Thursday, April 23, 2020

China Cotton Shrinks in Pandemic

The shrinkage of China's cotton-textile sector is gaining momentum during the global pandemic.

China's agricultural ministry expects cotton area to fall 0.5 percent in 2020, while a planting intentions survey by China's cotton reserves company predicts a steeper 5.1 percent decline. The Ministry of Agriculture and Rural Affairs newly-released 10-year projections show that area planted in cotton will decline by a cumulative 3 percent over the next 10 years (less than the 5 percent plunge in area predicted by the cotton reserves survey for this year!)

The cotton reserves corporation report expects a 4.7 percent decline in Chinas' cotton output to 5.58 million metric tons in 2020. The agriculture ministry projects a 2.2 percent increase in output, but this will only be temporary. The ministry projects a peak in cotton output at 6 million tons during 2021-22 and a decline to 5.82 million metric tons in 2029.

Both reports highlighted plunging area in the central and eastern regions with steadier production in the Xinjiang Autonomous Region in China's far northwest. The China cotton reserves corporation expects a 10.9 percent area decline in the Yellow River region, a 21.9 percent decline in the Yangtze River valley, and a 1.6 percent decline in Xinjiang's area planted. Xinjiang is expected to account for 77 percent of cotton area in China. The agriculture ministry expects a 2 percent increase in Xinjiang and slower declines of 6.2 percent in the Yellow River region and 8.7 percent in the Yangtze region.

The agriculture ministry said state reserves disgorged a cumulative 8.45 million tons of cotton over the last 3 years, including 1.16 million tons auctioned from May 5 to Sept 30 last year. The ministry said the de-stocking of excess reserves is now complete. Authorities aimed to add 500,000 tons to reserves between December and March and purchased most of their target in the first month.

Current market conditions are dismal, with export orders scarce and domestic textile business weak. The ag ministry expects a 2.5 percent decrease in cotton consumption to 7.93 million tons this year and further decline to 7.25 million tons in 2029. Imports were up 17.6 percent this year, but are expected to decline 8.1 percent this year and fall by a further 14.8 percent by 2029. A surge in imports from Brazil made that country China's top supplier of cotton imports last year.

Cotton prices reported by the National Bureau of Statistics fell below the price of imported cotton last year. Prices fell again during the peak of the covid-19 pandemic and appeared to stabilize in late March. The average cotton price in the first 10 days of April was down 17.6 percent from January 1. Polyester filament prices were down 26.7 percent over the same period.
Data from China National Bureau of Statistics raw materials purchase price reports.

China Cotton Net also reported that the Urumqi (Xinjiang) railway bureau has slashed the freight rate for cotton by 70 percent for 70-ton cars (65% for 65-ton railway cars). The bureau said it will take other measures to reduce costs of shipping cotton from Xinjiang to eastern regions. The measures are meant to revive production by cotton enterprises suffering losses during the covid-19 pandemic. According to the report, transportation by truck has been cheaper than rail since highway tolls were waived after the January Spring Festival holiday. Truck freight from Korla in Xinjiang to Hebei and Shandong Provinces now costs 400 yuan per metric ton. According to the report, orders have dropped sharply for exporting companies and show no signs of picking up soon.

China Cotton Net also predicted that Vietnam could surpass China to become the world's top apparel exporter this year. In the first two months of 2020, Vietnam had a 18.8% share and China had a 21.3% share of the U.S. textile import market. The shift of apparel exports from China to other countries began last year, the report said, attributed to rising labor costs over most recent decade. Vietnam has been exporting more apparel to China, another manifestation of the shift. Vietnam also has rising labor costs, the report said, and Vietnam's advantage is in chemical fiber while Bangladesh and Cambodia have labor cost advantages. Vietnam's exports fell during the first quarter of 2020, but the article expects a resurgence when the pandemic passes.

Saturday, April 18, 2020

China's Food Spending Stable in Cratering Economy

China's food spending was relatively stable as the economy cratered during the Q1 2020 COVID-19 pandemic. However, sales to restaurants, cafeterias and hotels shrank dramatically while food sales direct to consumers in stores and online were among the few bright spots in retail, according to figures released by China's National Bureau of Statistics. Food processing output and investment were down sharply, but a yawning gap in meat supplies left by last year's African swine fever epidemic is layered over the impacts of the this year's crisis.

China change in food industry indicators, Q1 2020 vs a year earlier
Indicator Percent
Consumer expenditure on food, alcohol, tobacco 2.1
Retail food sales by above-scale stores 12.6
Online sales of edible items 32.7
Food service industry sales -44.3
Primary processing of farm products and foods -11.1
Food manufacturing -7.9
GDP from Primary sector -3.8
Pork output -21.7
Source: China National Bureau of Statistics.

