Tuesday, November 26, 2019

China Pig Bubble Bursts, Supply Still Short

Chinese pork prices have dropped about 20 percent in November. Most industry analysts seem to view the decline in pork prices as a temporary market correction, and they expect a moderate rebound because there is still a 15-to-20 mmt deficit in pork supply. Prices stabilized or started to increase again in nearly all provinces last week. An industry survey found that 60 percent of industry people expect a renewed increase in pork prices as preparations of traditional pork products to celebrate the new year begin in southern provinces.

The average carcass price at the Beijing Xinfadi wholesale market on November 24 was down 23 percent from its October 29 peak of 26 yuan per 500g, erasing about half of the 58-percent increase during October. The price is still 135 percent higher than its year-earlier level of 8.5 yuan per 500g.

Chinese news media are thick with propaganda about farmers rebuilding production capacity. Ministry of Agriculture officials at a press conference last week instructed news media to report good news to restore the confidence of hog farmers. A Chinese Academy of Ag Sciences official recited the party line that production has already begun to rebound and the overall meat supply is stable as increases in supply of poultry, beef and lamb and imports have filled in the deficit.

While officials spread the mantra of stability, the situation on the ground suggests an industry still on a knife's edge, with panic-selling and new disease risks tipping the market into a downturn despite a yawning supply gap that consumers are learning to live with.

Most analyses give a shout-out to government policies for reviving hog production, yet pork supplies are still tight. Slaughterhouses are operating at about 15 percent of capacity and some have idled their facilities due to heavy financial losses. Beijing's Xinfadi wholesale market is still receiving about 40 percent fewer hog carcasses weekly than a year ago. Likewise, pork trade volume in four Shanghai wholesale markets is also down 40 percent from a year ago. Last week, MARA officials acknowledged that restoring pork supplies is a time-consuming process and said their objective is to restore pork production capacity to 80 percent of normal by the second half of 2020.

Two analysts revealed that government officials have been informally ordering companies and slaughterhouses to speed up slaughter, stop hoarding pork, release their frozen pork inventories into the market, and refrain from raising prices at the end of the year. "This news spread all over the country," one analyst said. A BRICS analyst said it is unclear how much frozen pork companies are holding. At last week's press conference MARA officials said they were investigating pork inventories.

Indeed, increased sales of frozen pork are cited as another factor in the price drop. Normally, fresh and frozen pork are largely separate markets but frozen pork has been putting downward pressure on all pork prices. Note: these are inventories stored up by companies early in the year when panicked farmers were sending pigs to slaughter en masse--not government reserves.

Analysts say consumption has been dropping in response to high pork prices as consumers and food service establishments learn to cope with high pork prices. Xinfadi market's weekly report says 10 percent or more of carcasses had been returned to suppliers at the end of the day in October even though the number available was low.

Farmers have been raising bigger hogs in response to high prices, but they began to slaughter them in November when they saw prices start to fall (and, after all, they can't keep on growing forever). One analyst remarked that the market couldn't absorb the big hogs. Carcasses are larger than usual, which MARA officials said added "15 kg of meat" per carcass, filling in part of the supply deficit. However, Xinfadi's report remarked that the "big hog" trend produced a surfeit of fatty carcasses that are hard to sell. The fatty carcasses were often the ones sent back to the supplier.

Analysts report that farmers in scattered localities have resumed panic-slaughter of animals over worries about plunging prices and scattered disease outbreaks. Only two ASF outbreaks have been officially reported in November and three were reported in October, but one analyst commented that unconfirmed reports of disease outbreaks have been more numerous. The analyst worried that farmers had become complacent after several months with ASF apparently under control and had become lax in biosecurity measures. Another analyst commented that the onset of cold weather and big differences between day and night temperatures leads to outbreaks of other diseases. Two of the officially-reported ASF outbreaks were found in trucks carrying pigs into Guangxi Province and Yunnan Chongqing, pointing to the persisting risk of spreading the virus around the country.

At last week's press conference a Hong Kong reporter asked MARA officials about rumors of recurrences of ASF in Jiangsu and Shandong Provinces and wanted to know how officials would ensure no new spread of the virus. The officials said they knew about these outbreaks and had confirmed that they were not ASF. They were mixed infections of other diseases which officials said they had dealt with.

Friday, November 22, 2019

China Ag Bank Pumps Funds to Keep Farms Afloat

The Agricultural Development Bank of China (ADBC) has been pumping money into China's agricultural sector by financing most of the grain and cotton marketed this year and lending for poverty alleviation, land improvement, marketing infrastructure, agricultural industry parks, "leading enterprises," and agricultural science and technology. The bank is one more seldom-noticed example of a Chinese economy increasingly propped up by debt.

With downward pressure on many commodity prices, ADBC loans are holding up sagging crop markets. In a press conference last month, the bank's president touted ADBC's role in maintaining food security by announcing that ADBC lent 170.4 billion yuan ($24.3 billion) to finance purchases of 124 million metric tons of grain and oil in the first three quarters of 2019--up 87 percent from last year. The ADBC president acknowledged that the bank financed 75 percent of wheat sales this year and 71 percent of early rice purchases. These shares were up from 49 percent last year. The boom probably reflects the 31 million metric tons of wheat purchased through the minimum price program--the largest total since 2008. Early rice production was down sharply this summer as farmers cut back on double-cropping, but officials still had to support the price with purchases at the minimum price.

