China's Countryside Debt Trap

While the rest of the world is focused on how China's "belt and road" initiative saddles developing countries with unsustainable debt to finance grand construction projects, China has been doing the same thing in its own countryside. The public works, environmental protection, and beautification projects built by the country's rural revitalization campaign have visibly improved China's rural landscape, but the village debt problem is mostly hidden from view.

A Xinhua Semi-monthly Talk article warned that "star villages" and "model villages" had been visibly transformed but piled up excessive debts in the process. The article gave the example of a "national civilized village" in a mountainous region that built a culture square, a primary school, kindergarten, a day-care center for the elderly, and a 3500-meter retaining wall that transformed the village but left it deep in debt. Another village owed 1.38 million yuan for a well and a road. The well consumed most of the money because approvals were onerous. The government subsidized 30,000 yuan of the road construction, but the project cost 200,000 yuan.

According to Xinhua, finance officials in northeastern Hunan Province did an investigation three years ago that found 90 percent of their county's 445 villages had debt, including 109 with debt exceeding 1 million yuan. A county in Shanxi Province estimated that their villages had debts totaling 3.86 billion yuan (over $500 million).

Last year, an Economic Reference News reporter discovered many villages with debt problems in his investigations in western China. Many villages had debts of hundreds of thousands of yuan. Some villages have debts from the 1990s. New debts to finance rural revitalization projects have been piled on. While there are subsidies or grants for construction projects, they typically cover only a fraction of the cost. Village collectives short on cash often borrow money to finance their share of the cost. Village leaders sometimes use their personal connections to get bank loans. In other cases villagers or business enterprises make contributions in exchange for IOUs.

There are no official statistics on village debt. A rural research institute in Hubei Province issued an estimate that national village debt totaled 400 billion yuan...in 2006.

An article by Hubei Normal University researchers last week attributed heavy village debt to failure to understand policies, unwillingness to pay or even acknowledge debts.

The core problem is that village collectives don't have much cash flow, and many of the projects do not generate enough income to finance the debt. The easiest way to get cash is to turn over the village collective's chief asset--land--to companies to operate as industrialized farms, industrial parks, or rural-themed tourism projects or vacation homes.

What's a village collective? Imagine a world where all land is managed by homeowners' associations who are also responsible for building local roads, sewers, and electric grids, leasing land to farmers and factories, handing out subsidies, and running schools. But they have no authority to tax residents. This is an approximation of rural China, where it's not clear who owns what, possession is 90% of the law, and blow-out budgets for ill-considered projects and squabbling are common.

The burst of articles in May 2019 focused on village debt problems (some of them were warmed-over versions of articles that had appeared 10 years earlier when this topic was discussed on this blog) linked to the rural revitalization initiative. The 2020 "number one document" included a half-dozen references to villages with weak collective economies in its sections about enhancing the role of the communist party in village governance, but there was no mention of debt. This month's articles emphasize creation of cash-generating businesses to strengthen the finances of "villages with weak collective economies" and inspirational examples of villages that had cleared up their debt problems.

One example appearing last week is from Yancheng in central Jiangsu Province where the municipal government reportedly budgeted 58.8 billion yuan to aid 120 villages with weak collective economies.  The strategy calls for municipal leaders to initiate projects that will increase village income by 100,000 yuan. It combines injections of funds from upper levels of government with attraction of investments and contributions from companies and individuals with links to the villages, launch of bigger money-making projects, and better management and accounting. According to the article, Yinle village leaders focused on land transfers, development of new types of farm businesses and agricultural structural adjustment; Runhe village built an agricultural market; and Daqiao village opened a string of standardized factories in the town industrial park.

Four years ago, Farmers Daily claimed that Zhijiang municipality in Hubei Province cleared up 136 million yuan in debt owed by over 190 villages to 37,000 villagers in just a year and a half. Authorities banned new debt, budgeted funds for debt clearance, called for establishing "special funds" for companies and government units to finance construction and public works projects, and converted "village debt to private debt."

Despite having this apparently successful example to draw from, Hubei Province agriculture department officials have been visiting villages with poverty-alleviation programs to learn about their debt problems. They met with villagers to learn about the structure of village debt, the reasons for it, ways of addressing debt problems, and approaches to developing the collective economy. They plan to design a program to address the village debt problem.

Hubei Province officials visit a village to learn about debt problems.

