Monday, February 25, 2019

U.S. Soybeans: 1% Market Share in China so far in 2018/19

China continued to import minimal volumes of U.S. soybeans during January 2019, while increased imports of Brazilian, Canadian and Argentine soybeans filled most of the vacuum. Chinese customs data show that China imported 7.38 million metric tons (mmt) of soybeans during January 2019, 1.1 mmt less than in January 2018.
  • China imported 25 mmt of soybeans in the first four months of the 2018/19 marketing year (October 2018-January 2019), of which 20.9 mmt were imported from Brazil and 2.2 mmt were from Canada. The United States supplied just 272,035 mt--a whopping 1-percent market share. 
  • During January, China imported only 135,777 metric tons (mt) of U.S. soybeans--about two Panamax cargoes--compared with 5,814,257 mt a year ago. 
  • Brazil was again the top supplier in January, with 4.9 mmt. Imports from Brazil were up 2.86 mmt from a year earlier. 
  • Imports from Canada jumped to their highest-ever monthly total of 1.23 mmt, 957,000 mt more than a year earlier. 
  • Imports from Argentina rebounded to 985,247 mt, about 900,000 mt more than a year earlier.
  • Imports from Russia, Uruguay and other minor suppliers were down from a year ago.
  • China's "Central Document No. 1" on rural policy priorities released last week called for diversifying sources of agricultural imports. 
China soybean imports, January 2018-19
Metric tons
Total 8,477,916 7,376,976 -1,100,940
United States 5,814,257 135,772 -5,678,485
Brazil 2,073,705 4,933,786 2,860,081
Canada 276,612 1,233,682 957,070
Kazakhstan 2,644 798 -1,846
Ethiopia 2,794 0 -2,794
Russia 123,070 87,691 -35,379
Ukraine 570 0 -570
Argentina 89,150 985,247 896,097
Uruguay 95,114 0 -95,114

Chinese importers are now paying higher prices to buy mass quantities of Brazilian soybeans. The unit value of Brazilian soybeans averaged $453/mt in January 2019 and $450/mt in December 2018, up from a low of $427 in September. The average unit value of China's soybean imports a year earlier in January 2018 was $421/mt.

Wednesday, February 20, 2019

China Corn Market: Supply Pressure This Year

Most analysts think China now has a substantial deficit between its production and use of corn which is being filled by dumping a purportedly huge stockpile into the market. Does that mean China will eventually become a major corn importer when the stockpile is depleted? No one really knows for sure because every component of supply and demand is clouded by uncertainty.
  • Last fall, Chinese statisticians adjusted their estimate of corn production upward by 20 percent after discovering 42 million metric tons of additional corn they didn't know about.
  • The statisticians claimed that the country produced 259 mmt in 2017/18, but the grain bureaucracy reported that only 98 mmt was purchased.
  • Authorities claimed to have auctioned off an implausible 100 mmt of corn from implausibly large stockpiles during April-October 2018.
  • We know that China imports 2-to-3 mmt of corn. But imports of corn substitutes--sorghum, DDGS, barley, cassava and cassava starch--have fluctuated, affecting corn consumption to an unknown degree. Imports of corn substitutes soared to 37 mmt in 2014/15, displacing an unknown amount of Chinese corn from consumption. Imports of substitutes fell 20 mmt during 2017/18 and 2 mmt during the first 3 months of 2018/19, crimped by antidumping duties on DDGS, threatened AD duties and retaliatory tariffs on sorghum, and a threatened AD investigation of Australian barley.  
  • Chinese authorities announced ambitious plans to expand ethanol production nationwide by 2020, but only marginal increases have actually occurred. 
  • Industrial processing of corn was heavily subsidized during 2016/17 and less so during 2017/18.
The blanket of fog over China's corn market is evident in a comparison of 2018/19 balance sheets by eight organizations that are all over the map. USDA, Ministry of Agriculture (MARA) and China National Grain and Oils Information Center (CNGOIC) have all adopted the 257.3 mmt production number officially announced by the National Bureau of Statistics.  Others have lower production numbers. Estimates of corn use range from about 250 mmt to 310 mmt, but these are all wild guesses. (MARA increased its estimates of both production and use by 40 mmt after incorporating the revised production number in January.) Most organizations expect moderate imports of 3 to 5 mmt. JCI expects a whopping 14.5-mmt of Chinese corn imports. MARA always low-balls imports early in the marketing year. 

