Audit of China Grain Reserve to Uncover Hidden Dangers

How much grain does China's government have in its bloated reserves? Have local officials duped top leaders by inflating the numbers? Is the grain too rotten to be eaten? It will take more than a year for Chinese officials to get the answers through a massive audit of the sprawling grain reserve system. If it turns out that China doesn't have as much grain as officials thought, there is no promise that the audit results will be revealed to common Chinese citizens or to market analysts.

On July 13 China's State Council ordered a complete check-up of national and local grain reserves to find out the actual quantity, quality, and location of the grain. The program will be conducted in a series of steps that will take 15 months to complete by the end of September 2019.

On July 26, Xinhua News Service said the grain inventory check-up is urgently needed following the accumulation of grain from price support programs in recent years, “difficulties of managing the reserves,” and "hidden dangers" to food security. Xinhua formulate plans to dispose of excess stockpiles, formulate targeted policies and assign responsibilities to central and local governments, warehouses, and grain enterprises.

Some of the specific concerns can be inferred from the State Council document:

• Statistics on grain purchases and reserves reported to higher-level authorities have been inflated
• Warehouses receive subsidy payments and loans for holding grain that they don't actually have
• Grain was not deducted from reported holdings after being sold or transferred to another province
• An unknown proportion of grain held in inventory is inedible or even toxic--i.e., is a food security hazard

The main part of the program will be an audit of "policy-type" grain reserves held by various companies and a check of commercial grain inventories held by grain reserve companies (presumably branches of Sinograin, the government's grain reserve corporation). "Policy-type grain" includes:

• central reserves
• minimum price purchase reserves 
• national temporary reserves
• national one-time reserve purchases 
• local reserves

Inspection teams will be formed to check inventories of all warehouses controlled by Sinograin, other enterprises, and warehouses hired to hold reserves. The audit will check physical quantities held against what is on the books.

The grain reserve audit will begin with a pilot conducted in 2 pilot counties each in 10 provinces from October to January. Most of the national audit work will be conducted in March-May 2019 through filing of reports and onsite inspections, with final results reported to the State Council by September 2019.

Previous grain reserve checks were conducted in 2001 and 2009, Xinhua said. The results of previous grain reserve investigations have never been revealed to the public. The results of this one will be reported to the State Council, but there is no mention of reporting the results to the Chinese public to assure them that their food supply is secure.

China's Poor Quality Wheat Must be Purchased

Local officials have been ordered to buy up large volumes of Chinese substandard wheat harvested this summer. A July 20 document on wheat procurement work in "disaster areas" said large volumes of wheat produced this year do not meet national standards due to lodging, germination, sprouting, and mold caused by heavy winds and rain at harvest time in regions of the middle and lower Yangtze River valley and the Huang-Huai region.

The document issued by the National Development and Reform Commission and eight other government organizations and companies orders local governments, grain depots, mills, and banks to buy up the substandard wheat and finance purchases to ensure that farmers are able to sell their off-grade wheat. Insurance companies are ordered to pay out contractually obligated indemnities to farmers and inspections of insurance companies are to be conducted. Agricultural Development Bank managers are ordered to simplify and speed up approvals for loans. Officials are warned to have a sense of responsibility and urgency and to prioritize wheat-buying as a political task in order to preserve social stability. The document says farmers are very concerned.

The National Bureau of Statistics report on summer grain output said winter wheat production totaled 128.35 million metric tons, down 2.2% from last year. The Statistics Bureau report did not mention quality problems and described the harvest as "relatively good." But the large amounts of substandard wheat will reduce the actual supply of milling-quality wheat more than statistics indicate.

State-owned companies are urged to go into the market to buy up wheat and downstream processors can be given awards to stock up on wheat inventories. (State-owned companies Sinograin, COFCO, China Supply and Marketing Group, and Sinochem are among the issuers of the document.) This year's revised program for minimum price purchases of wheat and rice urges provincial authorities to organize "temporary reserve" purchases of off-grade wheat when large volumes do not meet the standard of grade 3 or higher for national minimum price procurement.

Anhui Province launched a purchase program for off-grade wheat last week. Hubei Province launched a program June 8. A district in Hubei is paying 1600-1900 yuan per metric ton for wheat with excessive mold. One district of Anhui says 50 million yuan of insurance indemnities have been paid out to 340,000 farmers whose wheat was damaged by frost, storms, and pests.

According to the document, funds for programs to buy up substandard wheat can come from the provincial "grain risk fund." If additional funds are needed, they should be included in the provincial budget.

