Tuesday, February 18, 2020

Tough Year for China's Rice Farmers

China's rice market is in for a very tough year, a "Three Rurals Filling Station" (or "Go Rural") reporter warned this week. The journalist was alarmed to learn from chats and phone calls with rice growers in Heilongjiang Province that sales of the northeastern province's rice has stalled due to a perfect storm of a poor quality crop, a delayed government purchase program, the coronavirus quarantine, and unusual weather.

The reporter learned that the virus has spread quickly in Heilongjiang, villages are prohibiting movement of people, and some are using drones to monitor comings and goings. Rice marketing is nearly halted with the absence of traders and trucks. The reporter worried that rice still held by farmers may deteriorate, lose its flavor, and become moldy if held too long. This could result in unsold crops and plunging income, the reporter warned.

Heilongjiang Province issued an emergency notice on rice procurement in December 2019 when sales were proceeding at a little more than half the pace of the previous year. The provincial grain bureau said the action plan was needed due to lower-than-usual rice quality in some parts of the province and concern that large-scale farmers would be unable to sell their rice. Officials were ordered to fan out into villages, assess provincial grain output, arrange for farmers to sell grade-3 or higher rice to processors or government reserves, and help farmers improve the quality of grade-4 rice. The program also ordered detailed statistical reporting but no public reports on Heilongjiang grain marketing appear to have been issued since the program started. National figures indicate that japonica rice procurement stagnated in mid-January. The emergency program was due to end in February but a recent announcement indicates it will be extended.

A report in early January said the initial results of the action plan were disappointing. The report said new rice had "no price advantage," government reserves had little room for more rice, many processors in Heilongjiang had stopped buying local rice, and some were buying significant volumes of japonica rice from southern provinces like Jiangsu. Similarly, the "Three Rurals Filling Station" reporter heard that very little rice was being sold outside the province. This is unusual because Heilongjiang is the largest producer of japonica rice and normally ships its surplus rice to the rest of the country.

The explanation for the perverse flows of japonica rice from south to northeast is likely China's price support program. Heilongjiang and other northeastern provinces have a support price for japonica rice, but southern provinces like Jiangsu and Anhui do not. The chart below illustrates that rice prices largely follow the support price. Officials cut the support price in 2017 and 2018 to deal with massive surpluses. In 2019 the market price in Anhui province dropped about 7 percent below the support price in Heilongjiang. Prices were similarly low in Jiangsu Province and Shanghai, making it impossible for rice mills to sell their products at a competitive price and resulting in the freeze-up of rice markets in Heilongjiang. Similar perverse effects have happened to soybeans, corn, cotton, and rapeseed when those commodities were marketed with support prices in select regions in past years.
Prices from China National Grain and Oils Information Center.
Officials usually announce the coming year's minimum price for rice in February. Officials have announced that the program will continue this year, and a terse report attributed to China Central TV indicates that the minimum price will be kept stable in 2020 or possibly raised. The announcement also reversed recent years' policy by suggesting that farmers return to growing two crops of indica (long grain) rice annually in regions where appropriate--chiefly southern provinces like Hunan and Jiangxi. This is puzzling since prices are falling, supply exceeds demand, and there is little demand for the early rice crop. The minimum price clearly props up the price of early rice, as shown in the chart below.
Prices from China National Grain and Oils Information Center.

The "Three Rural Filling Station" reporter noted that supply and demand estimates indicate that China produces a surplus of 10 million metric tons of rice annually. The reporter estimated that the reserve of rice purchased at minimum prices has already swelled to 150 mmt and clearing out inventories is the "main theme." With such a large surplus, the reporter warns readers to expect weak rice prices.

Finally, the reporter admonished farmers to jettison "traditional thinking." The reporter suggested that farmers stop relying on government warehouses to buy rice, stop waiting for traders to knock on their door, and stop forming price expectations by comparing with neighbors. Instead, farmers should be more proactive and pay attention to analyses in news media and other outlets.

Unlike propaganda trumpeting recovery of production and abundant food, the "Three Rurals Filling Station" report is not widely posted. It only appears to be posted on two news aggregator sites.


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