Measures to Address ASF Risk to China's Pigs

Chinese officials acknowledged that African swine fever (ASF) is still a risk for the country's pork industry as they launched crackdowns, testing, and record-keeping initiatives to control the virus last week. The new initiatives are the first acknowledgement of continuing disease risk by Chinese officials who have been urging the industry to undertake a crash program to restore normal pork supplies by next year.

On May 21, the Ministry of Agriculture and Rural Affairs (MARA) issued "Guidance on strengthening measures to control African Swine Fever" that laid out a dozen measures meant to establish the prevalence of the virus and to shore up lax reporting, testing, record-keeping, and regulation at the grass roots level. The measures implement a directive issued by the State Council last year to strengthen ASF prevention and control. A MARA veterinary official explained that the measures are necessary because it is not easy to control disease in China's huge, complex livestock industry composed of millions of medium and small farmers. Recent ASF reports drew attention to the chaotic long-distance trucking of pigs, and an audit of slaughterhouses six months ago discovered shoddy record-keeping, unsanitary conditions, and positive tests for ASF.

The MARA official acknowledged that African swine fever (ASF) has spread widely across the country and there is still a high risk of further outbreaks if the industry slacks off on prevention and control. The official acknowledged that the rapid expansion of the industry this year raises the risk of disease. He acknowledged that the discovery of infected pigs on unregistered trucks in March and April reflected "loopholes" and slack regulation in regions where the animals originated. The official noted that positive tests of wild pigs this year show that the disease has "colonized" China.

Hey pigs! Pee in the cup! 

The "guidance" measures are meant to "normalize" strict testing, disease reporting, record-keeping, and supervision of farms, trucks, and slaughterhouses. The measures are wide-ranging, including a systematic survey of farms to test for ASF, firming up grass roots animal disease reporting, clamping down on issuance of animal health certifications, inspections of slaughterhouses, imposing strict record-keeping for trucks and animals, and implementing a regionalization pilot that will restrict marketing of finished hogs to multi-province regions.

A key measure is a plan to systematically test farms for ASF in order to establish a baseline for the prevalence of the virus in 498 major hog-producing counties. Each province will test every swine farm producing 2000 head or more and a sample of farms producing 500-2000 head. Each county livestock bureau will appoint a person responsible for entering farms to do testing; farmers will be penalized if they don't comply. Farmers will receive financial awards for reporting ASF cases, but they are also reminded that it is their responsibility to do so.

Authorities plan to establish a grid system (inspired by coronavirus work) to organize animal disease reporting and epidemiological investigations. Each grid will contain a fixed set of villages and farms with a designated official in charge. Quarantine certificates are to be withheld if reporting is false or flouts procedures or if a batch of slaughtered hogs is not accompanied by a third-party testing report. The objective is to make farmers take reporting seriously.

Testing pig urine in an audit focused on detecting clenbuterol and
other growth-promoting substances last year in Hainan Province.

All slaughterhouses are expected to establish capability for ASF-testing. Agricultural officials will conduct a one-time check with follow-ups to ensure problems are corrected. Slaughterhouses will have a veterinary official responsible for daily reporting system of ASF test results and inspection and quarantine information. Slaughter facilities should be able to trace the source of infected pigs.

The slaughterhouse measures are meant to address sloppy testing, slack record-keeping discovered during an audit of 21 slaughterhouses conducted in November 2019. The audit also found positive ASF test results in 5 percent of samples. Only 12 of 21 facilities had laboratories. The audit noted that technicians at several plants were unable to explain what constituted a positive test for ASF, and one had no criteria for a positive test. Several plants had no testing records, could not identify where samples came from, did not retain or label samples, and/or had no records of purchases of equipment or reagants used for testing. Several slaughterhouses were criticized for poor sanitation, dumping blood directly into rivers, and incorrect addresses on production licenses, environmental approvals, and animal health certificates. At least one positive ASF test was reported for blood and pork samples taken from each of 5 slaughter facilities whose test results were listed. One facility in Shandong Province had positive results for 6 of 10 samples.

A slaughterhouse audit in Heilongjiang Province last year.

Transportation of pigs is a key target of remediation. Trucks transporting pigs must be in a record system and pigs must be accompanied by health certificates. A 100-day enforcement action was launched last week to crack down on unregistered trucks, set up systems to manage and verify inspection and quarantine documents issued by veterinary officials in the district where pigs were produced, and to strengthen regulation of traders and buyers.

