Saturday, June 29, 2019

Pig Insurance Fraud Uncovered in Sichuan

A crackdown on pig insurance fraud is underway in China's Sichuan Province after officials uncovered a "chain of corruption" that collected insurance money based on false reports of dead pigs.

China began offering subsidized insurance for sows in 2007 and later extended coverage to fattening hogs. Insurance is sold by insurance companies, but the government subsidizes 80 percent of the premiums. The program is intended to stabilize production by reducing risk for farmers and to prevent diseased pigs from being sold and slaughtered. Insurance for sows and commercial hogs was included on the Ministry of Agriculture and Rural Affairs' (MARA) list of key rural policies for 2019. There has been no public discussion of whether insurance companies have been paying out claims on the large numbers of pigs that died of African Swine Fever since August 2018. Unspecified "improvement" of hog insurance was one of the policy measures to promote recovery of hog production offered at a MARA press conference this week.

On June 20, a special provincial rectification team met in Sichuan's Deyang City to learn about the pig insurance fraud case discovered in a local anti-corruption sweep. In a so-called use of "big data," Deyang officials compared the number of insurance payouts on dead pigs over 2016-18 with records of carcass disposals and found that insurance payouts exceeded the number of buried carcasses. Deyang mobilized dozens of communist party and government officials, police, and insurance company personnel who recovered 64.5 million yuan (about $9.5 million) in fraudulent claims.

In a "typical case" described by Deyang officials, the director of a town veterinary station conspired with several farmers and relatives to falsely report pigs to the insurance company and collected insurance payouts on phantom pigs. According to a description of the case in a newspaper devoted to communist party discipline, the scheme began in 2015 when an insurance agent sought the veterinarian's help to expand insurance coverage. The insurance agent offered a guaranteed payout based on the number of pigs insured, regardless of how many actually died. The veterinarian recruited three farmers and a relative to sign up for insurance on thousands of pigs that didn't exist. The veterinary station official--who raised no pigs himself--collected thousands of yuan in false claims plus "management fees" from the farmers. In January 2019, the veterinarian was expelled from the communist party and removed from his job. He is now awaiting trial where he is assured of receiving "severe punishment," the legal newspaper said.

A separate article described a farmer's complaint that he had not received an insurance payout on pigs that died this spring. The farmer in Shandong Province reported that he had bought insurance on 220 pigs last year when an insurance company representative came to his village offering policies that cost only 6 yuan (less than US$ 90 cents) per pig, with the rest of the premium paid by government subsidies. In March, the farmer's pigs died and he contacted the company to file a claim. An insurance adjuster arrived promptly, counted, weighed, and photographed the dead pigs. The farmer soon received 7000 yuan directly deposited in his bank account.

The Shandong farmer's next batch of pigs also died, and he filed another claim. The insurance adjuster once again arrived and filed his report with the company, but no compensation arrived this time. The local newspaper reporter said he contacted the insurance company to ask about the farmer's case. The manager confirmed the event and claimed that the new batch of pigs was not covered because the insurance had expired. The manager claimed that the company had not refused to pay out the claim, but was still investigating the situation.

It is unclear why these articles were inserted in news media this month. Are ASF claims overwhelming insurance companies, or are increased claims revealing extensive fraud? Are farmers complaining about unpaid claims, or are officials trying to reassure farmers that government-subsidized insurance is a safety net for them? We can only guess, for now.

Thursday, June 27, 2019

Sunny With Chance of Rising Pork Prices

A cheerleading session by Chinese agricultural officials emphasized the stability of agricultural markets while acknowledging risks of pests, disease, and extreme weather events. One official described the "overall adequate supply" of farm products as a "support against external risks and challenges."

The June 26 press conference given by three Ministry of Agriculture and Rural Affairs officials began with glowing reports of the summer grain harvest and prospects for fall crops, and the remarks finished with praise for this year's "soybean revitalization plan." In between, however, officials worried about northern drought and southern floods due to El Nino, the spread of fall army worms to northern corn-growing regions after summer monsoons, rising prices of pork due to African swine fever, and short supplies of apples and pears due to cold weather last year. Fall army worms were described as a new threat to the structure of the country's grain production.