China's Q1 2020 GDP was down 6.8 percent from a year earlier, the first Chinese GDP decline in decades. All the main indicators of economic activity for Q1 were down more than the topline number. Per capita consumption expenditures were down 12.5 percent, retail sales were down 19 percent, fixed asset investment was down 16.1 percent, and exports were down 10 percent from a year earlier. These year-on-year drops don't account for the loss of gains during Q2-Q4 last year.

Q1 income data indicate that China's wage earners had relatively steady income, while the self-employed were hit hardest by the pandemic shutdown. Average per capita disposable income was up 0.8 percent from a year ago. Wage earnings--accounting for 57 percent of China's household income--were up 1.2 percent from a year earlier, but household business earnings--accounting for 15 percent--were down 7.3 percent.  Income from transfer payments rose 6.8 percent and now accounts for 18 percent of income--exceeding the share of income from household businesses. The covid-19 epidemic may be the knockout blow to the army of individual entrepreneurs that drove China's growth in previous decades. Average monthly earnings by rural migrant workers were down 7.9 percent, and the 122.5-million migrant workforce at the end of February was 30 percent smaller than a year ago.

Q1 per capita consumer expenditure was down 8.2 percent from a year earlier. The two biggest chunks of household spending--food, alcohol and tobacco (accounting for 33.6 percent of household spending) and rent and utilities (24.4 percent)--were both up 2.1 percent. Spending in other categories was down in double digits. Per capita expenditure on clothing was down 17.8 percent and even medical spending was down 10.2 percent.

The Bureau reported that real per capita consumer expenditure was down 12.5 percent. However, this "inflation" adjustment is meaningless since the 4.9 percent increase in China's CPI in Q1 2020 reflects mainly a 122.5-percent increase in pork prices. The non-food CPI increased only 1.1 percent from a year earlier. There is essentially no inflation in China, just a doubling of pork prices to ration a 21-percent shrinkage of pork production.

Overall retail sales in China were down 15.8 percent in Q1 2020 from a year earlier, but the food service component plummeted 44.3 percent. Sales by "above scale" supermarkets, meanwhile, were up 1.9 percent and food sales by "above scale" stores were up 12.6 percent year-on-year. In contrast, department store sales were down 34.9 percent and specialty shop sales were down 24.7 percent.

Overall, online sales of physical goods were up 5.9 percent. Online purchases now account for 23.6 percent of China's retail sales, up 5.4 percentage points from a year ago, according to the Statistics Bureau. Online sales of edible items during Q1 2020 were up 32.7 percent from a year earlier, while online clothing sales were down 15.1 percent.

On the food production side, the pork shortage and the closure of most slaughterhouses during the epidemic are major factors in the data for Q1. During the press conference, a State T.V. reporter asked a softball question about whether the 3.2-percent decline in Q1 2020 "primary sector" GDP meant trouble for the food supply. The statistics bureau spokesman said the agricultural figure reflected mainly a 21.7-percent year-on-year decline in pork output reported for Q1 before launching into his talking points on food security and recovery of pork production.

China's farm producer price index for Q1 showed a whopping 39 percent increase from a year ago, but this number also is distorted by the hog shortage. Producer prices for hogs were up 133 percent from a year ago, cattle prices were up 17.5 percent, and sheep prices were up 10.7 percent. However, farm prices for rice, wheat, poultry, eggs, fish, and fruit were down from a year ago.

The statistics bureau's fixed asset investment data show a 13.8-percent decline in primary industry investment during Q1 2020 compared with a year ago. In comparison, industrial sector investment fell 21.9 percent and services investment fell 13.4 percent. The primary sector attracted just 2 percent of all fixed asset investment, less than half its 4.9-percent share of GDP during Q1 2020. Investment in agricultural processing was down 32.8 percent and investment in food manufacturing was down 29 percent. Textile industry investment was down 37 percent, the steepest decline of any sector.

In the bureau's manufacturing output data for above-scale firms, agricultural processing output during Q1 2020 was down 11.1 percent from a year earlier, a figure that also probably largely reflects shrinking swine slaughter. (This figure seems surprisingly robust since most slaughterhouses appear to have been shut for more than a month.) Food manufacturing output was down 7.9 percent, close to the 8.4-percent year-on-year decline in overall manufacturing output. Food manufacturing utilized 61.4 percent of its capacity during Q1, lower than in most other sectors and down 12 percentage points from a year earlier.