Another measure is a "regionalization" pilot program initiated in 2019 that aims to establish a closed region for marketing pigs in six south-central provinces. The program will allow breeding stock and piglets to be transported into the region from other regions, but finished hogs will stay within the region. Transportation will be limited to "point-to-point" arrangements between production districts/farms and slaughter facilities in the region. Organizers intend to establish coordinated disease reporting and response and information-sharing within the region. The program will gradually be expanded to eastern and northern regions, and transportation of hogs is expected to be curtailed starting April 1 next year.

There was no mention of other ingredients in China's pig virus cocktail--PRRS ("blue ear disease"), foot and mouth disease, classical swine fever, porcine circovirus, PED.

China's Unemployed Disperse to Villages

Covid-19 has reversed China's rural migrant flow, as at least 50 million people returned to their villages in 2020. The countryside is once again serving its historic role as a reservoir for underemployed people.

China's national urban unemployment rate was reported to be 6.2 percent in February 2020 and 5.9 percent in March, at the peak of the country's covid lockdown. However, much of China's unemployment may be hidden after a significant proportion of the labor force dispersed to the countryside.

China's first quarter 2020 statistics showed that the rural migrant workforce was estimated at 122.5 million at the end of February 2020, nearly 52 million less than the 2019 total reported by the National Bureau of Statistics in its annual migrant worker statistics released April 30, 2020.

Wages were also down. The average monthly earnings for migrant workers reported for Q1 2020 was 3,680 yuan, 747 yuan less than the 2019 average. Multiplying these figures suggests that the migrant workforce lost 321 billion yuan (about $46 billion) in aggregate earnings per month, a 41.5-percent decrease.

China's rural migrant workforce losses in Q1 2020
Item	Unit	2019	Q1 2020	Change
Rural migrant workforce	Million	174.3	122.5	-51.7
Average monthly earnings	Yuan	4,427	3,680	-747
Total earnings	Bil. Yuan	771	451	-321
Source: Calculated from China National Bureau of Statistics data.

The employment situation for rural migrants remained grim as the economy reopened in March, and many of the migrants appear to remain in their villages.

An April 1 article noted an unusual "tide" of rural migrants returning to villages after the end of the covid lockdown in March--described as a common phenomenon across the country. Netizens had noticed that many workers had returned to their villages a few days after the lockdown was lifted because jobs were hard to find. The article observed that factories had nothing for workers to do because they had no orders, so many laborers returned home. The article said construction work had also slowed after the coronavirus, and many workers feared for their health if they stayed in crowded dormitories at construction sites. Poor sanitation and high costs in cities, and competition for dirty jobs for low pay also repelled rural migrants who would normally be drawn to cities.

Officials have mentioned concerns about employment for both rural migrants and a record 8.5 million seniors graduating college in China this year.

On March 30, the Ministries of Human Resources and Agriculture jointly announced a program to "guide" enterprises to hire returned migrants and other rural people through subsidies, tax breaks, and credit support to counter the employment impacts of the covid-19 virus. The Ministry of Human Resources and Social Security called an unusual press conference to put a positive spin on the first quarter employment situation and to assure the public that the government is supporting unemployed workers. On May 9, the Ministry announced a "black list" of 30 companies that failed to pay workers their wages.

There have been some hints dropped that a new initiative to subsidize production of the labor-intensive early rice crop this spring was meant at least in part to create employment for migrants that returned to their villages.

China's Rural Investment Jump-Start Plan

China has piled up mountains cash in some of world's biggest banks, but officials are relying on commercial companies to come up with the cash to invest in an initiative to overhaul the countryside--one of China's top priorities for 2020. Last month the Ministry of Agriculture and Rural Affairs (MARA) published a document to "guide" more commercial investment into rural industries and infrastructure as they watched rural investment plummet this year.

An April 30 Q&A published by MARA explains the targets for rural investment and the inducements for investors. A MARA official explained that "social capital" (non-governmental investment) accounts for 80 percent of rural investment and is therefore necessary to build infrastructure, overhaul the agricultural sector, offer services to farmers, and to create rural industries. Commercial investment also brings technology, personnel, and management needed to build modernized agriculture and rural business.

The MARA official explained that fixed asset investment in agriculture has been on an extended downturn since last year, and the coronavirus pandemic caused a 13.8-percent decline in investment in "primary industry" in 2020. Officials determined that they must provide stronger policy guidance to revive investors' confidence and boost investment in agriculture and the countryside.