The Ministry's efforts to address China's tight pork supply occupied the largest part of the remarks. The Ministry officials urged their listeners (other officials and news media) to send positive signals about the pork market, convey interpretations of market reports that create "good expectations," and "guide" pig farmers to restore their confidence and restock their barns. The Ministry is also "guiding" expanded supply of poultry and other substitutes for pork. One official promised to implement the communist party central committee's instructions by doing everything possible to stabilize and revive production of pigs.

Officials ordered local cadres to effectively utilize an annual transfer payment to hog-surplus counties, make use of aid for African swine fever prevention and control, give subsidized loans to breeding farms and large-scale farms, give companies unspecified help to survive the difficulties, make exceptions to strict local land-use zoning for large hog farms, promptly pay farmers compensation for culling animals, and improve policy-type insurance for hogs.

Local officials were urged to continue a program to create large-scale model pig farms with good biosecurity and manure utilization to provide guidance to medium- and small-scale farms. Experts and technicians are to be sent to farms to give guidance on breed improvement and efficient production techniques. Inspections of disease treatment, transportation and slaughter are to be carried out, and swill-feeding is to be banned.

Agricultural officials attributed stable grain production to tight controls on farmland, construction of medium- and high-standard fields, creation of a "modern" seed industry, mechanization, and dissemination of technology to farmers. Agricultural officials now want to diversify sources of food by encouraging production and marketing of specialty products with geographic indications from mountainous regions, grasslands, oceans, and forests.

Saturday, June 22, 2019

China Wheat Price Support Policy Still in Play

China's wheat industry can't shake its dependence on government price supports. A good winter wheat harvest and weak demand are creating a supply glut, driving prices down. Officials say they want to marketize wheat procurement, but the price support program is once again the focal point of China's wheat market.

According to Grain and Oils Market News, the minimum-price wheat purchase policy "needs to give stronger guidance" and "enliven the market" by inducing more purchasers to enter the market. A Xinhua report said the influential role of intervention purchases on the wheat market "cannot be underestimated," and reported that experts expect the market to be enlivened after policy purchases of wheat begin. The Masses Daily assures farmers in Shandong Province that the price support will prevent prices from falling--despite excess wheat supply in the province.

With wheat prices falling, Chinese traders are cautiously buying the new crop only as needed, afraid of being caught with inventory that loses its value as the market becomes more glutted. After wheat from the new harvest came on the market this month, the price of old wheat from last year's harvest fell about 60-100 yuan/mt. Authorities hope that putting a floor under prices will encourage private traders to re-enter the market when they are assured the price will not continue dropping.

China wheat prices
June 2019 domestic prices Yuan/mt
Minimum purchase price 2240
Jiangsu Province 2100-2240
North of Huai River 2160-2200
Shandong Liucheng 2160-2300
Shandong Heze 2270
Purchase by flour mills 2240-2320
2018 wheat enter-mill 2340-2400
Average auction price 2330
April 2019 imports*
Canadian hard wheat 2254
Australian wheat 2087
Kazakh wheat 1720
Russian wheat 1759
*1% duty and 10% VAT added to unit values calculated from customs data

Market reports say Chinese wheat prices are under downward pressure following a rebound in wheat output and better quality of this year's crop. Adding to supply pressure, authorities offered 3 mmt of wheat from reserves for auction in each of the first three weeks of June (but with prices exceeding current market prices, less than 150,000 mt was actually sold).