The fall grain harvest happens in the fourth quarter, and the bank has announced that it has 160 billion yuan ($22.8 billion) of "money waiting for grain" to finance procurement of this year's fall grain crop. That's slightly more than last year when the bank financed half of fall grain purchases. Five rice-growing provinces have already begun minimum-price purchases of their fall rice crops which news media credit for price rebounds. Minimum-price purchases of medium grain rice are expected to begin in northeastern provinces after an audit of warehouses is complete. Markets are watching carefully to see whether big rice provinces Hunan and Jiangxi launch the program.

There is no longer a formal price support for corn or soybeans, but ADBC finances purchases for government reserves when the market looks weak. There were rumors in October that the government was considering purchasing corn for reserves, but nothing concrete. Officials are probably monitoring downward pressure on corn prices to determine whether they need to intervene as more grain is sold by farmers and demand remains soft due to the decimated pig herd and weak starch production. Chinese soybean prices fell to their lowest point in 5 years last weekend, but China's grain reserve company swooped in to make additional purchases--almost certainly financed by ADBC--to spark a rebound in prices.

The Agricultural Development Bank of China (ADBC) was carved out of the Agricultural Bank of China (ABC) in a 1994 reform that created specialized banks to carry out government policies, thus freeing up ABC and other state-owned banks to focus on commercial-oriented lending. ADBC's primary function historically was to finance the marketing of grain, edible oils, and cotton by state-owned enterprises. (Other policy banks focus on financing infrastructure and foreign trade.) ADBC is financed mainly by selling bonds. ADBC is one of the top three bond-issuers in China with 4.45 trillion yuan in bonds outstanding.

ADBC's outstanding loan balance has been doubling every five years--from 1.2 trillion yuan in 2008 to 2.5 trillion yuan in 2013, and 5.1 trillion yuan at the end of 2018. The ratio of the loan balance to the total value-added of China's agriculture, forestry and fishing has more than doubled from about 35 percent in 2004 to 75 percent in 2018--an indicator that loans have grown at a faster pace than the agricultural sector.
Source: ADBC annual reports and National Bureau of Statistics web site.
Here's another indicator of how ADBC's loan portfolio has grown. In 2005, ADBC's loan balance was about $10 billion less than the U.S. Farm Credit System's $106 billion. The ADBC loan balance surpassed that of FCS in 2008 and has continued soaring over the last decade. By 2018, ADBC's loan balance of $777 billion exceeded the FCS loan balance by 180 percent.
Source: Annual reports of Agricultural Development Bank of China and U.S. Farm Credit System.
ADBC lends mainly to grain trading and processing enterprises to make sure farmers do not have difficulties selling grain or receive IOUs in payment--occurrences that were common in the 1990s. Grain, cotton and oilseed procurement accounted for the biggest chunk of ADBC's portfolio in 2018 with a loan balance of about $265 billion. Poverty alleviation loans are now a close second, with a loan balance of about $192 billion last year. A little less than half the anti-poverty loans are for infrastructure, and they also include lending earmarked to buy grain, oil and cotton in poor regions.

"Agricultural modernization" is the third chunk of loans described in the 2018 annual report, with a smaller balance of about $31 billion. These include loans for marketing system development ($6.5 billion), so-called "dragon head" agricultural business enterprises ($4.7 billion), high-standard farmland projects, support for agricultural industry parks and "protected zones" for key commodities, and agricultural S&T. ADBC has loans to support "new-style" scaled-up farms. ADBC recently announced intentions to lend 50 billion yuan to support hog production over the next three years. ADBC finances transportation of grain from north to south.

Historically, China's banking system has siphoned money out of the countryside via peasants making deposits in postal savings banks and credit cooperatives which then deposit the funds in city-based banks or real estate and industrial investments. ADBC is reversing that tide by sending some of that same money from bond-buyers (probably commercial banks) back to the countryside, but it would be more efficient to develop self-contained credit markets in the countryside. One of ADBC's current initiatives is to jump-start "marketized" lending in the countryside by capitalizing loan guarantee entities run by provincial governments intended to reduce risk of bank lending to private grain traders and processors.

In theory, ADBC's money pipeline to the countryside is one of the few mechanisms to reduce the massive inequality in China. But the system has built-in incentives for corruption--a lot of the money was stolen by corrupt officials and unscrupulous warehouse operators--and one wonders whether the lending is unsustainable. ADBC claims its non-performing loan ratio is only 0.4 percent but it seems unlikely that loans for moldy, poisoned or nonexistent grain, fields producing crops that are falling in price, and apartment complexes for elderly peasants can be paid back. Moreover, the ADBC reflects the Chinese communist tendency to rely on behemoths. ADBC is itself a behemoth and one of its stated strategies is to help other creations of central planners--COFCO, Sinograin, the Supply and Marketing Cooperatives, and a State investment company--to "play a leadership role in the market" and stabilize market expectations.

Monday, November 11, 2019

China Subsidizes Soybean Revitalization

"Imports are cheaper; so why is the government spending 17 billion yuan to subsidize soybean-planting?" was the title of a recent article in No. 1 Business News (Di Yi Caijing). The article didn't really answer the question, but a few calculations show that increase in subsidies paid to increase soybean output this year is almost equal to their purchase price. Moreover, the price is dropping as the market for Chinese soybeans appears to be saturated.