Estimates of China corn supply & demand for 2018/19 (million metric tons, Jan-Feb 2019)
Inventory change
USDA 257.3 277.0 5.0 -14.7
MARA-CASDE 257.3 285.3 1.5 -26.5
CNGOIC 257.3 287.9 3.0 -27.0
JCI 246.0 309.8 14.5 -50.0 234.1 251.7 3.5 -14.3
Cofeed 222.0 247.1 5.0 -20.0
Rabobank 203.0 256.0 5.0
BRICS 210.0 255.5 3.5 -5.0

China claims that its corn stockpile peaked at more than a year's production, and authorities made disposal of the stockpile one of their policy priorities over the last three years. All organizations expect a significant reduction in inventories in 2018/19 ranging from -5 mmt to -50 mmt. Does China really have a deficit between annual corn supply and use of 25 mmt or more--as MARA and CNGOIC estimate? If so, does that mean China will one day import that 25-mmt deficit when it finally depletes its corn stockpile?

Most analysts agree that only a portion of the 100 mmt of corn auctioned during 2018 was actually used, and CNGOIC estimates that 45 mmt of it was carried over to 2018/19.

One recent corn outlook by Chinese futures analysts anticipates that this carryover will be one of several factors putting downward pressure on China's corn market this year. In May 2019 authorities are expected to start auctioning the estimated 79-mmt of corn that remains in the temporary reserve. The Ministry of Agriculture said they expect the reserve de-stocking to be completed this year. With potential buyers still holding 45 mmt of last year's auctioned corn and another 257-mmt corn harvest, auction prices will have to be set low in order to successfully dispose of the stockpile.

African swine fever has discouraged swine producers from restocking herds, potentially shrinking feed use of corn. MARA announced two new cases today in two new provinces: Shandong and Guangxi.

The futures analysts worry that more aggressive auctions of low quality wheat and rice from reserves could also compete with corn in feed and ethanol use. Moreover, a pledge to buy U.S. corn and possibly other feeds to settle the trade war could further add to supply, driving prices down further.

China Grain and Oils News notes that farmers have been slow to sell their corn this year. Only 62.5 mmt of the 257-mmt crop had been purchased as of 10 February, 16.7 mmt less than a year ago. That suggests farmers have plenty of corn left to sell in the next few months of the peak marketing season, adding more downward pressure on prices.

If Chinese authorities agree to buy U.S. corn, they will likely ship it directly to a warehouse and lock it up for a couple years until China's corn glut finally dissipates. 

"Document No. 1" Worries About Supply of Farm Products

China's Central Document no. 1 proclaims the importance of doing a good job on rural affairs work in 2019 in view of the challenges of "downward pressure on the economy" and "profound changes in the external environment." Communist leaders insist that emphasis on rural affairs must be unwavering to maintain the "ballast stone" role of rural people, agriculture and the countryside to respond to various challenges and "win the initiative."

The 2019 document announces ambitions to "decisively win the fight against poverty." It includes many ambitious reforms of rural land and governance institutions, promises to construct rural infrastructure, to make the countryside more livable, and to improve rural governance that are already underway. The document emphasizes that these initiatives are especially important this year because 2019 and 2020 are key years for achieving the "all-round relatively well-off society" and preparing for the Chinese communist party's 100th anniversary.

Concerns about maintaining supply of agricultural products are reflected at several points in the document, including a paragraph about safeguarding key commodities through "top-level design," setting up a system to maintain domestic supplies of each commodity, coordinating use of domestic and international markets and resources, and scientifically determining the volume of domestic commodity supply that must be maintained. The document asserts that rice and wheat "must be protected," corn production needs to be stabilized, and production capacity for cotton, oilseeds, sugar, and natural rubber needs to be firmed up. It advocates greater production of "commodities that are in short supply."
  • A soybean revitalization plan, a call for increased soybean planting, and a Yangtze River rapeseed production initiative reflect concerns about reliance on oilseed imports made more acute by the trade war. The document advocates production of tree crop oils--an idea that has come and gone intermittently since the 1970s.
  • The document calls for construction of "dairy bases," overhaul of small and medium dairy farms, upgrade of infant formula production, and expansion of corn for silage and alfalfa as fodder crops to support cattle.
  • A Xinjiang cotton base initiative is to be re-launched
  • A "dual high" sugar base is to cover the entire production region
  • The document calls for increased effort to prevent and control African swine fever in order to protect the industry's security.
  • The document promotes a recent strategy of creating local industries centered on local specialties fruits and vegetables, medicinal crops, bamboo, tea, nursery crops, and ethnic handicrafts tied in with rural tourism.
Agricultural policy features a series of dictates to maintain minimum amounts of cultivated land (120 million ha), grain planting (110 million ha), enforce "permanent farmland" (103 million ha), strengthen a "responsibility system" to reward and chastise provincial leaders for progress in grain production, and ensure that 53 million ha of high-standard fields are constructed by 2020. It calls for completing the delineation of "functional regions" for grain production and "protection regions" for other important agricultural products.