The chief of Shandong Province's grain and commodity reserves bureau warned that a "seasonal decline" in the wheat price is possible. The Masses Daily described this year's summer grain procurement as "especially complicated" with several factors weakening demand for wheat:
  • summer is the low season for flour consumption
  • shrinking swine inventories due to African swine fever have depressed demand for feed ingredients such as wheat bran 
  • flour mills are having difficulty raising funds for working capital to buy wheat.
According to reforms of the program issued in 2018, local authorities can launch minimum price procurement after verifying that market prices have fallen below the minimum for three days in a row. Reports say the price for newly-harvested wheat in Shandong is hovering near the minimum price of 2240 yuan/mt.  In Shandong Province's Heze Prefecture, the price of common wheat is 2270 yuan/mt, down 5-to-25 yuan from early June. In Shandong's Liucheng the price is below the minimum price, at 2160-2300 yuan/mt.

North of the Huai River the price is 2160-2200 yuan/mt, and in Jiangsu Province the price is 2100-2240 yuan/mt. Anhui Province launched its price support purchase program June 5, and neighboring Jiangsu Province launched its program on June 12. Xinhua said under current market conditions, Hubei, Henan and southern Shandong could also launch minimum purchase programs soon. Xinhua estimated that 10 mmt of this year's wheat crop will be purchased by the minimum price program.

China's National Grain and Oils Information Center (CNGOIC) estimates China's 2019 winter wheat crop at 125 mmt, up 430,000 mt from last year. Total wheat output is estimated at 132 mmt.

The 2018 wheat crop quality was seriously degraded by heavy rains after harvest in Hubei, Anhui, and parts of Henan that caused lodging, mold and sprouting, but the 2019 crop is said to be good quality. Test weights are said to be 780-800 g/L, up 20 g/L from 2018. Large amounts of the 2018 crop could not be used for flour-milling. None of the 2018 wheat reserves offered for auction this month has sold. Some organizations estimated feed use of the 2018 wheat crop was 18 mmt, up 3 mmt. Industrial use was estimated at 12 mmt, up 2.5 mmt. CNGOIC estimates that those increases in feed and industrial use will be reversed in 2019.

A separate Xinhua report from Shandong assures farmers that the provincial branch of the Government's Agricultural Development Bank of China has 30 billion yuan (about $4.3 billion) set aside for purchase of this year's Shandong wheat crop, estimated at 18.75 mmt. According to Xinhua, Shandong has set up post-harvest service centers to clean, dry, store, process, and sell wheat on farmers' behalf. Following this spring's audit of grain reserves, Xinhua promised strict investigations of violations of national grain purchase policies.

The Shandong reserve bureau chief told The Masses Daily that his bureau will ensure the volume of grain held in reserves is "truthful," meets quality standards, and that farmers do not encounter difficulty in selling their grain. The bureau is on the lookout for potential threats to social stability and warns grain-buying officials who neglect their responsibilities that they will be severely punished for bad effects on society.

Despite the glut of wheat and massive reserves, China imported 1.15 mmt of wheat during the first four months of 2019. Seventy percent was from Canada and about a fourth came from Kazakhstan and France. Smaller amounts came from the United States, Australia, and Russia. The Canadian wheat cost an average of 2254 yuan/mt after adding the 1-percent in-quota duty and 10-percent VAT. That's slightly higher than the minimum price, but the quality is superior to most Chinese domestic wheat. On the other hand, Kazakh and Russian wheat had low prices indicating poor quality. Other sources reveal that the Kazakh wheat is used to manufacture feed.
China's tight control over the tariff rate quota system insulates the domestic market by channeling imports into government reserve warehouses or coastal provinces that are distant from production regions. China customs data say about 80 percent of the imports were made by companies registered in Beijing, most likely COFCO/Sinograin. Authorities may be replacing 1.8 mmt of old U.S. wheat imported in 2013 that was auctioned from reserves last year. Other significant importers were registered in coastal provinces Guangdong and Fujian and in Xinjiang which borders Kazakhstan. Major flour-milling provinces of Shandong, Henan, and Jiangsu imported only a few thousand tons apiece, and none was imported by companies in other major flour-milling provinces Anhui, Hebei, or Hubei.