In the article, China's Ministry of Agriculture and Rural Affairs lauded success of the "soybean revitalization plan" ordered up by this year's "Number 1 Document." The Ministry expects this year's soybean output to increase to 17.2 million metric tons (mmt) from last year's 16 mmt. The plan's objective was to reduce reliance on imported soybeans by 1 percentage point in 2020 and another percentage point by 2022. The Ministry projects a slight increase in imports from 83.1 mmt in 2018/19 to 84 mmt in 2019/20, but the Ministry projects a slight decrease in soybean consumption in 2019/20 to ensure that the increased self-sufficiency target is met. (Actually, the Ministry's decrease in soybean consumption of less than 1 percent still seems over-optimistic in view of the large reduction in the number of swine due to African swine fever.)

The marginal subsidy cost of increasing soybean output is even more outrageous. A Ministry official attributed the increase in China's soybean output to soybean producer subsidies of 17 billion yuan (about $2.4 billion) and 80 million yuan (about $11.4 million) in transfer payments made to soybean-producing counties. That works out to nearly 1,000 yuan (about $140) in subsidies per metric ton produced.

At the current average purchase price for soybeans the crop would be worth 58.8 billion yuan, so the 17 billion yuan in subsidies equal 29 percent of the value of this year's soybean crop.

This year's soybean subsidy works out to an average of 1875 yuan ($268) per hectare, 125 yuan per mu, or $109 per acre. The subsidy payment is made only in northeastern provinces, so the national average is much lower than the subsidy levels in the northeast. According to another article, the average soybean subsidy in northeastern provinces averaged more than 300 yuan per mu in 2018 and was as high as 560 yuan/mu in parts of Jilin Province. (It is unclear what soybean subsidies are paid in regions outside the northeast.)

The Ministry of Agriculture and Rural Affairs official said this year's soybean subsidies were increased by 4 billion yuan from last year. That means the Chinese government spent an additional 4 billion yuan to increase soybean output by 1.2 mmt, which represents a subsidy price tag of 3,333 yuan ($476) per additional metric ton. That's 97 percent of the current farm gate price of 3,421 yuan ($489) per metric ton. The average landed value of imported soybeans (before tariffs and taxes) during 2018/19 was 2821 yuan ($408) per metric ton. The cost of imported soybeans would be 3,130 yuan/mt with the 1-percent tariff and 10-percent VAT.

The market for the additional soybeans is weak. Nearly all domestic soybeans are used for food processing, and the National Grain and Oils Information Center estimates that only 2 mmt of domestic Chinese soybeans will be used by crushing plants to make oil and meal in 2019/20. According to one market report last week, the increase in soybeans available is putting downward pressure on prices. The government's grain reserve corporation, Sinograin, has been buying up soybeans to prop up the price, but another report says prices per metric ton have nevertheless fallen about 40 yuan to 60 yuan since new soybeans started coming on the market in Heilongjiang Province. Analysts worry that a commitment to purchase more U.S. soybeans could put further downward pressure on prices.

The futures price for domestic soybeans has been trading at about 5-to-15 percent below year-ago prices. In October last year Sinograin went into the market to buy soybeans when the price was 3800 yuan but the price soon crashed anyway. The average price fell to 3150 yuan in December 2018--a 17-percent decline. The futures price now--in November 2019--is teetering at 3380 yuan, slightly below year-ago prices. Will the price crash again this year?
Closing prices at Dalian commodity exchange. 
No. 1 soybean contract for non-GMO soybeans delivered in northeast China.

Officials also emphasize the importance of diversifying soybean imports. However, China purchased 74 percent of its imported  soybeans from Brazil during 2018/19, up from 48.5 percent in 2016/17--that does not sound like diversification. No. 1 Business News says that China can control trade to ensure a steady supply via foreign investment, cooperation, and other measures. Officials acknowledge that most soybeans are grown on the American continent but say the "one belt one road" initiative can help diversify by promoting production in regions suited for growing soybeans such as Russian, Ukraine, Kazakhstan, and Africa. However, China's soybean imports from belt and road countries were stagnant in 2018/19 and they together supplied less than 1 percent of China's soybean imports.

Saturday, November 9, 2019

Northeast China Attempts Pork Production Recovery

On-the-ground investigations emphasize that northeastern farms have begun to restore hog production after at least half of the region's swine were lost to last year's African swine fever (ASF) virus and panic-selling. The region is still severely short of pigs, but its slaughterhouses are shipping thousands of carcasses to southern regions where production has not rebounded at all. The facts and figures the report cites suggest there has been only marginal progress in restocking farms, and individual farmers who accounted for the bulk of production pre-ASF are mostly still on the sidelines or raising chickens now.

A report from Huatai Futures is based on interviews with farmers, breeding companies, traders and slaughterhouses in northeastern provinces of Liaoning, Jilin, and Heilongjiang--apparently in October 2019. Another online article and an assessment of a drop in hog prices in early November report similar information.
This chart claims to show the percentage loss in hog inventories (blue bars) in 7 districts of 
Liaoning and Jilin Provinces and the percentage recovery of swine production (red bars) in each district. 
The northeastern provinces were the first in China to be hit by ASF in August 2018 and the epidemic peaked last fall and winter. All farms were severely impacted, especially individually-operated farms. In districts of Liaoning and Jilin provinces hog inventories fell to varying degrees--from 50 percent to as much as 80 percent (see chart above). In Liaoning the number of swine held by small, independent farmers is down 60 to 80 percent from last year, while swine held by large-scale farms is down 30 to 50 percent.