The document calls for designing a new agricultural subsidy system that is "adapted to WTO rules," protects farmers' income, and supports agricultural development. It specifically calls for adjusting and improving "amber box" policies (those limited by WTO rules) and expanding "green box" support (not limited by WTO rules).  Other domestic policy measures advocated:
  • Improve the minimum price policy for rice and wheat, giving a greater role to the market mechanism
  • Improve subsidy payments for soybean and corn producers
  • Subsidize farmer credit guarantees and cajole banks to increase farm and rural lending and give them lower reserve requirements as a reward. The document calls for rural lending quotas that sound like the U.S. Community Reinvestment Act.
  • Increase support for agricultural insurance, move ahead on pilot programs to insure farmers against income reductions and cost increases, and move forward on "insurance + futures" subsidy pilots.
  • Set up an award system for major grain-producing counties (this appears to tweak the existing grain transfer payment to give local officials stronger incentives to use money for grain production).
The document reiterates a strategy of relying on technology to raise production and correcting environmental abuses that went unchecked in past years when officials urged farmers to expand production without regard for external costs or depletion of resources.
  • Breakthroughs in agricultural technology are featured as a key driver to be nurtured by an elaborate agricultural R&D system that integrates companies and academic institutes and setting up agricultural science parks, innovation centers, demonstration zones, and technology alliances. The document emphasizes protection of property rights, attracting talent, and giving scientists rights to profit from their innovations.
  • A "digital countryside" advocates an "internet + agriculture" strategy, big data, intelligent farming, and e-commerce.
  • Programs to correct past abuses include a program to remediate heavy metal contamination in soil; protect black soil and reverse depletion of aquifers in the northeastern region; efforts to collect and utilize manure from livestock and poultry farms; and a plan to cut back on over-fishing and aquaculture in lakes, rivers, and coastal waters.
The document includes only two sentences dealing with international trade (in contrast to initiatives by the top leadership to expand imports of food to improve the standard of living in the country). The No. 1 Document advocates:
  • "Taking the initiative" to open channels to import products in short supply. This probably means maintaining tight controls over gradual increases, rather than passively allowing imports and foreign companies to flood into the country.
  • Greater diversity of import channels
  • More support for agricultural companies "going out" to invest abroad
  • Greater international cooperation with belt and road countries
  • Nurturing a group of multinational agricultural conglomerates
  • Increasing efforts to control smuggling of agricultural products
The document is rounded out with lengthy exhortations to keep the communist party in firm control of the countryside.
  • Village communist party branches are to be "battle fortresses" that are central to constructing rural infrastructure and institutions.
  • Officials are instructed to do well in "thought work," guiding rural people to practice socialist core values and consolidating the party's ideological positions in the countryside
  • Officials and news organs should propagandize the party's policies that benefit agriculture and rural areas
  • Officials should exhort rural "mass organizations" to discourage bad social practices such as extravagant marriages and funerals, sky-high bride prices, filial piety, and skimming off funds meant for support of the elderly.

Sunday, February 17, 2019

Meat Smugglers Continue to Evade Authorities

Meat smugglers continue to evade Chinese authorities, but shipments are smaller and more fragmented after several years of elevated enforcement efforts, customs officials say.

Customs authorities publicized several seizures of smuggled meat in January, ahead of the spring festival holiday:

Vans intercepted in Guangxi Province reportedly carried 1000 kg each of smuggled meat.
Also in January, customs officials reported to State media that their enforcement efforts have not been able to fully stamp out meat smuggling. Gangs controlling an entire chain of foreign purchases, transportation, and distribution within China now resemble a chain of ants bringing in smaller shipments concealed in trucks and decommissioned boats with false names and disabled tracking systems, customs officials say. Smugglers use cash or online payments with hidden records to avoid detection.

