean supplies. 

In view of these facts, all three commentators conclude that the main impact of imposing a steep tariff on U.S. soybeans will be to increase the cost of soybeans to Chinese buyers. The commentators anticipate that the higher cost of soybeans will have a "chain reaction" passing on price increases to meat and vegetable oil in China, causing an increase in the CPI. 

The "striking back" authors recommend that China save retaliation against soybeans as its "ace card." Blogger Shi suggests that the Chinese population eat less meat and switch to eating salads. 

For now, China seems to have little recourse to retaliate against U.S. soybeans without hurting itself, perhaps as much as it hurts U.S. soybean growers. In the long run, this will surely prompt Chinese leaders to double down on their efforts to nurture new soybean suppliers in order to reduce China's reliance on two soybean suppliers. 

Ironically, a similar effort by Japan many years ago helped catalyze the emergence of China's top supplier. After a U.S. export embargo during the 1970s raised questions about its reliability as a supplier, soybean importer Japan looked to diversify its soybean supply by investing in Brazil--a minor soybean producer at the time. A lot of other events, R&D, and policies had to line up to make it happen, and it took decades, but Brazil has now emerged as the top soybean exporter in the 21st century. Brazil's massive supplies also are the chief reason for low soybean prices--the "unfair" phenomenon Chinese soybean commentators normally chatter about and blame on the United States.

Now Chinese government and agribusiness leaders will surely get busy trying to create the next Brazil somewhere in the world.