At the same time, the document cautions the same officials to ensure food safety by preventing moldy wheat from contaminating the food supply with mycotoxins.

Wheat buyers are warned not to limit purchases of qualified wheat, nor to downgrade wheat, withhold payment, to issue IOUs, or exaggerate prices paid. They are warned not to steal subsidy funds and not to cheat farmers or charge them high interest rates. Wheat-buying officials are admonished to keep reserve wheat separate from wheat purchased at market prices and to prevent damp wheat, off-grade wheat, and foreign material from mixing with reserves.

Stop Illegal GMO Corn by Legalizing It, China Scientists Say

Illegal planting and sale of genetically modified corn seeds is a persisting problem in China. The best way to deal with the problem is to legalize GMOs, Chinese scientists say.

An article in Science and Technology Daily this week notes that China's top corn seed company was recently implicated in the illegal sale of 50 kg. of genetically modified corn seed, an incident the company attributes to "internal management problems." The reporter observes that such incidents of illegal sale and planting of GMO corn seeds have appeared regularly in recent years.

Industry experts told Science and Technology Daily that the main reason for the persistence of illegal GMO corn-planting is that farmers "love" the seeds. Farmers growing conventional corn have suffered serious losses from pests, and scientists say mold from pest-damaged corn contaminates other corn when the ears are mixed together, resulting in further losses from mycotoxins. China has varieties of corn genetically altered to resist pests using genes from bacteria which can reduce pest losses, raise yields 10-30%, and increase income by about 40 yuan per mu (about $40 per acre).

According to Science and Technology Daily, farmers have found no safety problems from planting GMO corn. Some merchants will gladly violate regulations to supply GMO seeds as long as farmers are eager to get the seeds. Huang Dafang, chief scientist of a biotechnology institute, says seed companies faced with vicious competition and tiny profits are strongly tempted to deal illegally in GMO seeds.

Wang Dayuan, former head of China's National Rice Research Institute, assures readers that GMO corn is evaluated by supervisory organizations and is just as safe as conventional corn varieties. He cites a report issued by ISAAA (International Service for the Acquisition of Agri-biotech Applications) which estimates that 189.8 million hectares of land in 24 countries have been planted in GMO crops and no food safety or environmental safety harm has been verified in 21 years of planting GMO crops worldwide. China has planted GMO cotton and imported GMO soybeans for more than 20 years without problems either.

Huang Dafang says legalizing the planting of GMO corn in China would be welcomed by most farmers, seed companies, and processors. Making persistent illegal behavior legal would help China become internationally competitive, reduce use of chemical pesticides, and spur a new round of innovation in Chinese agricultural science, Huang told Science and Technology Daily.

Huang claims that Chinese scientists have intellectual property rights to insect-resistant and herbicide-tolerant corn varieties they have developed.

Perhaps it's a coincidence, but Economic Observer reveals that Denghai--the seed company caught growing illegal seed--was engaged in a cooperative GMO research project with Dabeinong (aka DBN) whose executive pled guilty to stealing seeds from test plots in the United States several years ago. Investigations in the U.S. revealed that DBN employees had carried the seeds back to China disguised as boxes of popcorn.

The advocacy of GMO legalization appears to be part of a concerted campaign. The day after the Denghai company admitted its seed incident last week, another academician from China's Academy of Sciences also advocated GMO legalization at a seed industry meeting, saying, "If China waits until the entire general public accepts GMOs to commercialize them, that day will never come."

China Livestock Upgrade Accelerates, MARA says

Great progress in transforming the country's livestock and poultry sector has been declared by China's Ministry of Agriculture and Rural Affairs (MARA). Markets have stabilized, outmoded farms have been closed, and pollution problems are being addressed.

First, MARA lauds a rebound in hog and egg markets. Hog prices went through a precipitous decline from February to May this year. The rebound in prices since May has approached the breakeven level, and some efficient farms are making good profits now. Officials say they prevented a more serious disequilibrium by issuing guidance to farmers to reduce herds to tide them over the depressed market. The egg sub-sector has also recovered from a steep drop in the market last year. The average egg price of 8.29 yuan per kg is up 42 percent from a year ago. Meat poultry, beef and sheep production is stable with good profits, MARA says.

Second, MARA reports that traditional modes of livestock and poultry production are being transformed to achieve greater efficiency. Each locality is upgrading its breeding and propagation system to overhaul the breeding stock, and genomic technology is spreading. Benchmarking helps farmers improve efficiency: the days needed to raise a pig to a market weight of 100kg decreased from 170 days to 163 days since 2012. China now has 4,573 model livestock and poultry farms that demonstrate efficient, environmentally-friendly, safe management techniques. Farms that failed inspections were shut down.