The statistics bureau spokesman emphasized signs of a rebound in production during March, but acknowledged that demand remains relatively weak and manufacturers are not getting many orders with the pandemic spreading around the world. The official emphasized the key role of consumption in reviving the economy, commenting that peoples' desire for a better life is "irreversible." This gives consumption growth great potential, the official said. As production recovers, income growth will spur consumption, but the official acknowledged that numerous factors influence consumption. He predicted that recent policies would spur growth in consumption.

Monday, April 13, 2020

Does China See a Food Crisis?

China seems to be worried about a global food crisis on several fronts. Consumers in Jiangsu, Shanghai and Zhejiang Provinces began panic-buying rice in late March, causing prices to surge. Since then, China's news media have issued articles almost daily to dispel panic but in doing so most recite alarming signs of possible spikes in prices and famine. Meanwhile, the topic is nearly absent from U.S. news media--prospects for a world food crisis rated only a brief note on the back page of today's Wall Street Journal.

On March 28, China's official Xinhua News Service published a food security Q&A to assure readers that there is no danger of a food shortage in China. The article recited the policy of self-reliance and "absolute security in food grains", the usual statistics about grain production exceeding 650 million metric tons, the small percentage of rice imported, reliance on technology and minimum price guarantees for rice and wheat, and a policy of holding massive reserves and a 10-day supply of consumer grain products and oils in cities. Xinhua promised that curbs on food exports by other countries during the COVID-19 pandemic would not have much impact on China and would, in fact, allow officials to dispose of some excessive reserves.

On April 4, the State Council Information Office held a press conference to answer softball questions from state media about the danger of a food shortage. Officials had facts and figures on grain production, reserves, grain sales, and farm inputs ready to assure the public that there is plenty of grain. In response to a question from a State news organ about whether there would be a food crisis in April or May, the head of the grain reserve administration assured the reporter that  the country is holding a year's supply of rice and wheat in reserves, and "quite a few" cities have a 30-day stockpile of rice and flour. He warned against stocking up on rice on flour at home because it could attract bugs, degrade in quality and lose its flavor. Agricultural officials assured listeners that farmers would be able to get seeds, fertilizer, and pesticides to plant spring crops. An official explained that policies would be rolled out to encourage early-season indica rice planting this year: an increase in the minimum price, 3.6 billion yuan to give farmers technical guidance, and provinces will fund rice-transplanting and other services for early rice production. Another official assured a State TV reporter that China would buy U.S. soybeans as part of the Phase I agreement, U.S. and Brazilian officials would work to ensure export of soybeans during the pandemic, and China would push forward with its domestic soybean revitalization program.

Numerous articles regurgitated this information and reported that progress on spring planting has been normal. However, a commentary on rice-hoarding noted that this information did not prevent consumers and processors in Jiangsu and neighboring areas from panic-buying rice this month. The commentator attributed the panic-buying to news about grain-export curbs, news about panic-buying in the United States (a google search in Chinese for "panic-buying" turns up mostly reports of Chinese people panic-buying rice in New York supermarkets), and fears that news about asymptomatic COVID-19 cases portends a recurrence of the epidemic in China.

The title of an April 9 essay, "Working Together to Maintain Food Security" published in State media is very similar to a 2012 Xi Jinping speech "Working Together to Maintain World Peace and Security." The author--a retired agricultural policy official still engaged in a national food security commission--draws an alarming scenario of a global food crisis with references to the price spike in 2007-08 (the accompanying graphic is a world map constructed of different grains). Like many of the other Chinese articles, this one cites a warning by the UN's Food and Agriculture Organization, last year's forest fires in Australia, and desert locusts now threatening East Africa and Pakistan. The author calls for countries to coordinate food policies while they are working to bring the COVID-19 epidemic under control. Specifically, she calls for cuts in tariffs, reducing trade barriers, working together to maintain supply chains, and making contributions to UN food aid programs to fend off a food crisis (The fact that FAO is now run by a former Chinese agricultural official surely has no bearing on China's great esteem for the organization now). The author cites China's dispatch of experts to Pakistan to advise on their locust infestation and their supply of pesticide and spraying equipment as examples of aid that is needed.