Areas targeted for investment include agricultural production, processing and services, rural infrastructure, and science and technology. Priorities include "modernized" crop and livestock, regional specialty industries, cold-chain facilities, and grain-drying. The plan features construction of entire industry chains, including warmed-over Stalinist strategies repackaged by 21st-century technocrats as "agricultural industrial complexes" and "industry clusters." The plan includes a big emphasis on custom farming, technical services and training for farmers, rural tourism, and rural e-commerce. A call for investment in garbage collection, sewers, reconstructing ramshackle housing, ecological agriculture, renewable energy, and waste utilization reflect the priority of creating a scenic and sweet-smelling countryside. The need to raise agricultural productivity is reflected by priorities on investment in "high-standard fields," rural innovation parks, technical training, and "platforms" to link up research institutions with industry.

The MARA official acknowledged that land and financing are bottlenecks that constrain development in the countryside. Rural land is owned by village collectives and each parcel has a designated use as agricultural, housing, or "construction" that cannot be changed without extensive negotiation and horse-trading. Major banks are state-owned and rural banks are often controlled by a local fiefdom. Banks and officials like to finance big photogenic vanity projects. Since there is no land ownership, mortgages can only be secured by vague "land use rights" and other illiquid or hard-to-value assets like barns, a shed full of garlic, or tractors. A new initiative to expand the pig industry this year is to mortgage livestock that can die, decline in value or turn out to be nonexistent.

The official said the government has been contemplating these problems and offers some work-arounds in the plan. The 2020 "Number one document" decreed that land designated for growing crops may be used to construct cold storage and grain-drying facilities, machinery sheds, buildings for farm management, packing sheds, waste management facilities, and other auxiliary farm structures. Electricity for storage facilities will be charged at the lower rate designated for farming. "Construction land" parcels in villages will receive priority for rural business investment, especially by returned rural migrant workers.

Credit services will be improved following a policy document published last year by MARA and the Peoples Bank of China. In 2020 the government announced a package of re-lending, discounts, and interest subsidies to improve rural credit availability, and an agricultural loan guarantee system is beginning to show results, the MARA official said. Agricultural officials at the provincial and local levels are expected to set up platforms to link up financial institutions with rural investors. Agricultural insurance is being expanded to mitigate risk. Insurance premiums are subsidized for traditional crops, several types of livestock and local specialty crops are being added. Pilot programs are covering the entire production cost for crop and livestock and insurance for income from grain production.

The investment guidance plan calls for respecting market rules and acknowledges that companies need to expect a stable stream of profits to justify their investments. In return, investors must accomplish the government's objective of refurbishing the countryside and "raise the rural people's level of happiness." Investors must "respect" rural villagers as the "main actors" in rural business and must share profits with them in a win-win model. Investment must stimulate the enthusiasm and entrepreneurial passion of rural people.

Investments are encouraged to follow a whole industry chain model that integrates and "pulls along" farmers, processors, and providers of services. Pig-farming companies like Wens Group are cited as orchestrators of "long" industry chains. A PPP (public-private partnership) model is envisioned for ecological services and digitization of the countryside. Another model features establishment of "industry funds" for investment in "relatively mature" sectors in regions with rich financial resources, citing a "modern agriculture investment fund" in Guangdong Province and a "rural revitalization fund" in Zhejiang Province as examples.

Perhaps not by coincidence, a plan by real estate conglomerate Vanke to invest in pig farms had the Chinese internet puzzled last week. "Are pigs more profitable than real estate now?" was the question. A Beijing newspaper article last week pointed out that there is a history of seemingly-odd plans to invest in pig farming by Goldman Sachs, other real estate companies, entertainment-real estate conglomerate Wanda, Wuhan Steel, and an internet-gaming company over the past 15 years. There are many other examples of rich Chinese companies making agricultural investments that have no connection to their core competency and little prospect for profit.

During the mid-2000s the Evergrande real estate conglomerate invested in apple juice processing in impoverished regions of Shaanxi Province as part of a strategy to move apple production westward and manufacture juice for export. Soon thereafter Evergrande won rights to develop a shopping mall in the provincial capital, Xian. Probably not a coincidence (and not the only project won by Evergrande in the "Develop the West" investment frenzy that was in full swing at the time). Goldman Sachs invested in China's two largest meat companies about 15 years ago and also bought a string of pig farms, but lost interest in pigs after taking both meat companies public. A small investment in an apple juice factory, a rural amusement park, or a pig farm is a cheap way to build goodwill with officials who award billion-dollar real estate projects, stock market listings, and movie theater licenses.

While few Chinese investors speak Latin, "quid pro quo" is a keyword that probably explains many of China's baffling rural investment projects.

China Cracks Down on Meat Smuggling (Again)

Chinese customs authorities have been announcing seizures of smuggled meat products. This crackdown began in 2019 and seems to reflect a surge in smuggling prompted by a spike in Chinese meat prices last year that increased the trade's profitability.