Sunday, June 16, 2019

Fish vs. Pigs on Chinese Riverbanks

A Chinese fish farm's demand for compensation from a pig farm illustrates the competition for China's overburdened natural resource base and the power vested in courts by vague assignment of property rights.

The Changjiang Daily reported that a fish-farming company went to court to seek compensation for loss of fish they blamed on wastewater dumped in the river by an upstream swine breeding farm. After large numbers of the company's fish died during June-October 2018, the fish company and the swine farm both filed a request with the local fishery supervisory commission to investigate the cause and evaluate the losses.

The Ministry of Agriculture's Central-Upper Yangtze River Fishery Environmental Monitoring Center reported in December 2018 that the river's water quality suffered from serious ammonia-nitrogen, chemical oxygen demand, and eutrophication due to the long-term violation of regulations by the swine farm's discharge of wastewater. The initial court judgment ordered the breeding farm company to pay 2.32 million yuan to the fish company.

The swine farm appealed the judgment. The swine farm pointed out that the river had suffered from severe eutrophication since 2010 and that the fish company routinely lost fish every year. In most years the fish losses were small, and the two companies settled the losses through private mediation. In 2014, the managers of an "agricultural park" set up a formal mechanism for the swine farm to pay an annual 180,000-yuan "water adjustment fee" to fund compensation for the fish farm's losses. The unusually large loss during 2018 prompted the fish company to file the legal complaint.

The court's investigation found that the fish company had collected funds from the "water adjustment fee" as compensation in previous years, had never filed a complaint until 2018, and had not regularly monitored water quality. The appeal judgment issued this month determined that the swine farm was at fault for the 2018 fish kill, but found that the fish company was responsible for bearing 20 percent of the loss. The appellate judge slashed the fish farm's compensation to 1.86 million yuan.

China's farm families once used animal manure and canal mud to fertilize fields, fed pigs food scraps and mash from liquor distilleries, burned crop stalks in their stoves, and only ate meat on special occasions. Today, all these activities are uncoupled, and by-products that were once valued resources have become wastes. Soaring agricultural production in an increasingly-stressed ecosystem means not only that water and land are degraded, but different agricultural activities often impinge on one another. The communist system has long been obsessed with maximizing production statistics without regard for broader social impacts or sacrifice of future productivity.

Pigs have been a growing problem that has mostly gotten lip service since the 1990s. The idea of banning pig farms in environmentally sensitive areas, residential areas, and near roads was first included in a 2006 livestock law. It was never widely implemented until 2014 when China's State Council and Ministries of Environmental Protection and Agriculture introduced a series of laws, regulations and action plans to close pig farms in zones near bodies of water and residential areas. The Yangtze River region where this pig farm is located was one of the regions specifically targeted by these plans to control pig-manure pollution. News media featured triumphant images of pig farms being destroyed to save the environment, yet this farm was allowed to continue operating and dump effluent into a river that was already known to be polluted. The farm's name was not revealed, but it is likely a breeding farm under the provincial government's purview that is subsidized and too important to be closed or moved.

In 2014--when officials were ramping up the campaign to close polluting pig farms--a mechanism was set up to allow this farm to pay the fish farm for its pollution. The damage to the fish farm is surely only a fraction of the full social cost of the pig farm's pollution. Individual fishermen and people who use the water for drinking or other activities like food manufacturing did not receive compensation.

Will regulation of pig manure lighten up now that China likely faces a shortage of pork and needs to rebuild pork production capacity?

Wednesday, June 12, 2019

Differing ASF Impacts in Guangdong and Sichuan

Teams of Chinese futures analysts found that Guangdong Province has suffered much more severe declines in swine numbers than has Sichuan Province. While the latest national estimates say China's May 2019 swine inventory is down 23 percent from a year earlier, the surveys find African swine fever (ASF) is moving at a different pace in various regions. Family-based pig farms are being closed down, some farms are switching to poultry production, big companies with good biosecurity are maneuvering to expand swine output later in the year, cheap soybean meal is crowding out other proteins, and use of domestic wheat bran and rapeseed in feed has shrunk.

