China Blames Big Grain Traders for its Woes

With China's grain and soybean imports on a record pace and agricultural prices at a high level, communist propagandists are blaming multinational companies for price-gouging. When Chinese officials blame someone else for a problem, they are usually trying to divert attention from their own mistakes. Wonder what they're hiding?

On August 11, the Party's Economic Daily asked, "International grain prices are persistently high; are domestic grain prices stable?" This article cited the covid-19 pandemic, flooding, drought, supply chain disruptions, and soaring shipping costs for driving world food prices to a high level. This article called for China to increase its control of food supply chains, diversify its sources of imports, create major Chinese international grain merchants, and increase China's voice and price-setting power in global markets (all mentioned briefly in the 2021 "Number 1 Document."

A week later, Economic Daily's "Corn market 'reducing false fire' has achieved results" praised Chinese authorities for pricking a corn price bubble that resulted after the transfer of corn reserves into private hands (via 2020's auctions) led to hoarding and speculation. Yet the author also credits injection of (wheat?) reserves and imports for deflating the bubble. The author blames "international capital" for "hyping" covid-19 and weather to drive up prices and make money. And no, the author insists, flooding in Henan last month absolutely will not result in a grain shortage, nor drive up prices, really it won't. The implied purpose of the article is to head off such rumors. 

The same day, "Ensure stability and security of moderate grain imports" by a rural development research institute at Wuhan University was published by the Party's Academy of Social Sciences. This article insisted China is food-secure but pointed out growing imports of soybeans and corn, and warned of risks from reliance on supplies from Brazil and the United States and potential "choke points" in the Malacca Straits, Panama and Suez Canals. The authors warn of permanently increasing corn and soybean prices due to shrinking stocks-use ratios, spread of covid-19, speculation by investors, a global flood of liquidity, and inflationary expectations. This means that China's imports are expensive, the authors warn. 

The Wuhan authors advocate a "systems engineering" approach to building a global food-supply layout. This includes actively nurturing large multinational grain trading companies to expand foreign supply networks and exert more control over grain prices in foreign markets. The authors call for "flexible use" of tariffs, quotas, and technical measures to insulate China from risks in the international market. The authors call for China to gain a "voice" in public international food governance by increasing aid and technical assistance and playing a more active role in international organizations like the UN's FAO, UN Development Program, World Food Program, and creating new international food cooperation platforms. 

A more confrontational August 26 article, "We need more big grain traders with price-setting power," by Economic Daily insisted that price-setting power is vital to China's food security. The author claimed that China has no voice or price-setting power, complaining that soybean prices are not determined by Chinese demand despite buying 60 percent of all soybean imports. 

The Economic Daily author insists that the soybean price is "whatever the multinational grain traders say it is." Four big multinationals are able to set the price because they "monopolize" 80 percent of global grain trade, Economic Daily asserted. The main strategy is to nurture "more international big grain traders like COFCO." The author celebrates COFCO's position in the Fortune 500, which is determined entirely by size. "Other" firms mentioned are Beidahuang, a company affiliated with State farms in Heilongjiang Province, and Capital Agribusiness, a merger of companies that supplied Beijing with poultry and milk during the planned economy era. 

China's solution is to divert vast sums of capital from the State-owned banks to create its own grain-trading behemoths. 

Officials included the "create big multinational grain traders" plan in their "Number 1 documents" every year 2014-2019 (and added a passing mention to the 2021 document). Economic Daily reveals that the plan to create grain trading companies is also written into the 14th five-year plan. A recent document on financing rural poverty alleviation and rural revitalization issued by China's central bank and its bank regulator calls for pumping funds into Chinese companies to become big (fat?) multinational grain traders and take their place alongside the so-called ABCD grain traders.

This has been tried before. A 2008 China food security plan formulated during an earlier grain price spike authorized Beidahuang and Chongqing Grain Group to acquire huge tracts of land and build warehouses and wharfs in Brazil and Argentina to save money on imported soybeans, but both plans quickly crashed and burned. A decade ago, COFCO and other state-owned companies were handed money to build soybean crushing plants in China to dilute the share of multinationals in that industry, but complaints go on. 

China Hog Stock Riches Evaporate

China's hog market boom has turned to bust, feeding worries in corporate boardrooms and government offices. As profits and equity vanished, pig producers have pulled back on feed purchases and trimmed expenses. 