The inspection bureau of the Huangpu port in Guangzhou says it has arrested 36 suspects and seized 4582 metric tons of frozen beef, chicken feet, and pork stomachs in a six-month crackdown. Customs and police jointly mobilized 458 officers to conduct 62 operations in Guangzhou, Dongguan, Shantou, Shenzhen and Guilin over the past six months. They arrested 36 suspects, bringing down this "huge gang" "in one fell swoop." Officials say a suspect received shipments of beef in Hong Kong, then transferred them to ports in Guangdong and stored them in warehouses. Customs inspectors say they saw large amounts of meat in boxes with foreign labels stored in a warehouse with fraudulent documents and inspection certificates, and no identification of final customers for the products.

Purportedly smuggled meat seized by Huangpu customs inspectors. 

The box bears the name of a Brazilian company.

Customs inspectors in Taizhou, a port in Zhejiang Province, have reported seizures of two separate smugglers' boats. In the Linhai District police said they intercepted a boat carrying over 83 metric tons of chicken, duck and pig feet and beef on April 16. Another article reports on a hearing in the Taizhou Procurate regarding the case of a man named Wang, his henchman Kong, and an 8-man crew of Myanmar nationals who allegedly smuggled 1,344 metric tons of meat from Busan South Korea to Taizhou until they were nabbed in April 2019. The origin of the meat was unknown.

Last month Shanghai authorities reported that smuggling cases reached a record high in 2019. Petroleum and sugar were the top items, but frozen meat was also tagged as a new target of smuggling.

Shenzhen authorities attributed a surge in smuggled meat in Pearl River ports since last year to the big difference between Chinese and foreign prices

Baoshan City in Yunnan Province reported intercepting 74,430 cigarettes, 130 metric tons of frozen meat and 1,926 live cattle in a smuggling crackdown on the Myanmar border that began February 20. The article reports an uptick in smuggling as companies have resumed operations after the lifting of covid-19 lockdowns. Tengzhong police say they have intercepted over 500 cattle and sheep being smuggled over the border.

In July 2019, official news media announced that surveillance of smuggled meat would be stepped up in Guangdong, Guangxi, Yunnan, and Hebei Provinces. According to the article, illegal meat from the United States, Brazil, Australia, and India is sold mainly to "western" and barbecue restaurants. The article quoted a post on social media by a self-described smuggler who promised cheap prices and large volumes, and he said there was great demand for smuggled meat. This article claimed smuggled meat arrived in Vietnam's Haiphong port and was carried across the border on boats, small trucks, and vans.

All of the articles emphasize food safety and disease risks introduced by smuggled meat, regularly reminding readers that smuggled meat can come from areas where disease is present, lacks inspection certificates, and often spoils because temperature is not consistently maintained. Many add comments about putrid meat and nasty smells. The Linhai report claims to have found high bacterial counts on meat they seized.

China's customs authorities report crackdowns on meat smuggling every year or two. Extremely high prices in China and onerous inspection and documentation requirements make the activity attractive. Past reports are available here.

Chinese Soybean Prices on Different Paths

Are Chinese soybean prices going up or going down? Yes. Prices for China-grown soybeans have risen faster than any other major commodity in China this year, but imported soybeans remain a bargain for the country's processors.

The price of the no. 1 soybean contract on China's Dalian futures exchange is up 40 percent since the beginning of 2020, but the price for the no. 2 soybean contract is down 16 percent. At least one Hong Kong journalist has misinterpreted the price increase as an indicator of disrupted supplies of imported soybeans. While imports from Brazil were down 12% during April, huge volumes are expected to arrive next month. The price of imported soybeans in China has fallen to near 3000 yuan/metric ton, a level not seen since 2016.

The no. 1 soybean contract specifies delivery of non-genetically modified soybeans, but the no. 2 contract does not have this restriction. Since GMO soybeans cannot be legally grown in China, the no. 1 soybean contract reflects the price of domestic soybeans and no. 2 reflects imported soybeans. The no. 2 soybean contract price generally follows the Chicago soybean futures price. In fact, the Dalian no. 2 contract is largely superfluous and not traded much since the Chicago market is used to price and hedge soybeans imported from the United States and South America.