Teams of Chinese futures market analysts visited farming, feed, and meat companies in Guangdong and Sichuan Provinces during May 2019. These are key pork-producing and consuming provinces. Official statistics say Sichuan slaughtered 65.8 million hogs in 2017 and Guangdong slaughtered 37.1 million. Guangdong is the second-largest feed-producing province.

According to the Guangdong survey report, serious outbreaks of ASF began in Guangdong during the February 2019 spring festival and prompted panic slaughter. According to the report, the severity of the epidemic there peaked in March and remained severe during April and May. Guangdong's decline in March swine inventory is estimated at 40 percent from a year earlier, double the national decline. The reduction was most prominent in Guangdong's western districts of Maoming, Yangxiang, and Zhenjiang. Shaoguan--in northern Guangdong--had a decline of only 10 percent.

The Sichuan survey reported that ASF had less impact there, attributed to Sichuan's relatively remote location, mountainous terrain, and small scattered farms. The report says that environmental regulations have pushed pig farms out of the Sichuan river basins into mountainous areas. There were serious outbreaks reported in Yibin and Zigong prefectures, but they did not spread widely. When an ASF outbreak occurs in Sichuan's hills and hollows, the radius of culling to contain the disease encompasses fewer farms than in plains and heavily-traveled regions further east, the report said. The report also credited strict biosecurity measures taken by large companies in Sichuan. The year-on-year decline in Sichuan's swine inventory is estimated at 10 percent, half the national rate.

The survey reports indicate that both Sichuan and Guangdong have large numbers of small, family-operated pig farms. The reports say large companies hope to take advantage of the ASF crisis to expand. The Sichuan report notes that the province's officially-reported outbreaks were among small-scale farms and no large-scale farms reported ASF problems. In Sichuan, backyard farmers reportedly had a 30-percent decline in swine inventories while large farms had little change.

In contrast, small farmers in Guangdong are concentrated in the western districts of the province. In Maoming, the decline in pig inventories was reported to be 50%, and sales of pig feed were said to be down 70% there. In western Guangdong, villages are overwhelmed once the disease hits one farm. The report emphasized that losses were especially heavy in Yangchun district, known as Guangdong's main supplier of piglets. Sows are said to be especially vulnerable to ASF, and their numbers may have declined by as much as 60 percent in Yangchun, where carcasses reportedly lined the roadside. Heavy rain in April may have contributed to spread of the virus.

In Guangdong, many of the family farms have started raising chickens and ducks after clearing out their pigs. Aquaculture production in Guangdong can ramp up quickly, but its expansion this summer depends on weather conditions and prices. In Sichuan, small farms are also reported to have taken up poultry production. The increase in poultry feed sales is offsetting declines in pig feed to some extent.

The two provinces show how China is gradually becoming a pork-deficit nation. Guangdong is one of the clear pork-deficit regions. Its Pearl River Delta is highly urbanized and is now set to become part of an advanced "Greater Bay" metropolis extending into Hong Kong--dirty pig farms will not be welcome there. (Dongguan City was the first locality to limit pig farms a decade ago.) A separate article last month estimated that Guangdong produces only about 60 percent of the 55 million hogs needed to support annual consumption. Worried about dual impacts of ASF and farm demolitions (to comply with environmental plans), Guangdong officials say they set up 133 pork production bases that are ordered to prioritize supplies for Guangzhou to avert shortages.

Sichuan is the second-largest hog producer, but it is also the top consumer of pork. One large feed company in Chengdu estimated that Sichuan produces 45-to-55 million hogs annually (official statistics say 65.8 million). "Legal" imports of 9 million hogs and "illegal" imports estimated at 12-15 million fill the deficit. Sichuan has some of the highest hog prices in China, but the report claims that an influx of hogs from other provinces has prevented prices from rising higher. There is some concern that hogs from Yunnan and Guizhou Provinces could bring more ASF into Sichuan.