China's African swine fever (ASF) epidemic produced a 2-year M-shaped price cycle. The first cases of ASF appeared in August 2018, but hog prices were depressed until mid-2019 as farmers killed off their herds to avoid the epidemic. Prices soared about 150 percent in three months--reaching their peak in November 2019. Hog prices fluctuated in mini-cycles until they crashed during the first half of 2021. China's hog prices are now back where they started in 2018. 

Average wholesale price from China Ministry of Agriculture and Rural Affairs.

At these prices most hog producers are said to be losing money. Farms monitored by China's Ministry of Agriculture and Rural Affairs posted a 9.7-percent loss in May 2021. Most corporate hog-farming companies reported substantial losses or declining profits for the first half of 2021.

The popping of the hog price bubble is also wreaking havoc with balance sheets. Most of China's publicly listed hog-farming companies enjoyed soaring stock prices in 2019 as it became evident that a severe shortage of pigs was on the horizon. Most share prices doubled at some point during 2019-20, and some soared as much as 350 percent above their 2018 values. However, shares began deflating in 2020 in anticipation of a rebound in supply and thinning profits. Some shares are still above their 2018 values but far off their earlier highs, but others have lost value, on net, since 2018.

Yahoo Finance rates all these stocks as "strong buys", by the way.

Changes calculated from average monthly share prices.

Muyuan Foods is the biggest hog producer and best performer. Muyuan's share price soared from 10 yuan in 2018 to a peak of 80 yuan in early 2021. Even Muyuan shares are off this year, but the price is still 4 times its 2018 average. Muyuan's hog production grew four-fold, from 10 million head to 40 million head last year.

Monthly average share price.

Apart from Muyuan and a few others, most hog-farming companies in China posted financial losses in the first half of 2021. 

• Muyuan earned an estimated 9.4-10.2 billion yuan in H1 2021, down 5.4-10.8% from last year.
• New Hope Liuhe--one of the world's largest feed companies--estimated its loss at 2.95-3.45 billion yuan, compared with a 2020 profit of 3.16 billion yuan.
• Wens Foodstuffs announced an estimated loss of  2.26-2.56 billion yuan, a reversal from last year's 4.15 billion yuan profit. Wens' performance was poor despite being diversified as both a poultry and a swine company. 
• Zhengbang--a pig farming company--lost an estimated 1.2-1.45 billion yuan compared with last year's 2.4 billion yuan profit.

The chairman of New Hope Liuhe issued an open letter of apology for the company's first loss in many years, citing dual impacts of ASF and covid-19, weak consumer demand, resurgence of ASF, and the rebound in hog supplies since last year for the poor performance. Apologizing for not "keeping up with the times," he promised to focus on cost-cutting, replace the management team and nurture a cadre of younger managers.

The 81-year-old chairman of Hong Kong-listed WH Group--owner of Shuanghui and Smithfield Foods--stepped down, but the move was said to be unrelated to the company's performance -- visibly worse than the Hang Seng Index. The company had to write down the value of its pig inventory due to falling prices, while rising costs trimmed profits in its U.S. and Europe operations.

Some observers see Muyuan's superior performance versus Wens Foodstuff as validation of Muyuan's fully-integrated farrow-finish production model. Wens was an early adopter of the "company + household" model in which the company has a loose relationship with individual farmers who buy chicks/piglets, feed, medications from the company and raise animals to market weight. Government officials cite this "company + household" model as central to their poverty alleviation strategy and one of the factors boosting swine production.

Big companies are clearly playing a significant role, but family-run microenterprises still comprise the bulk of hog production. The Ministry of Agriculture says that 57 percent of hogs were produced by farms slaughtering 500 head or more in 2020. (That was 5 percentage points higher than the target set by the 2015-2020 five-year plan.) 

Compiled from China Ministry of Agriculture data.

Data from a company registration database show that there are 376,500 registered hog businesses in China, but 73 percent have less than 1 million yuan (about $150,000) in registered capital. Just 3 percent have capital of over 10 million yuan ($1.5 million). The biggest influx of new hog businesses was in 2020, when 77,600 were registered. These "new" enterprises likely represent official registrations of existing "backyard" farms that had to formally organize their business to get loans and other subsidies handed out by local officials last year.