Breeding animals were especially vulnerable to ASF. A string of breeding farms operated by a company in Jilin Province's Songyuan district lost 100,000 sows. One large breeding farm shrank from 26,000 head to 4,000 and has since rebuilt its inventory to 5,000 head. Since March this year, many finishing farms have held back female swine to use as sows, a factor that has contributed to the shortage of hogs available for slaughter. In Liaoning, the government will subsidize half of the cost of imported swine breeding stock and 500 yuan of the cost of breeding swine brought in from other provinces.

Instead of going through a 2-year process of expanding breeding herds to supply commercial finishing farms, many farms are taking a shortcut by holding back females from their finishing herds to use as sows. This process reportedly began in March and the first litters are coming on the market.

With few hogs available, slaughterhouses are operating at less than 20 percent of capacity. One company said it is now slaughtering 1,000 head daily, a fifth of its usual volume. A meat company in Jilin Province said it has been slaughtering 500 head per day, less than a third of its 1600-head capacity. A second company in Jilin said its slaughter fell as low as 750 head per day and is now 1300, still well below its usual 2300-head volume (and as high as 5000 head per day during the peak holiday season).
This chart shows daily capacity utilization by designated hog slaughterhouses in China 
during 2018 (blue line) and 2019 (red line). 
These are probably unpublished data from the Ministry of Agriculture and Rural Affairs.
Source: http://cj.zhue.com.cn/xingye/2019/1030/345925.html
Meat companies are offsetting losses from slaughtering expensive hogs by selling frozen meat from inventory. The Jilin company says it loses 30-to-40 yuan on each hog it slaughters, but its three plants have been selling 50 metric tons of frozen meat from storage each month. One company says it has 2,300 metric tons of frozen pork in storage, but another report says inventories of frozen meat are running low. The 30,000 metric tons of national pork reserves released last month nationwide had a minor impact on pork supplies.

Hogs are highly profitable. The cost of fattening pigs is estimated at about 13 yuan per kg, while the price for live hogs was reported to be around 35 yuan/kg (when the survey was conducted). With these profits and a limited supply of piglets available, the price of piglets has soared even faster than the price of finished hogs. One company reported an 1,100-yuan sale price for 15-kg piglets--which works out to 73 yuan per kg. The average piglet price in late October was reported to be 1760 yuan in the northeast and 1860 yuan nationwide. One commentator complained that the high price of piglets prevents individual farmers from re-stocking their farms. Another commentator--who identifies himself as a farmer who "listens to farmers"--complains that big companies are making money selling frozen meat they bought from farmers at cheap prices and forcing independent farmers out of business.

With the price of an additional kilogram of hog weight far exceeding feed costs, farms are fattening hogs to 135 to 140 kg, up from usual slaughter weights of 115-120 kg. Individual farmers are raising even fatter pigs of 150-200 kg. (Traditionally, Chinese slaughter weights have been highest in northeastern provinces because corn is cheapest there.) One slaughter plant said its equipment is not set up to accommodate such large animals.

Farms in the northeast that feel confident of low disease risk are expanding. These include mainly large farms confident in their strong biosecurity measures and newly-built farms in regions that were not hit by ASF. In particular, companies are targeting eastern Liaoning Province where the geography is viewed as favorable to disease control. In contrast, no rebound in production is taking place in places like northern Liaoning and patches of Heilongjiang Province that are still vulnerable to ASF. In southern provinces, it is said that neither companies nor individual farmers are willing to restock their farms because disease risk is still too high.

Individual farmers who used to raise 500 to 1000 hogs at a time have mostly stayed on the sidelines because sporadic outbreaks of ASF continue in some areas. Although officials have not made any official announcements, rumors of "dead pigs" in the northeast early this month raised fears of a renewed outbreak. About 30 to 50 percent of individual farmers have switched to raising poultry.

Consumption of pork is down sharply in the northeast. According to one estimate, pork consumption in Liaoning Province is down 40-to-50 percent from normal years, and down 70 percent in poor regions. A supermarket chain in Liaoning said its pork sales dropped beginning in July and August. Sales are down 40 percent in its Shenyang stores and 50 percent in its Anshan outlets. Chicken sales are up 20 percent and prices have also risen. Increased sales of chicken and beef do not offset the decline in pork sales.

About half of the carcasses produced by the northeast region's slaughterhouses are shipped south, where prices are higher. A Jilin Province meat company says it sends 15-to-20 large trucks packed with carcasses to Guangdong/Guangxi each day.  Hunan/Hubei, and Shanghai/Zhejiang are also destinations. Smaller trucks carry pork to closer markets. Another slaughterhouse says it sends 200-to-300 carcasses a day to Jiangsu Province and sent 260 head to Shandong.

Thousands of miles to the south in a Shanghai market, a pork vendor said he now pays 52 yuan per kilogram for pork, three times the 16 yuan/kg he used to pay. He used to sell 6 or 7 half-carcasses daily, but now he sells only one. He grinds up unsold meat to make dumplings that he sells elsewhere.

Wednesday, October 30, 2019

Fight for Carcasses Drives Pork Prices Higher

The price of a lean hog carcass was three times its year-earlier price in Beijing's Xinfadi wholesale market on October 29, 2019. The Xinfadi market's weekly report described the nationwide competition for carcasses that is driving the price upward at an accelerated pace this month.