Over the years, domestic and imported soybeans have formed two distinct markets. Chinese-grown soybeans are used for food products, nutritional protein supplements, and premium non-GMO soybean oil. Cheaper imported soybeans are used to produce most of the country's soybean oil and soybean meal used in animal feed. National wholesale market prices reported by the Chinese government also tend to reflect the price of domestically-produced soybeans. Imported soybeans go directly to processing plants and seldom show up in wholesale markets. China produced 18.1 million metric tons of soybeans in 2019 and is expected to import 89 million metric tons.

The price of products made from imported soybeans has fallen this year. Dalian futures price for soybean oil has fallen roughly in parallel with the Chicago price--although not quite as steeply. China's soybean oil price rebounded slightly as China began to emerge from covid lockdown. According to the National Bureau of Statistics, the cash price for soybean meal--used in animal feed--jumped during March when soybean imports did slow, but the price started falling again in April.

There is no clear reason for the rise in price for China-produced soybeans. Cash prices have also been rising. Market reports say farmers have sold most of their crop and traders are bullish on prices. They note that a granary in Heilongjiang Province boosted its procurement price to buy soybeans for reserves, putting a floor under prices. One report says that national, provincial, and local soybean reserves are largely depleted. There was a temporary disruption in supplies due to a blizzard in Heilongjiang during April.

Several reports link the rise in soybean prices to high pork prices. Tofu and other high-protein foods made from soybeans are substitutes for meat. There are no statistics tracking consumption of foods in China with any precision, but it seems certain that consumption of soybean-based foods has risen--pork prices have doubled this year and pork consumption is probably down 30-35 percent. One report notes that the rise soybean prices began in late December, about two months after pork prices had spiked. With restaurants reopening and life gradually returning to normal, consumption is surely rising, but supplies of both pork and food-grade soybeans are limited.

Pork Imports Dent Big China Shortfall

The United States exported a record volume of pork to China in the first quarter of 2020. China's purchases soared as the impacts of an African swine fever epidemic took hold. China pork prices were already about double those in the United States a year ago when farmers were killing their pigs en masse to avoid the disease. Prices in China soared to quadruple the level of U.S. prices in October 2019. Prices spiked again in February during China's peak-covid month when most slaughterhouses were closed and farmers in blockaded villages could not market their hogs. Chinese pork prices have fallen since then, but they are still triple the level of U.S. prices.

Annual production and consumptions statistics do not measure China's pork supply-demand deficit precisely because the deficit did not become apparent until the second half of 2019. Monthly slaughter numbers issued by the Ministry of Agriculture and Rural Affairs (MARA) show that the gap between monthly 2019 slaughter numbers and year-earlier amounts gradually widened during April-October 2019. The peak deficit was in October--the month of peak prices--when slaughter was 46 percent less than a year earlier. Slaughter numbers during the first three months of 2020 are still well below the last two years and in fact the lowest since these data were first reported ten years ago. The March slaughter volume was 37 percent less than in 2018 and 2019. These numbers don't include small facilities and butchers who don't report to the Ministry.

Quarterly national slaughter data pieced together from National Bureau of Statistics reports and a presentation at last month's China Agricultural Outlook Conference show a roughly similar deficit. The national slaughter total bottomed out at 96 million head in the third quarter of 2019. That was 64 million fewer than Q3 slaughter in the previous two years. Q4 2019 and Q1 2020 have similar 60-million-plus declines in slaughter from pre-ASF years. MARA projected 2020 hog slaughter of 501.5 million head--192 million fewer than in 2018 (the year the virus first entered China).

China hog slaughter, quarterly (million)
Quarter	2017	2018	2019	2020
	Million head
Q1	191.5	199.8	188.4	131.3
Q2	130.3	134.2	125.0
Q3	160.4	161.8	96.3
Q4	206.6	198.0	134.4
Total	688.6	693.8	544.2	501.5

Quarterly pork output totals assembled from National Bureau of Statistics reports show a similar pattern--a low of 7.1 mmt of pork produced in Q3 2019 and continued low output during Q4 2019 and Q1 2020. MARA projected 2020 output at 39.3 mmt, down more than 14 mmt from 2018.

China pork production, quarterly (mmt)
Quarter	2017	2018	2019	2020
	Million metric tons
Q1	14.7	15.4	14.6	10.4
Q2	10.3	10.7	10.1
Q3	12.2	12.3	7.1
Q4	16.2	15.6	10.7
Total	53.4	54.0	42.6	39.3

Assuming production in 2017 was more or less "normal", China's hog/pork shortage was 60-70 million slaughtered hogs or 4-to-5.5 million metric tons of pork during Q3 2019 to Q1 2020.  In percentage terms, the pork deficit narrowed from 40% in Q3 2019 to 34% in Q4, and 29% in Q1 2020.