The financialization of hog production surely played a key role in recovery of the hog industry. Soaring stock prices for publicly listed companies got big influxes of capital they could leverage with borrowing. Smaller farmers accustomed to operating hand to mouth got investments from family and neighbors. Bank loans and land leases were key policy measures used to expand hog farms. Now that profits and equity have vaporized, the farms--both big and small--surely find themselves over-leveraged.

Government officials seem worried that money-losing hog farmers will quit en masse, causing further gyrations in pork supplies and prices. Farmers Daily advises hog farmers that the days of high profits from pigs are over and the era of cost-cutting has now arrived. 

Feedtrade.com.cn reported examples of individually-operated hog farms that are cutting back on their herds, saving money on feed by substituting cheap materials and by dialing back daily feed rations and animal growth rates. Big companies are getting into cost-cutting mode too. Wens Foodstuff says it is adjusting feed formulations to cut costs, using wheat in place of corn, and reducing soymeal use. New Hope, DBN and Wens pledged to stop purchasing feeder pigs and breeding stock from outside the company, cull low-productivity sows, and stop building new projects. 

Zhengbang Company reportedly raised the productivity of sows to an estimated 20 pigs per sow after eliminating 50,000 low-productivity sows in Q2 2021. Breeding stock imported by Zhengbang during November is expected to reduce piglet costs next year when the progeny of these high-quality animals reach the commercial herd. The company hopes to reach 25 pigs per sow then. 

A new countercyclical mechanism for the hog market announced by six government agencies reflects the concerns. An ag ministry official's Q&A on the countercyclical program raised concerns that the hog market still lacks a solid foundation despite ample pork supplies and full recovery of production capacity. He worried that falling pig prices might encourage both farmers and local officials to lose their enthusiasm for hog farming, throwing the sector's expansion abruptly into reverse. 

Two years ago local officials were given hog production quotas and assigned to implement support policies--some localities rolled out 19 hog farm support measures. The ag ministry official worried that local leaders might amplify the downturn by withdrawing favorable land-use and easy environmental assessments for hog farms or by resuming declarations of pig-free districts and counties. Banks are ordered not to call in loans or stop lending to pig farms. With rising production costs and risk of recurrences of ASF, the official declared that the task of stabilizing hog production and guaranteeing pork supplies is "huge." 

The counter-cyclical program calls for an impossible combination of producing large amounts of pork, keeping supplies stable, reducing environmental pollution, maintaining food safety, and limiting imports to 5 percent of consumption. 

The program targets a sow inventory of 43 million head (and no less than 40 million), with advice issued to farmers when sows change by +/- 5% monthly, and market interventions when sow numbers fall 10%. A "normal" pork output of 55 million metric tons is targeted. The program calls for officials to ensure credit is available to hog farmers and to refrain from banning pig farms or assist them in relocating if a farm really needs to be demolished. The plan calls for establishing a platform for issuing market information and early warnings.

The countercyclical program calls for "scientific guidance of import rhythm" which sounds like a veiled plan to allow pork imports when domestic supplies are tight and raise barriers to imports during  downturns in the Chinese industry. The program reiterates a 95% self-sufficiency target for pork that was first declared in a September 2019 State Council. 

With a pork production target of 55 mmt, the self-sufficiency target implies a limit on imports of 2.9 million metric tons to maintain 95% self-sufficiency. China's pork imports have been close to or above that implied limit every year since 2016, and pork imports have already hit the target in the first six months of 2021. 

Watch for Chinese news media throwing shade on foreign pork and feed additives. The recent report in State media about the son of the WH Group chairman criticizing the Smithfield acquisition could possibly be the opening salvo (see this blog's August 9 post). Will containers of rancid foreign pork be discovered in Shanghai? Will exporters be shut down for insufficient covid prevention controls? Will the ASF virus mysteriously jump from the Dominican Republic into North America? 

China "Buying U.S. Farmland"...and Regretting It?

Some U.S. politicians warn of a Chinese takeover of American farmland, but the one big acquisition of U.S. farming assets may have been a bust for the Chinese buyer. At the same time U.S. politicians were moaning about land grabs, a Chinese meat scion got booted from his dad's company for arguing that the acquisition of Smithfield Foods was a boondoggle. 