The final section of the essay reiterates the same comforting statistics about China's grain output and plays up another common theme: China's "contribution" to global food security by deploying "precise" policies, poverty alleviation, and holding massive grain stocks. While acknowledging that food crises have complex causes, the author relies on slapdash anecdotal analysis to imply that the United States and Australia were responsible for the 2007-08 food crisis. She forgets that China essentially banned grain exports during the 2007-08 crisis and the "precise" price support policies to cushion the crash in prices that followed all failed massively by creating huge price distortions and mountains of stockpiled grain, cotton, rapeseed oil, and soybeans that cost billions of dollars. As a National Development and Reform official, the author must have designed or overseen these policies. Before this month's food panic arose, Chinese officials were pondering how to offload inedible rice stockpiles next month to make ethanol and other industrial products.

The soaring food prices referred to by the "Working Together" author are missing from Chinese data--except for record-high meat prices that she fails to mention. Japonica rice prices--the target of the panic-buying in Jiangsu, Shanghai, and Zhejiang--crashed last year and have not recovered. National Bureau of Statistics wholesale averages have rice prices well below prices in 2019 and 2018. Similarly, wheat prices were still below 2019 and 2018 prices as of March. New data released today show that the average rice price rose 1.2 percent in the first 10 days of early April and wheat rose 0.5 percent.
Domestic soybeans are the only futures price that has surged--up about 25 percent since the beginning of the year--for murky reasons that seem to have little to do with global markets. The May futures price for imported soybeans has been weak, in comparison. The japonica (medium grain) rice May futures price has barely changed since January, and corn futures are up 4 percent since January 1.

China has already had a food crisis in meat, but this has been declared off-limits in the food crisis discourse. Meat was never mentioned at the April 4 press conference, nor in any of the "food crisis" articles. The National Bureau of Statistics reported that the March 2020 CPI was up 4.3 percent from a year earlier, led by a whopping 18.8-percent increase in food prices that accounted for 3.7 percentage points of the overall year-on-year CPI growth. Drilling down deeper shows that meat is responsible for most of the increase in food prices. Pork prices were up 116.4 percent in March from a year ago, beef was up 21.7 percent, and mutton was up 12.1 percent. No other item in the CPI was up in double digits. Grain was up just 0.7 percent. Most nonfood categories were up 2 percent or less, and many were down from a year ago.

Year-on-year price changes, China CPI, March 2020
Item Percent
CPI 4.3
Food 18.8
Grain 0.7
Edible oil 5.7
Fresh vegetables -0.1
Pork 116.4
Beef 21.7
Mutton 12.1
Fish, shellfish 2.8
Eggs 1.9
Milk 0.6
Fresh fruit -6.1
Tobacco 0.7
Alcohol 2.7

Bottom line is that it remains unclear why Chinese officials, news media, and consumers are worried about a food crisis. It seems that common people in China still have lingering worries about COVID-19 and its possible impact on food supplies. Are Chinese officials trying to scare their farmers to get them out into their fields? Do they know something we don't? Officials seem to be genuinely concerned about potential declines in grain production, yet prices don't seem to be soaring. Is China looking for a better deal from the United States, or a way to wriggle out of Phase I? No signals sent to the U.S. have been made public. Or is China maneuvering to position itself as the new benevolent protector of global food security? Maybe, but they have almost exclusively been talking to a domestic audience up until now. Are they trying to create a narrative about a crisis that comes from abroad to divert attention from their own bungling?

Whatever the motivation, officials in China do seem to be rattled by food security concerns.

Tuesday, April 7, 2020

Financing Holds Back China Pig Farmers

"It used to be that poor people raised pigs; now only rich people can raise them." This was a comment from a pig trader named Li in China's Henan Province reported by a Caijing Magazine piece documenting the financing obstacles preventing many family-operated pig farms from getting back into business.

Li said companies are throwing around money as they hoover up scarce piglets to restock farms. Companies will pay 2000-2200 yuan (roughly $300) for a 15-kilogram piglet, Li said. With the high cost of piglets, restarting a mid-sized farm can require a 10-million-yuan investment that is out of reach for family farms.

According to Caijing, many farmers in Henan already are already in debt, can't get credit, and are balking at the high prices for piglets. Meanwhile, big companies like Wens, Muyuan, and Zhengbang are getting infusions of capital from soaring stock prices and government aid. Individual farmers generally can't get bank loans, and persisting disease risks make them cautious about restocking their farms.

Pig-farming has been a path out of poverty for many rural families in densely-populated Henan where per-person land allotments are less than 1 mu--the size of a garden plot. Few young people are left in the villages to help with farm work.