A daily average of 1,450 swine carcasses arrived in the Xinfadi market during the week of Oct. 19-25. The daily supply was up from its low point during the National Day holiday week early in the month, but it was 33 percent less than the 2,350 carcasses supplied daily during the same week in 2018. According to a monthly report for September, the number of carcasses arriving at Xinfadi during July was the largest in 5 years, but tight supplies resulted in a noticeable decline in carcasses arriving during August and September.

According to the reports, Beijing's market competes for carcasses transported all over the country. Most of the carcasses in the Beijing market come from the three northeastern provinces of Liaoning, Jilin, and Heilongjiang, hundreds of miles away. Some carcasses come from Yunnan Province--thousands of miles away in the southwestern corner of China. For a time in July, Yunnan was the main source of carcasses for the Beijing market because it had the lowest prices, but rising prices in Yunnan during August reduced the flow of carcasses from that provinces. Only a few carcasses come to the Xinfadi market from nearby Hebei Province and Inner Mongolia.

A September report said hog supplies in the northeast began to recover in March, but prices went up because transportation problems limited the number arriving in Beijing. The September Xinfadi report expected prices to decline after transport problems were resolved, but the rise in prices actually accelerated to an unprecedented pace in October.

Last week's report explained that prices are now rising because provinces in southern China--where production has not rebounded--have also been buying carcasses from northeastern provinces and Hebei.

The report said that increased slaughter weights are also limiting the supply of pork. Carcasses in the market are said to be about 33-40 percent heavier than usual weights. The delay of slaughter represented by heavier hogs not only reduces the number of carcasses available, but the added weight of these big hogs has a higher-than-usual proportion of fat and not that much more muscle than hogs. Thus, the market is now receiving a surplus of fatty carcasses and the premium for a lean carcass has doubled to 2 yuan or more per 500g since August, up from 1 yuan earlier in the year. Last week the price of fatty carcasses went down and the premium for a lean carcass went as high as 3.5 yuan/500g last week, but that trend appears to have reversed this week.

The Xinfadi market report says consumer demand for pork has fallen as the price has soared. Despite the limited number of carcasses available, about 10 percent are unsold and returned each day--sometimes 20 percent are returned. A September report said consumption by cafeterias and restaurants had declined the most, while purchases by consumers had not changed that much. The monthly report for September, however, said purchases by food service and individual consumers had dropped 30 percent.

Tuesday, October 22, 2019

China Food Security: Self-Sufficiency and Free Trade

China's food security strategy insists on self-sufficiency, yet China also claims to advocate liberalized global food trade, according to a white paper on China's food security released October 14, 2019.

The paper recites vague phrases like "keeping Chinese peoples' food bowls tightly in their own hands," a mantra that has been repeated as in speeches and communist party documents since Xi Jinping's ascension to party chief in 2013. The Chinese version of the white paper has an emphasis on self-reliance that is largely scrubbed out of the English translation. The Chinese version advocates a "path to food security with Chinese characteristics" (中国特色粮食安全之路) that is translated as "food security in China" in the English version.

The food security policy is stated in a series of opaque phrases that call for China to remain self-sufficient in grain most of the time by ensuring domestic production capacity while allowing for undefined "moderate" imports.
China's food security strategy, in Chinese and English
ensuring basic self-sufficiency of grain, absolute security of staple food
self-sufficiency based on domestic grain production
确保产能 guaranteed food production capacity
适度进口 moderate imports
科技支撑 technological support

Key measures for maintaining China's production capacity are encapsulated in another inscrutable couplet, "藏粮于地, 藏粮于技" (storing grain in the ground, storing grain in technology) translated as "sustainable farmland use and innovative application of agricultural technology to increase farmland productivity." Strict zoning, control of land use and government planning are featured measures. The paper claims that Chinese technology has achieved most of the dramatic increase in food output over the last 20 years.

The paper rattles off a series of statistics showing impressive gains in food availability, nutritional outcomes, and grain yields since 1996. Indeed, China's food availability and nutritional outcomes have vastly improved, and statistics have met or exceeded objectives set in the 1990s.

A third section of the paper boasts that China is playing a more assertive world in global food markets. According to the paper, China:
  • is an "active promoter" of liberalized food trade
  • has "worked hard to fulfill its WTO commitments"
  • has opened its food market to imports and foreign investment
  • is playing an active role in setting global food standards and rules governing food trade
  • aims to address global food insecurity through multilateral organizations
  • is setting up new mechanisms to promote trade through its "one belt, one road" initiative. 
The "new" food security policy is a more vague statement of a 1996 white paper, "The Grain Issue in China," that specified a 5 percent limit on imports in normal years for a specific list of grains, beans, potatoes, and soybeans. That limit was cast aside and soybeans were excluded from "grain" after soaring soybean imports blew through the 5-percent limit. The "new" policy uses vague language about "moderate imports," basic self-sufficiency and absolute security that are not clear in Chinese or English. Since 2013, the policy has not set a concrete self-sufficiency criterion, nor has it specified commodities.

The vagueness gives the policy an elasticity that allows officials to interpret it any way they want, depending on the circumstances and audience. With no numerical target, they can never miss it. The more assertive global role in reshaping food trade is a new addition to the post-2013 food security policy that aspires to give China a "voice" in global food markets and represents a subtle challenge to the United States whose government and companies China believes unfairly dominate markets and rule-setting at present.