A customs post in Shenzhen said it seized 100,000 kg of chicken feet, wings, beef, and tripe last year.

Smuggled meat dodges tariffs, value added tax, exporter certification requirements, and inspection and quarantine procedures. Shipments of meat lacking proper documentation and required Chinese labels sell for approximately a 20-percent discount vs. legal meat. A metric ton of chicken feet can be 10,000 yuan cheaper than legal product.

Buyers are said to be mainly second-tier wholesale merchants who sell to restaurants, cafeterias, and barbecue stalls. Once in the country, smuggled meat is delivered all over China, some with fake labels affixed. A reporter monitoring an online discussion group said buyers asked specifically for undocumented meat. One buyer explained that the barbecue business is slow now, and he hopes the cost-savings from cheaper undocumented meat will yield a profit.

Officials complain that the low cost of smuggling and weak penalties keeps the smuggling business going. Most smuggled meat is purchased in small quantities that do not constitute a criminal offense and can only be assessed a fine. A food service company cannot be held liable unless it can be proven that they knowingly purchased illegal meat.

Saturday, February 16, 2019

China Begins Food Safety Testing Plan

China is launching a food safety monitoring plan that aims to collect and test over 1.3 million food samples annually. The plan calls for "double random" selection of randomly-chosen food items from randomly-chosen manufacturers, markets, restaurants, cafeterias and distributors. The testing program also covers imported foods and food products sold through e-commerce platforms. Results are to be made public in a timely manner.

The program was announced by the State Administration for Market Regulation in January 2019. Responsibility for carrying out 1,339,600 tests of 259 kinds of food will be allocated among the central market regulation department, provincial, and city/county bureaus. sampling should be spread throughout the year and focused seasonally or heightened during holidays, according to the program description.
  • The central administration will collect and test 20,600 "double random" samples that focus on large companies, major wholesale markets with a national scope, imported food and e-commerce sites. 
  • Provincial bureaus will collect 489,000 samples on food manufacturers licensed in the province, large food service enterprises, supermarkets and malls. 
  • City and county bureaus are responsible for 830,000 samples of meat, eggs, fish, fruit, and vegetables in local markets and checks of small shops and restaurants. 
The program specifies multiple substances to test for each of 259 food and beverage items, health foods and nutritional supplements. Each food item is classified at three levels of risk. Foods include specific items such as instant noodles, rice noodles, flavorings for instant noodles and hot pot, soy sauce, chili oil, marinated meat, a dozen kinds of cooking oils and animal fats, MSG, and edible agricultural products. Pasteurized milk, UHT milk, and fermented milk, for example, each have a separate set of prescribed tests (all are classified as high risk).

Each item has a different set of substances to check for, but heavy metals, bacteria, aflatoxin, and antibiotics are prominent. Some foods have just three items to check for but others have more than a dozen.
  • Pasteurized milk is to be checked for aflatoxin, a steroid called dexamethasone, melamine, lead, chromium, protein and acidity levels, bacterial count, staphylococcus, and salmonella. 
  • Pork liver is classified as "high risk" and is to be tested for four growth-promoting beta agonists (such as clenbuterol and ractopamine) and more than a dozen antibiotics (such as nitrofurazone and chloramphenicol). 
  • Soybean oil is also high risk and should be checked for acidity, arsenic, lead, benzo[a]pyrene, solvent residue, butylated hydroxyanisole, dibutylhydroxytoluene, and tert-butylhydroquinone.
Other items to check for include amino nitrogen level, benzoic acid, sorbic acid, dehydroacetic acid, rhodamine B, Sudan red, butylated hydroxyl anisole, nitrates and nitrites.

A January 31 report posted on the Administration of Market Regulation's web site says that 1,869 food samples were collected before the spring festival holiday, of which 16 failed to meet Chinese standards. The report lists the products, the reason for noncompliance, the stores where the products were sold, the name of the producer, and the name of the lab where testing was performed. Products included bamboo shoots, salted peanuts, sesame seeds, spicy beans, instant oatmeal, nutritional sesame paste, dried mango, sausage, sesame oil, and a candy made from apricot and chocolate. Products were sampled from major supermarket chain outlets in cities all over the country and an e-commerce platform. Problems detected included bacteria, residues of a bleaching agent, hydroacetic acid, and acid level outside limits prescribed by national standards.