Estimated pork deficit in China
Year	Quarter	Hogs	Pork
		Million head	1000 metric tons
2019	Q1	-3.1	-50
2019	Q2	-5.3	-150
2019	Q3	-64.1	-5130
2019	Q4	-72.2	-5490
2020	Q1	-60.2	-4300
Note: calculation shows difference from same quarter in 2017 .

China's pork imports have been rising but only fill part of the deficit. MARA reported that pork imports totaled 3.13 mmt during 2019 (up 45% from 2018), and projects imports of 2.8 mmt for 2020. In 2019, MARA reported that imports of muscle cuts totaled 1.99 mmt (up 67%) and offal imports totaled 1.13 mmt (up 17.9%). MARA said the largest suppliers were Spain (26%), Germany (25%), and United States (20%).

Quarterly pork imports rose from about 500,000 mt in Q1 and Q2 2019 to 725,000 mt in Q4 2019, filling less than 15% of the shortfall in production. The 1.2 mmt imported in Q1 2020 filled about a fourth of the 4.3 mmt deficit for that quarter. The government injected over 300,000 metric tons of frozen pork reserves into the market from January to April--also making a modest dent in the pork shortfall. (It has not been revealed how much of China's pork imports are stored in reserves, but the proportion is probably minor.)

Chinese news media have been under orders to tell only good news about the pork supply since last August when prices started skyrocketing. News reports in recent weeks frequently pointed to increases in sow numbers and declines in pork prices over several months as evidence that government policies to restore pork production are working (although MARA has not released a monthly swine inventory report since last October).

Last week, one journalist bucked the trend by warning that the decline in pork prices over the last two months may only be temporary because China still has a pork deficit of about 30 percent that cannot be quickly closed. This judgment seems to be consistent with the numbers above. While big companies with soaring stock prices are making big profits and expanding rapidly, the medium- and small farmer-entrepreneurs who produced most of China's pork before the African swine fever epidemic are sitting on the sidelines with debts incurred during last year's sell-off, scared of the risk of new outbreaks, discouraged by sky-high prices for piglets, or busy raising ducks and chickens.

On April 20, the Ministry of Agriculture issued ten-year projections of China's agricultural supply and demand. The estimate of 39.3 mmt of output for 2020 is nearly 20 mmt less than the target set for this year in MARA's 5-year plan, but the pork projection dutifully predicted a quick recovery. MARA expects pork output to bounce back to 50 mmt in 2021, then grow to 60 mmt in 2029. The China analysts anticipate pork imports will shrink to 1.23 mmt in 2029 and they give assurance that the country will maintain self-sufficiency in pork.

In contrast, USDA has a more pessimistic projection of Chinese pork output that falls more steeply and does not begin to rebound until 2022. The rebound is slower, and production in 2029 is about 10 mmt less than projected by China. USDA expects China to import 3.5 mmt of pork in 2020 and then imports will rise to near 4.7 mmt in 2029. The USDA projections imply China would account for about a third of world pork imports in 2029.

All these projections assume that African swine fever remains under control and there are no new outbreaks, but there are indications the disease is still being covered up. The Ministry of Agriculture has not reported any outbreaks on farms since November 2019 and did not report any at all in January or February. All reports of ASF since last December have been instances where trucks were discovered at toll booths, deliveries of piglets "from other provinces" were discovered to be infected and two instances of infection of wild pigs were reported.

The absence of official reports of on-farm outbreaks is belied by a Wall Street Journal report that foreign consultants working in China have observed or verified infections of African swine fever.

The day after the Journal report, China's MARA held a video conference for veterinary officials where leaders acknowledged that the African swine fever situation remains grim and complex, and they admitted that the industry lacks a firm foundation for recovery of hog production. Officials admonished some unidentified operators in the industry for not taking their disease prevention responsibility seriously, called for a crackdown on illegal transport of swine and told local officials to strengthen grass roots animal disease prevention. Despite persistence of the disease, officials reiterated the goal of restoring basic swine production capacity by the end of 2020 and normal pork supplies in 2021.

Diverging Corn Prices in China and U.S.

The gap between Chinese and U.S. corn prices has been widening. Chinese officials are rumored to be contemplating big purchases to take advantage of the discount U.S. corn, restock reserves, and make some movement toward their Phase one purchase commitments.