While the 2019 white paper emphasizes government control and planning as key to food security, it also acknowledges that raising prices and cutting taxes on farmers were critical to improving incentives for farmers. The white paper does not consider the possibility that privatizing farmland might awaken rural credit markets and give farmers incentives to make their own investments in farmland instead of waiting for subsidized programs to do it.

China's white paper neglects to count the cost of its food security policies. Spending on agricultural programs has soared. Farm spending reported to the WTO rose from $30 billion in 2002 to over $200 billion in 2016. Most of the expenditure is on so-called "green box" programs that are exempt from WTO-imposed limits on farm spending. The most prominent are the program to build "medium and high standard fields" and irrigation infrastructure. In 2016, three direct payments to grain producers were lumped into one, renamed a "land fertility payment", and moved into the "green box." Payments to corn, soybean and rice growers are also kept hidden from prying foreigners and falsely declared "blue box" measures so they can also be exempt. This year's direct payment to soybean growers in Heilongjiang Province is equal to about half of the gross value of the crop.

China claims to have "reformed" its support price program for wheat to make market-oriented purchases predominant, but this year's government purchases amounted to 30 mmt out of 70 mmt of wheat procured. In Anhui Province half of the wheat marketed this year was purchased through the minimum price and the local news paper claimed the support price effectively raised prices for farmers by 10 percent.
The white paper trumpets China's success in "reforming" support price programs for corn, soybeans, rapeseed, and cotton. These were ill-conceived, costly programs begun in 2008-10 that exported instability to world markets by prompting import surges followed by years of suppressed imports as officials sought to offload massive stockpiles. The full cost of these programs is not counted in its reporting to the WTO. In the most egregious example, the 167 mmt of corn sold from the "temporary reserve" stockpile the last three years cost an estimated $31.7 billion, including costs of storage, interest and losses incurred by selling grain at prices 18% to 38% below their purchase cost. This is how China "works hard to fulfill its WTO commitments."

The 1996 white paper promised to reduce waste of grain, but holding excessive grain stocks--another core "food security" policy--is hugely wasteful. Large areas of land and chemical inputs are used to produce grain that is stored in hundreds of warehouses where it rots or is eaten by rats and insects. Authorities have kept secret the results of a nationwide audit of grain reserves carried out this year, but there are hints that much of the grain is poisoned by mycotoxins and heavy metals. After the audit authorities published admonitions that grain reserves must not threaten "food safety."

China's 1996 white paper promised to reduce crop production costs, but instead the self-sufficiency policy has resulted in soaring costs and prices of Chinese food commodities. China's wheat price, for example, has drifted far above U.S. wheat prices. China's wheat price was more than double the U.S. price in 2016 and was 80% higher in 2018. The difference is maintained by China's price floor and tight control on imports using a restrictive import quota system.
The 2019 white paper celebrates China's rise in meat consumption. While authorities have myopically sought to stabilize grain markets at huge cost, the country's livestock production is routinely rocked by boom-bust cycles, diseases like avian influenza and African swine fever, and food safety crises like the melamine adulteration of milk. Grass roots veterinary services and animal health have been neglected for decades. Gyrations in the Chinese livestock market also spill over into the world market by creating unanticipated ebbs and flows in China's demand for imported meat.
The 1996 self-sufficiency policy directly led to environmental costs that remained hidden for years. The 1996 white paper called for farming "wasteland" on mountainsides, grassland, and river bottoms, which had to be reversed later via a subsidy to retire erodible land. The 1996 paper also called for cultivating abandoned factory and mining sites--an initiative that ignored the possibility that such sites are often polluted with lead, cadmium, and arsenic. Authorities hid the contamination of rice with cadmium from metal smelting for years. Subsidized chemical fertilizer and pesticides led to excessive use, huge run-off and eutrophication of rivers and lakes.

"Enlarging irrigated areas" was a solution offered by the 1996 white paper, but underground aquifers were pumped dry to grow wheat in north China and rice in Manchuria. Land is now being retired in both regions to cope with the problem. High prices guaranteed by a price support prompted farmers to plow up grasslands to plant corn. All these problems were created by China's food security policy despite a principle of "realizing sustainable development" promised in the 1996 white paper.

The white paper presumes that the communist party's policy is the only way for China to be food-secure. However, several East Asian neighbors achieved dramatic improvements in living standards years before China. In the years after World War II, U.S. advisors designed land reforms, farmer cooperatives, and rural credit systems in Japan, South Korea, and Taiwan, laying a foundation for improvements in farm production. U.S. advisors were invited to China in the 1940s by the Nationalist leadership, and might have helped develop the mainland's agriculture decades earlier if civil war had not brought their efforts to a halt. Communist China leaders today are still working on many of the same agricultural problems identified by U.S. advisors during the 1940s.

Friday, October 18, 2019

China Pork Output Plummeted 42 percent in Q3 2019

China's pork output is down 17 percent in Q1-Q3 2019, but the decline accelerated to 42 percent during the third quarter, according to data released by the country's National Bureau of Statistics. September consumer price data show an increase in all meat prices, led by a 69-percent increase in pork costs.

The Bureau's economic report on the third quarter of 2019 included estimates of meat output for the first three quarters of 2019 and percentage changes from a year earlier. The country produced 31.8 million metric tons of pork in the first three quarters of 2019, down 17.2 percent from the same period in 2018. Poultry output was 15.39 mmt, up 10.2 percent. Beef and mutton output were a combined 7.9 mmt and rose at a slower pace of 2-to-3 percent. Egg output increased 5.5 percent. The Bureau did not report any animal inventories or number of animals slaughtered.

