Tuesday, May 4, 2021

What is [not] in China's granaries?

Is there something China is not telling us about its grain supply? Since last year, Chinese authorities have been fretting about covid-caused foreign grain supply disruptions that threaten global food security. But maybe this chatter is intended to deflect attention from food supply issues at home they are keeping under wraps. Maybe China's frantic grain imports over the past year are part of a campaign to refill grain reserves that were faked, looted, or rotten.

In a Futures Daily commentary on China's grain, oilseed and meat import boom, grain market researcher Zhang Zhixian finds the explosion of grain imports this year "astonishing." Grain and soybean imports totaled 37.6 million metric tons (mmt) in the first quarter of 2021, up 62 percent from Q1 2020. Futures analyst Xu Ruzhou told Futures Daily the 6.7 mmt of corn imported in the first three months of 2021 is surprising since we were told just a few years ago the "temporary reserve" of corn was a gargantuan 260 mmt. How did China's corn market flip from a huge surplus to a huge deficit in four years? 

Last week China's Food and Strategic Commodity Reserve Administration and several other departments released "Notice on Problems Related to Strengthening State Daily Management and Legal Supervision of Policy-Type Grain." The long list of shenanigans banned by the document suggests that reports of empty warehouses, granaries that burst into flames, and inedible reserves are more widespread than the government has admitted. Last year, some granaries posted signs forbidding cell phones after someone posted a photo of a warehouse in Heilongjiang full of rotten grain that was about to be auctioned. Authorities claimed it was an isolated incident.

Some Grain Reserve warehouses posted notices banning cell phones and other recording devices
after someone posted a photo of degraded corn kernels in a warehouse leased by China's grain reserve authority last year.

The grain management document praises daily management of grain for being "good overall" in recent years, but the document scolds units in some places for not giving grain reserve management high political status and for failing to fully recognize the major significance of legal supervision of policy-type grain management. The document warns officials that "hidden dangers" need to be nipped in the bud. The bottom line is to ensure that the volume of grain reserves is truthful, the quality is good, and storage is secure, according to the document.

The document orders grain reserve management companies to strictly manage grain held by subsidiaries, watch the flow of subsidies, and to keep an eye on personnel and leased storage facilities. It charges the Agricultural Development Bank with verifying the reserves it finances. Particular attention is given to grain that was purchased before 2018. 

The document proscribes escapades such as false reporting of grain statistics, "round-tripping" (collecting subsidies for buying grain already in storage), surreptitiously shifting grain around to different locations, speculating on grain reserves, buying and auctioning grain that doesn't exist, pledging grain reserves as collateral for loans, using degraded grain to pad inventories, faking grain sales, charging extra fees to move grain out of warehouses and putting up other barriers to moving grain. The document also calls for treating farmers fairly in purchasing grain by publicly posting prices and grades, banning downgrading grain to cut the price, and banning payment with IOUs. 

These activities have been major concerns since the 1990s, so why do they need to be banned again?

What if the purported 260-mmt temporary reserve of corn was bloated by fake transactions and was never as big as we were told? What if the implausible 100-mmt auctions of reserve corn in 2018 and the 55-mmt auction sales of corn that mysteriously sold out week after week last year were phony transactions to take nonexistent grain off the books? Most of the corn auctioned in 2020 had been purchased in 2015 when authorities supposedly bought 125 mmt of corn that would have been nearly half that year's harvest. What if China's statistics bureau used the excuse of an agricultural census to revise their corn production data upward by 20 percent in 2018 to make production statistics consistent with the inflated "temporary reserve" number?

This is all conjecture, but conjecture is all we have to go on with less and less solid information available to make solid assessments. Is China reverting to the closed China of the 1950s and '60s when propagandists photographed children standing on wheat stalks, crops were replanted along Chairman Mao's train route, the government hid the biggest famine in history, and foreigners had to guess about China's food situation by dissecting newspaper reports and interviewing refugees?

A huge famine occurred a few years after Chinese propagandists claimed to have achieved world-record
rice yields in the 1950s based on bogus scientific concepts. 



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