A report from the previous week in January reveals that 17 of 2402 food samples were found to be non-compliant. Problems included microorganisms, pesticide residues, and heavy metals.

Monday, February 4, 2019

ASF Hits Company Finances

African swine fever (ASF) is having its most severe impact on the financial performance of Chinese companies hit by plunging prices, tight credit, lockdowns on pig shipments and culls of pigs, according to 2018 financial results released by the companies last month.

Chuying Agro-Pastoral may be the most prominent victim of what one writer has dubbed a "dragon head crisis." Chuying ran short of cash in November and asked bondholders to accept payment in hams, gift boxes and wine. The company has been accused of devoting too much of its cash flow to "high finance" and internet gaming. Chuying's latest estimate is a net loss of -1.9 to -3.3 billion yuan for 2018 after posting profits during the previous three years. The net loss was about 300-million yuan worse than the company had projected in its third quarter 2018 report.

Chuying Agro-Pastoral said sales were hurt by the lockdown of interprovincial swine movements imposed to prevent spread of ASF. Working capital dried up and loss of favorable prices from suppliers raised costs and prevented the company from getting timely supplies of feed. News media interpreted the lack of feed supplies to mean the "quite a few pigs starved to death." The company declared a 90-million-yuan capital impairment after company farms were demolished by local officials in Shantou City during the fourth quarter (presumably to comply with an environmental pollution remediation initiative).

Xinjin Nong, a supplier of pig feed, feeder pigs, and veterinary drugs, estimated its 2018 net loss at -240 to -290 million yuan, a sharp turnaround from its 2017 profit of 67.6 million yuan. Its third quarter 2018 report had projected a 20-to-40 million yuan profit. This company's swine sales plummeted 46 percent between the third and fourth quarters, and falling prices forced the company to reduce the value of the swine it still holds. Xinjin Nong's value is also impaired by potential bankruptcy by a downstream customer. Write-downs in company assets forced the company to put on hold a merger with a Hubei company.

Aonong Biological projects a reduction in 2018 profit of 58-to-72 percent attributed to impacts of ASF on sales and prices. The company had to write down 10 million yuan on its stake in a breeding farm in Jiangsu that had an ASF outbreak.

Fujian An Joy Foods, a maker of ingredients for hot pot meals, confirmed that meatballs produced by its subsidiary in Gansu Province tested positive for ASF. An Joy's stock price plummeted, reducing the company's market value by 600 million yuan. The company shut down pork operations to avoid risk of further occurrences due to the wide scope of sales, persisting problems among its hog suppliers and potential problems such as cross contamination in the production process.

Henan Shuanghui Investment Development was reorganized by merging with its parent company, Shuanghui Group. The company is part of a tangled web of holding companies and subsidiaries under WH International that also includes Smithfield Foods. After the deal, a company called Rotary Vortex will effectively control 73 percent of Shuanghui Development. Rotex, owned by Goldman Sachs and a prominent Chinese investment firm, issued additional shares to finance the absorption of Shuanghui Development. The company blamed four consecutive quarters of declining business income on falling hog prices and closure of its Zhengzhou processing plant for six weeks after ASF was detected in a load of pigs arriving at the plant in August. Shuanghui Development has also experienced leadership upheaval with the departure of several top executives in 2017.

On the other hand, shares of Hong Kong-listed Yurun Group--China's other leading pig butcher by volume--soared 29 percent after its chairman reappeared after four years under house arrest. Zhu Jiancai, once the richest man in Jiangsu Province, was believed to be under investigation for bribery and shredding accounting documents. He founded Yurun in the 1990s and expanded by taking over loss-making state-owned meat canneries and a string of 25 other slaughterhouses. Yurun is also engaged in real estate, shopping malls, banking, logistics, travel, and insurance.

Pig breeder Tangrenshen has not let false test results that initially reported ASF in feed manufactured by its subsidiary in eastern Anhui Province stop its expansion. Tangrenshen, confident in its ability to avoid ASF, is raising capital to expand its production capacity aggressively. Tangrenshen hopes that national policy will squeeze out small-scale pig farms and shut down interprovincial transportation of live swine as it eradicates ASF over the next 3-to-5 years. The company says it is building a million-head slaughter facility in Hebei Province, two 300,000-head propagation farms in Hunan and Henan, a 100,000-head native breed "black pig" farm in western Hunan, and a 1200-sow nucleus breeding farm in Gansu Province.