Hog prices have been coming down recently but they are still at near-record levels. The Beijing Xinfadi wholesale market attributes a modest drop in prices last month to a rebound in production in the northeastern provinces, removal of village road blockades, and resumption of slaughterhouse operations after the waning of COVID-19. However, the Beijing wholesale market received an average of just 971 carcasses weekly during March 2020--47 percent less than a year ago and by far the lowest total in recent years. Xinfadi says pork demand is weak due to a seasonal lull in the spring and closure of many restaurants and cafeterias, which the market's commentary identifies as an opportunity to build up swine inventories.

Another trader named Yang told Caijing that in past years 90 percent of the calls he got were from farmers wanting to sell pigs; now it's reversed and everyone is looking for pigs to buy. They don't care about the size or leanness--just whether you have anything to sell. Mr. Yang was on the phone with a buyer in Zhejiang Province making a deal for 3 truckloads of hogs for 2 million yuan (over $280,000).

The Caijing reporter visited a county in Henan that used to be a major meat-producing area where many farmers quit after waves of crises that include a crackdown on clenbuterol use and the African swine fever epidemic. Along the road multiple swine farms are visible, some idle and some already converted to other uses.

A farmer named Yu hit the jackpot by netting 1.4 million yuan last year--more than he usually makes in 3 years. Last year he lost 50 sows to a respiratory illness. He has only 50 sows left and the high price of piglets and rumors about new disease outbreaks make him hesitant to expand.

Ms. Li got her start raising 6 pigs 20 years ago and had 1000 head last year, but most of her pigs died in January. She still has 30 sows and dozens of piglets, but she doesn't dare restock her farm.

Ms. Li's husband has been sleeping in the courtyard. He is furious that she bought expensive medicated feed to save her sick pigs against his plan to sell them before they died. The carcasses are still lying in the courtyard.

Last year Ms. Li lost 70 sows and 500 finishing hogs to disease after the spring festival holiday. She notified local veterinary officials who sent someone to draw blood from three of the animals, but she never received results of the tests. The insurance company said they could only pay a small amount because they were "abnormal deaths." She didn't get any culling subsidy from the government either.

Last August she complained to the local government about the culling subsidy. Local officials made a deal with the insurance company to compensate her for about half the sows that died. Later the local government gave her 100,000 yuan as aid for restocking her farm. When she complained again they gave her some more cash.

Farmer Qi in northern Henan told Caijing he used to sell 20,000 pigs a year, but he lost about half his herd in 2018. He would like to restock his farm, but has never gotten any compensation for his lost pigs. He needs the cash to buy new pigs at 6000 yuan per head--three times what he used to pay.

Farmers complain that subsidies for rebuilding China's swine industry are tilted toward big companies. An aid program announced by the agriculture ministry in September 2019 focused on aiding breeding farms and large-scale farms. Last October Henan Province announced that farms with 10,000 to 50,000 head would be eligible for pig farm aid. Farmer Qi got someone to help him with the application but he failed to get any aid.

Farmer Qi finances his pig farm with loans from friends and family. Local banks don't accept pigs or farm buildings or equipment as collateral. Farmers can only mortgage their houses to get loans.

Farmer Wang told Caijing he got calls from local bankers after they had a meeting with local officials about ramping up loans to pig farmers last November. At first, they talked about accepting farm assets as collateral, but soon "the pendulum swung back" and banks were again looking mainly at houses as collateral, Wang said.

Quite a few farmers are already in debt. Farmer Wang also used to be an agent for a feed company, and 30 of his former customers have past-due debts for feed they couldn't pay due to low pig prices and disease in 2018. A collection agency told him to pressure the farmers to pay, but he refused because he knows the pressure pig farmers are under. Feed sales dropped off last year when disease killed off most of the local pigs and he quit the feed business.

Last month the Ministry of Agriculture announced that the threshold for applying for subsidized loans was reduced from 5000 head to 500. Banks were advised to start accepting live pigs, land operation rights, and hog farm machinery as loan collateral.

Cash-rich companies welcome the opportunity to expand and gain market share. Soaring stock valuations and government aid give them cash that family farmers lack. In December, Henan and Hubei Provinces announced Muyuan and its subsidiaries would get 73 million yuan (over $10 million) in loan interest subsidies.

Last month Dekang Group flew in 500 breeding pigs from France to populate a breeding center the company has been building in Guizhou Province over the past 15 months. These purebred animals purchased from a leading breeder in Europe cost 40,000 yuan each. They will form the nucleus herd whose descendants several generations and more than a year from now will become commercial hogs for slaughter. No family farmers can make this kind of investment in time and money.

One securities firm expects the top 10 hog-producing companies to gain 40-50 percent of the market in 3-to-5 years, up from about 10 percent before the ASF epidemic.