MARA says the project to designate districts where livestock and poultry farms are banned is now complete. The program eliminated 34 million pigs through farm closures, relieving environmental pressure in the southern watershed region. Livestock farms have been moved to regions that are less environmentally vulnerable.

MARA has issued technical materials to guide officials in calculating land parcels' carrying capacity for livestock waste. The central government budgeted 5 billion yuan (about $770 million) to support 200 livestock and poultry manure utilization counties that demonstrate how to collect animal waste, treat it, and utilize it as biogas and organic fertilizer for fruit, vegetable, and tea farming. By the end of the year, MARA thinks more than 64% of livestock and poultry waste will be utilized.

China Can Replace U.S. Soybeans, Propaganda Says

China can replace U.S. soybeans with imports from other sources, Chinese propaganda says. Drawing from a stable of reliable "experts" and executives of state-owned businesses, State media are spinning China's retaliatory 25-percent tariff on U.S. soybeans as another opportunity to change the world with country's "One Belt, One Road" initiative.

A China Central Television broadcast, "Geometry of Soybean Trade Impact," emphasized that China can shift its sources of soybeans.

Li Xiaowei of China National Grain and Oils Information Center says the 25-percent tax will make U.S. soybeans more costly, but the tax will bring about "deep changes" in China's pattern of imports.

Cheng Guoqiang, Tongji University professor and former State Council agricultural economist, described the 25-percent tariff as making U.S. soybeans "uncompetitive" and will send a "radical signal to the world market" that will attract new soybean suppliers. He claims China's imports from the U.S. will be shifted to the Black Sea region, causing U.S. farmers to miss out on the "dividends" from China's growing consumption.

[In fact, the China tax is making Brazilian soybeans uncompetitive as Chinese buyers bid up their price. Driving the U.S. price down has given buyers outside of China a huge bargain on U.S. soybeans.]

Similarly, Li Guoxiang of the Chinese Academy of Social Sciences claims that the tax will invite other countries to increase soybean production.

In the Peoples Daily's “Our Country is Fully Capable of Filling the Deficit From Reduced Imports of American Soybeans” Li Xiaowei says that Chinese companies have not made any soybean purchases from the United States in three weeks and have canceled orders for 615,000 metric tons. He says U.S. farmers will incur big losses and speculates that China can fill the deficit by growing more soybeans domestically, importing more soybeans and meal from Brazil and from "one belt one road" countries in Central Asia, and researching feed formulations to reduce reliance on soybean meal.

A spokesman for Sinograin, China's grain and oils reserve company, says his company has not bought U.S. soybeans since April and has switched to purchases from Brazil, Argentina, and Uruguay. He thinks China will buy even more soybeans from South America in the future. He says Sinograin has developed an integrated reserve and processing system with 6.5-mmt of crushing capacity. He says reserves are adequate to prevent disruption of the market.

[Note that Sinograin switches to imports from South America every year in April when the southern hemisphere crop comes in. Not mentioned here is speculation in other news reports that Sinograin's imports to refill reserves will be either exempt from the tax on U.S. soybeans or will be compensated by the government.]

Yu Yunbo, head of COFCO, China's largest state-owned agribusiness, says that China imported the equivalent of 6.25 mmt of soybean oil and 26 mmt of soybean meal from the United States last year. He insists that the products of U.S. soybeans can easily be substituted with other products. He says China can import more soybeans from other countries, import rapeseed and sunflower seed, import meal from soybeans-rapeseed-sunflower seed, and import more meat to replace U.S. soybeans. He emphasizes that COFCO's "global vision" in meeting China's growing demand is embodied in the company's 2014 acquisition of Nidera and Noble Agri that have assets in Brazil, Argentina, the Black Sea region and Indonesia's palm oil region.

The commentators don't mention the cost to China of diversifying the country's imports. China already pays the highest soybean prices in the world and they are going even higher. Driving the price of U.S. soybeans down to a $1-plus per bushel discount to Brazilian beans gives the rest of the world a bargain and lures more buyers of U.S. beans. The real test for Chinese importers will come in the next few months as South American supplies are depleted.