The Guangdong report said the widespread sell-off of pigs is the reason why prices have not risen. The Guangdong report says panic slaughter of hogs has filled pork storage facilities to capacity. The Sichuan report says pork inventories are not as large there. A Sichuan slaughterhouse is holding 600-to-700 metric tons of pork in inventory, but it has 12,000 tons of storage capacity. The company says it will consider stocking up on frozen pork if the price falls below 12 yuan per kg. Its main customers for frozen pork are food processing plants. Five thousand tons of its storage capacity is for holding state reserves. There is concern that frozen pork inventories could contain the ASF virus. A Sichuan manager said testing of pork inventories ordered by the government has not started yet. Some people say 90 percent of the pork held in inventory is infected, but the slaughterhouse manager doubts it is that prevalent. Infected pork will have to be destroyed, the manager said, since there is nothing else to do with it.

The Sichuan report contains a mix of pessimistic expectations about future ASF outbreaks and maneuvering by large companies to expand output. Sichuan is described as a "battleground" for several national companies and a handful of local companies fighting for market share. At a meeting of 12 companies accounting for 11 percent of the province's output, they set a goal of expanding their share to 15 percent this year (collusion among companies is not considered an antitrust problem in China). A feed company in Meishan said small farmers are adding sows. Expansion of frozen semen companies has promoted artificial insemination and raised productivity in Sichuan.

Saturday, June 1, 2019

Fake Pig Vaccine Case in China

Last week police in China's Zhejiang Province announced their arrest of a gang selling pig vaccines made of colored water. The fake pig vaccine case shows that braggadocio about progress in developing a new vaccine for African swine fever and use of artificial intelligence technology in pig-farming masks dysfunction at the grass roots level.

Local police in Jiaxing City (also the source of 10,000 dead pigs that floated into Shanghai in 2013) said the 14-person gang manufactured fake animal vaccines at workshops in Henan Province. The vaccines were little more than colored water with no efficacy in preventing disease, authorities said. False labels were affixed to vaccines that were marketed to customers all over China using internet and social media. Customers were mainly pet shops and veterinary stations, police said. A raid of the facilities in Henan reportedly discovered 58,000 bottles with labels from 16 companies and 270 kinds of vaccine as well as many more empty bottles, labels, instructions, cell phones, and sales books.

Police say a person named Zhou bought 100 bottles of foot-and-mouth disease vaccine in September-October 2017 and then sold the vaccines to a swine-producing cooperative. The farmers' pigs died, causing losses reported at RMB 500,000. The company whose name was on the vaccine label claimed the vaccines were fakes. Police formed a task force and somehow uncovered the gang in Henan.

Some observations:
  • This fake vaccine producer apparently continued to operate despite annual Ministry of Agriculture action plans to crack down on fake vaccines since at least 2015.
  • Subsidized (mandatory) vaccines for foot and mouth disease are no. 33 in a list of 37 agricultural support policies released by the Ministry of Agriculture and Rural Affairs this week--a policy that was initiated 12 years ago to address severe disease problems. There is supposed to be a system of approved manufacturers and distribution through government-run veterinary stations to supply foot-and-mouth vaccines to farmers. Yet farmers apparently still buy vaccines through acquaintances and cheap online vendors.
  • The death of unvaccinated pigs suggests that foot-and-mouth disease is endemic. Chinese authorities control diseases with vaccines but they do not eradicate them.
  • China has never had significant formal education to train professional practicing veterinarians. The shortage of veterinarians in China has been estimated at 1 million. A propaganda article last month discussing measures being taken to shore up surveillance of African swine fever in Shandong Province includes resolve to address the shortage of official veterinarians. Today, veterinarians can make more money treating dogs and cats in cities.
Security Times recently quoted a Chinese pork industry investment analyst who said, "Although the country already has technology to detect African swine fever, the market doesn’t give it much credibility. [In my area] there are cost and reliability factors."