China Livestock Production, Q1-Q3, 2019
Item Q1-Q3 output Change from year earlier
Million metric tons Percent
Pork 31.81 -17.2
Poultry 15.39 10.2
Eggs NA 5.5
Beef 4.58 3.2
Mutton 3.3 2.3
Source: China National Bureau of Statistics. 

The fall in pork output accelerated during the third quarter. Pork output during Q3 2019 was 7.1 mmt, down 42 percent from Q3 2018 (calculated from the Q1 and Q2 numbers reported earlier this year). The 42-percent decline in pork produced nearly matches the 41.1-percent year-on-year decline in swine inventories reported for September by the Ministry of Agriculture and Rural Affairs.

Slaughter of hogs at designated slaughterhouses reported by the Ministry of Agriculture and Rural Affairs shows a 13.8-percent decline in slaughter for the first nine months of 2019. However, the year-on-year decline in slaughter clearly accelerated to 25.7 percent in August and 35.8 percent in September 2019 from a year earlier as impacts of shrinking swine numbers began to affect the supply of hogs. There are anecdotes about increased slaughter weights, but no statistics are reported.

Hogs slaughtered at "above-scale designated slaughterhouses", 2018-19
2018 2019 Change
Million head Percent
Jan-Sept 180.07 155.24 -13.8
Jan 22.9 24.3   6.3
Feb 17.5 12.9 -26.1
Mar 19.2 18.6 -3.2
Apr 21.2 18.4 -13.0
May 21.4 19.2 -10.3
Jun 19.6 17.6 -10.2
Jul 19.5 17.3 -11.3
Aug 19.7 14.6 -25.7
Sep 19.2 12.3 -35.8
Oct 19.5
Nov 20.1
Dec 22.9
Source: China Ministry of Agriculture and Rural Affairs.

A broad-based rise in meat prices is evident in the National Bureau of Statistics' report on September 2019 consumer prices. China's CPI for food was up 11.2 percent from a year earlier but the nonfood CPI was up only 1 percent. Pork led the way with a 69.3-percent increase in September consumer prices from a year earlier. Beef was up 18.8 percent, mutton was up 15.9 percent, and poultry was up 14.7 percent.

China Consumer Price Index, September 2019 
Item Change from a year earlier
Nonfood 1.0
Food 11.2
Pork 69.3
Beef 18.8
Mutton 15.9
Poultry 14.7
Fish/shellfish 2.9
Eggs 8.2
Dairy 1.1
Grains 0.6
Edible oils 2.3
Fruit 7.7
Vegetables -11.8
Source: China National Bureau of Statistics.

Wednesday, October 16, 2019

Beijing Pork Prices Resume Skyrocket Trajectory

Beijing pork prices shot upward again in October after officials pulled out all the stops to stabilize them ahead of the Oct. 1 National Day holiday. A comparison with Beijing market prices from the "blue ear" disease panic in 2007 shows that the African swine fever epidemic is the biggest-ever disruption of the world's biggest pork market.

Ministry of Agriculture and Rural Affairs figures showed a worsening supply situation. The Ministry reported that the inventory of swine during September was down 41.1 percent from a year earlier while the sow inventory was down 38.9 percent. The Ministry's figures tracking "above-scale" slaughter facilities showed the number of hogs slaughtered in September was down 35.8 percent from a year earlier.

Daily price data from Beijing's Xinfadi wholesale market show that pork prices stabilized in September following an August 30 order from Vice Premier Hu Chunhua to keep pork markets stable during the Mid-Autumn Festival and the 70th anniversary of the Peoples Republic of China celebrated October 1. Authorities injected 40,000 metric tons of pork reserves into the market last month. However, prices began rising the day after National Day and climbed 32 percent during the first two weeks of October, showing that officials cannot dictate prices for very long. The average price for a lean carcass at Xinfadi market was 21.75 yuan per 500g on October 15, up 125 percent from the price a year earlier in the same market.
Average prices quoted by Beijing's Xinfadi wholesale market xinfadi.com.cn
Prices for different parts of the pig rose to varying degrees. Fatty carcasses have a lower price than lean carcasses, but their price on October 15 was 140 percent higher than a year earlier. Livers went up 120 percent. Prices for bellies and hindquarters were about double their year-earlier prices. Ribs were up 81 percent. Prices for other parts like tails, feet, kidneys, and brains rose by 30 to 60 percent from a year ago.

Year-on-year pork price increases, 
October 15, 2019
Beijing Xinfadi Wholesale Market
Oct. 15, 2019
Change from a year earlier
Dollars per lb. Percent
Carcass (lean) 2.78 125
Carcass (fatty) 2.53 144
Belly 3.26 104
Hindquarters 2.88 105
Ribs 4.29 81
Feet 2.69 40
Tail 5.12 60
Ears 3.26 31
Brain 5.12 60
Stomach 2.69 53
Heart 1.41 29
Liver 1.41 120
Kidney 3.71 61
Calculated from prices at xinfadi.com.cn
Prices per 500g converted to dollars per lb. using exchange rate of 7.0868 RMB/$.

The historic nature of this year's pork price increases is evident from a comparison with the trajectory of prices in the Xinfadi market during 2007-08 when pork supplies were disrupted by a "blue ear disease" (Porcine Reproductive and Respiratory Syndrome) epidemic--China's previous most-notorious pork supply crisis which began the meme about pork prices influencing China's CPI.