China's corn prices have been on the rise as the country emerges from covid-19 lockdown, while U.S. prices have tanked in sync with the plunge in petroleum prices and the disruption of the U.S. economy. The May 2020 futures price on China's Dalian exchange rose a cumulative 7 percent from January to the end of April, while the May futures contract in Chicago plummeted 23 percent in March and April. A modest 2-percent depreciation of the Chinese yuan against the dollar during China's covid peak magnified the difference in prices. The Dalian price rose to the equivalent of about $7.35 per bushel at the end of April while U.S. corn futures price fell to around $3.10 per bushel.

Spot prices reported by BRICS market consultants showed strong price hikes in nearly all Chinese regions. Cash price quotes at Dalian in late April were about $7.38 per bushel, up 11 percent from early January. Cash prices at other northeastern locations were also up 11-17 percent from early January. Prices in southern regions were up 7-11 percent. Cash prices at southern ports were $7.50-$7.80 per bushel in late April. The highest prices were equivalent to over $8 per bushel in southwestern provinces of Sichuan and Yunnan--regions with lots of pigs, separated from corn supplies by mountains, rivers, and deserts.

Prices at the Huangpu port in Guangdong province quoted by the South China Grain Exchange illustrate the complicated dynamics in China's corn market over the past year. These quotes reflect the price of Chinese corn shipped from ports in the northeastern region. In early 2019, corn prices dropped about 7 percent when African swine fever swept through southern China's pig herd. The price bounced back in April-June 2019 and fluctuated between 1950-2000 yuan/metric ton during July-December before the price in Guangdong spiked to 2050 yuan/mt in January 2020 when supplies were interrupted by the covid-19 lockdown. The price dropped to 1970 yuan in early March and climbed to 2060 yuan/mt in April, about 6 percent above its level at the beginning of 2020.

Most Chinese feed mills and starch manufacturers are reopened and gradually ramping up business. Pipeline inventories are said to be relatively low. Many are looking to build inventory while traders are cautious about selling with prices on the rise. Farmers have sold most corn from the 2019 crop. The Ministry of Agriculture is trumpeting news about pig farms restocking and pigs have consuming more feed per head due to heavier slaughter weights and lower feed efficiency. However, there are still at least 20 percent fewer pigs on farms than usual. There has been no surge in soybean meal prices that would indicate booming demand for feed ingredients. A divergence in Chinese and U.S. soymeal futures during April was entirely due to a slide in U.S. prices.

China Grain and Oils News estimated that the landed cost of U.S. corn with taxes was 1822 yuan/mt, well below prevailing prices for domestic corn at southern ports of 2140-2150 yuan/mt.

China imported 1.25 million metric tons of corn during Q1 2020--nearly all from Ukraine and Bulgaria--at an average unit value (before taxes) of about 1,500 yuan/mt. China did not start granting exemptions from punitive tariffs on U.S. commodities until March, so imports of U.S. corn will not appear for a while. China did import 633,400 metric tons of U.S. sorghum--a substitute for corn--in Q1.

In early April, Chinese investors began speculating about the possibility that low U.S. prices were about to prompt Chinese officials to make big purchases of corn, soybeans, and other commodities to meet purchase commitments in the Phase one agreement. By April 23, the rumor had taken shape as discussions of a government plan to restock reserves with 20 mmt of U.S. corn and 10 mmt of U.S. soybeans, plus cotton, wheat and other commodities, but it remained unconfirmed. Bloomberg reported this week that the Chinese government issued an additional 1.5 mmt of corn tariff rate quota to state-owned companies that could be a step in carrying out the plan. China's Ministry of Agriculture raised its estimate of 2019/20 corn imports by 1 mmt last month on expectations of purchases of U.S. corn prompted by tariff waivers.

China appears to emerging from the shadow of a corn reserve overhang that loomed over the market the last five years. News reports say the "temporary reserve" has been whittled down to 56 mmt from a peak purportedly more than 200 mmt in 2015-16. It is expected this year's corn reserve auctions will begin selling 1 mmt weekly in the second week of May. Most of the corn will be from 2015. There is also a rumor that 10 mmt of reserves were sold directly to corn processors in mid-April.

China has been consuming more corn than it produces as it digested its stockpile. The Ministry of Agriculture's balance sheet for corn estimated that corn inventory grew by 35 mmt or more annually 4-5 years ago, but the 2019/20 balance sheet indicates the inventory will fall 11 mmt. As the current stockpile is depleted, and with China consuming more corn than it produces, authorities will need to import tens of millions of tons if they want to maintain stockpiles to meet their current guidelines.

This may be why Chinese authorities are sending signals to encourage more corn production this year.