The commentators put far too much confidence in the capacity of alternative suppliers to ramp up soybean production. In Brazil, it took decades and huge subsidies to colonize its empty interior, develop cultivars that could grow in the tropics, subsidize trucking-in of inputs and trucking-out of crops, and to build logistics infrastructure. Chinese soybean importers had highly-touted plans to grow soybeans in Argentina and Brazil a decade ago that crashed and burned. Chinese farmers have been growing soybeans in Russia for a decade, and Chinese imports from that source have not yet reached 1 million metric tons.

China Ideas on Expanding Imports in "New Era"

China's State Council has issued a document guiding Government ministries to push ahead on strategies to promote imports and free trade in the country's "new era" proclaimed by Xi Jinping.

The July 2 "Ideas on expanding imports to promote balanced development of foreign trade" (unofficial translation) directed various government departments to carry out practical implementation of the strategic "mutually beneficial opening of the economy" that has been proclaimed by China's leadership.

The strategy has multiple objectives:

• promote imports to better satisfy the rising demands of consumers,
• speed up institutional innovation,
• push ahead on upgrades of the economic structure,
• raise international competitiveness,
• further expand imports while keeping exports stable
• promote balanced development of foreign trade,
• preserve free trade

The document is a practical implementation of directives issued at last year's 19th communist party congress to keep consumers happy by giving them access to imported products, reform outdated economic institutions, produce higher-quality internationally-competitive products, and to burnish China's credentials as a leader of global "free" trade (as defined by China). The document does not make reference to trade tensions with the United States. It does emphasize "One Belt One Road" countries and establishment of a web of free trade agreements as targets for efforts in opening the economy.

The document calls for measures to facilitate imports of products and services that improve peoples' lives and raise living standards. This represents a break from the Soviet-era dogma of suppressing consumption and focusing on imports of raw materials and equipment to promote industrial development that has shaped China's trade strategy since the 1950s. The new strategy encourages imports of items for daily life, medicine and health-related products, and support of the elderly. It calls for reduced taxes on some imported commodities, reducing layers of intermediaries in distribution, cleaning up irrational charges, and improving the duty-free shop system.

The document also focuses on imports of "transformational" technology and equipment that can support China's ambitions to become a high-tech superpower. It calls for complementary foreign investment and imports in key strategic industries. ...and it calls for protection of intellectual property rights (again).

Agricultural and resource-type products are also targeted for "appropriate increases in imports," including agricultural products that are in tight supply domestically, inputs that can upgrade agricultural competitiveness, and ag machinery. The document advocates fast-tracking inspection and quarantine protocols with related countries and pushing inspection and quarantine entry arrangements for important food and agricultural products. It calls for increased international cooperation in agriculture and forestry.

"Belt and Road" countries are targeted for "optimizing" the international trade layout. Several commitments to give concessionary trade access, including zero tariffs for most commodities, to least-developed countries and "south-south" foreign aid receive emphasis.

Strategies for promoting trade include China's international import expo, free trade agreements, free trade demonstration zones and industrial parks, e-commerce development and oversight, trade facilitation, elimination of "irrational" fees, simplifying the import process, and improvement of the technical barrier system.

Finally, the State Council document orders each government department and locality to give a high level of attention to work based on these ideas in the new situation of expanding imports.

China Grain/Soy Imports Surged as Trade Tensions Rose

China's grain imports rose to over 3 million metric tons in May 2018 as trade tensions with the U.S. heated up. China is set to assess 25-percent retaliatory tariffs on imports of grains and soybeans from the United States as of July 6.

A Grain and Oils News article reported robust China grain imports during April and May. The combined volume of rice, wheat, corn, sorghum, and barley imports reached 3.1 mmt in May, up from 2.9 mmt in April and about 2 mmt during January and March. Imports were 1.5 mmt during February which included the Chinese New Year. The cumulative imports of rice, wheat, corn, sorghum, and barley totaled 11.5 mmt for January-May, up from 10.9 mmt during the same months a year earlier despite the rise in trade tensions.

Barley imports have been consistently strong. China recorded 640,000 mt of sorghum imports during April when China announced a 179-percent antidumping duty (it was terminated May 18). Intrepid buyers imported 470,000 mt of sorghum in May. Corn (760,000 mt), wheat (630,000 mt), and rice (480,000 mt) imports all surged during May. China's imports of soybeans also surged to 9.7 mmt during May 2018.



According to Grain and Oils News, the average unit value of imported corn during May was 1,337 yuan/mt, 463 yuan less than the average domestic corn price of 1800 yuan/mt. A year ago, domestic and imported corn prices were nearly equal. Worries about domestic wheat quality due to wet weather in May and June increased premiums for high quality wheat and may boost demand for imports.