The chart below compares the daily price for a lean carcass in the Beijing Xinfadi market during 2007-08 and 2019. Interestingly, prices in 2007 and 2019 began close to 17 RMB/kg in January of each year (with no adjustment for inflation). In 2007, the "blue ear" disruption of pork supplies caused rapid rises in pork prices beginning in April and May. The Beijing market's pork price reached 20 RMB/kg by August that year, 75 percent higher than the price in March. Prices eased in September-October before peaking at 22.5 RMB/kg in February 2008, more than double the March 2007 price. Those increases in pork prices were considered a serious crisis at the time.

During the ASF disruption in 2019, the Beijing market's pork carcass price was steady at about 20 RMB/kg in March-May, but the increases from August to October were much more dramatic than the 2007 pork price increases. Prices rose rapidly in August, stabilized in September--as noted above--and then rose dramatically in October. The October 15, 2019 price of 42.5 RMB/kg is the highest-ever in the Beijing market and up about 150 percent from the price on January 1. This pork shortage makes the 2007 event look like a blip in comparison--and the full effects have not run their course.
Comparison of prices tracked in 2007-08 and 2019 from xinfadi.com.cn

Monday, October 14, 2019

Wheat Program Limits Purchases

China's minimum price for wheat will remain steady at 2240 yuan/metric ton in 2020, but a new 37-million-metric-ton limit on purchases at the minimum price will be introduced.

The limit on wheat purchases will be divided up into two batches, according to an announcement issued by the Administration of Grain and Commodity Reserves and four other departments. A basic purchase limit will be set at 33.3 mmt. If purchases reach 90 percent of the initial limit, provincial branches of Sinograin--the government's grain reserve company--can make recommendations for allocating an additional 3.7 mmt to provinces. The Administration of Grain and Commodity Reserves will make a determination based on monitoring of production, market prices, volume of farmers' unsold grain and other factors. If needed, the Administration will post the allocations of the second batch of reserve purchases on a web site.

Wheat purchases at the minimum price were 30.9 mmt during 2019. Purchases were much higher than in recent years because production increased and demand is weak this year, so prices fell to the minimum level in many regions. Large portions of the 2018 crop were below quality standards due to heavy rains, but there were few quality problems this year. The last time minimum-price wheat purchases exceeded 37 mmt was in 2009.

No specific reason was given for placing a limit on purchases. China may have introduced the limit to bring the program into compliance with its WTO commitments on domestic support following the United States' challenge of China's minimum price programs for wheat and rice.

China also held the minimum price for rice steady this year, but no limit has been imposed on purchases of rice to date.

China's Farm Investment Fizzles

Investment in China's farming and agricultural processing sectors is down this year, according to figures released by China's National Bureau of Statistics, a development at odds with policies focused on pumping up investment in the sector.

Fixed asset investment in farming, forestry and fishing during January-August 2019 was down 3 percent from the year-earlier period. Investment in primary processing of agricultural products (grain milling, oilseed processing, livestock slaughter, etc.) was down 9.4 percent from a year earlier, investment in food manufacturing was down 2.2 percent, and investment in textile manufacturing was down 5 percent. The data do not include rural households, but this has little impact since other data show that rural households don't make many agricultural investments.

China fixed asset investment, January-August, 2019: year-year change
Sector Percent change
Farming, forestry, fishing -3.0
Primary processing of ag products -9.4
Food manufacturing -2.2
Textile manufacturing -5.0
Source: China National Bureau of Statistics web site. 

Overall fixed asset investment increased 5.5 percent during January-August 2019. The Bureau says this was 0.2 percentage points faster than in 2018. These rates are much slower than 20-to-30 percent annual growth in fixed asset investment during China's peak growth years up to 2012.

Investment in manufacturing during January-August was up 2.6 percent from a year earlier, slower than 9.5 percent growth in 2018. Investment in services was the most robust, up 7.3 percent this year.

The slowing of agricultural investment in 2019 was remarkably abrupt. In 2018, fixed asset investment in agriculture had grown 12 percent--faster than overall growth--but this year it has fallen 3 percent. Agriculture's share of Chinese investment has historically been low, but its share had risen above 4 percent during 2016 and 2017. Agriculture's share of investment has now fallen to 3.5 percent in 2018 and 2.7 percent in January-August 2019.

Monthly figures on growth in fixed asset investment in "primary industry" indicate a sudden slowing of investment in 2019. "Primary" industry (agricultural) investment grew about 12 percent year-on-year through the end of 2018. Growth then slowed to 3.7 percent in February, 3 percent in March and posted slight declines in April to July. The 3.4-percent decline in August is the largest decline reported this year, so far.

Chart shows year-on-year growth in fixed asset investment in primary industry, by month.
Data from China National Bureau of Statistics.

The plateau in agricultural investment is at odds with the "rural revitalization" and other Chinese policies that call for boosting credit to new-type farmers, subsidizing upgrades of "medium and low standard fields", upgrading equipment, and building agricultural industrial parks. The decline in agricultural processing and textile investment is also at odds with policies to increase links between farmers and value-added processors and to build a new textile industry in Xinjiang Autonomous Region which now produces 80 percent of the country's cotton.

The fizzling of agricultural investment is, however, consistent with reports of new-type farmers abandoning their leased land after finding farming tougher going than they had expected.