Last month Rep. Dan Newhouse of Washington State warned, “The current trend in the United States is leading us toward the creation of a Chinese-owned agricultural land monopoly.”

National Public Radio got in early on the story by running a May 27 segment on the threat of foreign investors gobbling up U.S. farm fields and destroying rural communities, with a nod toward a Chinese company's ownership of Smithfield grain elevators as a prime example. Within days, politicians glommed on and numerous stories led with a warning that "China is buying up U.S. farmland," citing USDA statistics and the example of the Smithfield acquisition. The theme was taken up by former VP Mike Pence, Sen. Dianne Warren, and Fox News. 

According to USDA statistics on foreign farmland ownership, "China" owns 192,000 acres of U.S. farmland. Most of that total comprises 146,000 acres of Smithfield Foods land acquired in 2013 by WH Group, a holding company assembled by New York and Singapore investment bankers and executives of a Chinese pork company expressly to acquire Smithfield and go public in Hong Kong. The USDA data show there has been no increase in Chinese ownership of U.S. farmland since the Smithfield deal. 

Source: USDA reports on foreign ownership of U.S. farmland.

At the same time accusations of Chinese land grabs were hitting American airwaves--a family feud was breaking out at the headquarters of the Chinese pork company Shuanghui over the Smithfield deal. Mr. Wan Hongjian apparently got booted from Shuanghui for insisting the Smithfield acquisition was a money pit that generated meager profits and distracted Shuanghui from more profitable strategies. 

Wan Hongjian is the son of Wan Long--the long-time boss of Shuanghui who reportedly has god-like status in the company. Wan Long was at the center of the Smithfield deal, and as the biggest shareholder in WH Group he pocketed close to $1 billion dollars in the Hong Kong IPO. The younger Mr. Wan argues that the huge payday for his dad tarnished Shuanghui's claim to be a "company of integrity" and sowed dissension among the company's rank-and-file.

The younger Mr. Wan began working at Shuanghui in 1990 after his dad had turned a state-owned money-losing abattoir in a sleepy Henan town into a privately-owned money-spinner by exporting beef to Russia and the Middle East. Later Shuanghui became a nationally-known purveyor of processed sausages and other pork products. 

Wan Hongjian told China's Yicai paper that the acquisition of Smithfield created no real synergies and argues that the strategy of promoting American-style pork products like bacon, ham and sausages in China is a mistake. Wan Hongjian argues that such products are not suited to the Chinese palate and the market is already saturated. Shuanghui spent 800 million yuan (over $100 million) building a Smithfield-inspired processing plant in China's Zhengzhou City while neglecting China's bigger market for chilled pork. He said Shuanghui's hog slaughter volume declined from 12.3 million head to 7.1 million head between 2015 and 2020. 

Younger Wan criticized elder Wan's pursuit of American pork products

Wan also faulted the company for pouring $3 billion into retooling a Smithfield plant in Virginia to export meat to China during China's African swine fever-induced shortage. Between 2015 and 2020, Shuanghui boosted its pork imports from 160,000 metric tons to 720,000 metric tons--80 percent of it from Smithfield. While there was some profit, Wan accuses the focus on American-style products of putting Shuanghui's chilled pork sales under tremendous pressure. 

The last straw for Wan Hongjian was Shuanghui's new five-year plan to increase sales of processed pork products by 400,000 metric tons. Pointing out that sales of these products had decreased over the previous five years, Wan asked how sales of these products could be expected to increase. These statements and a fist-banging tantrum enraged the elder Wan, resulting in the younger Wan's apparent ouster from the company.

Shuanghui's acquisition of Smithfield was depicted at the time as a synergistic acquisition of upstream hog-farming assets, but Wan Hongjian denies that the benefits were worth the risks. While Wan acknowledges that hogs are cheaper in the U.S., he argues those gains are offset by the high labor costs of meat processing in the U.S. He argues that Latin America is more competitive.

The senior Mr. Wan is also faulted for turning down an overture from Chinese hog-farming giant Muyuan ten years ago. In 2011, Shuanghui had been implicated in a feed additive scandal and Wan Long had pledged to become a "raiser of pigs", not just a "killer of pigs." Muyuan Company--a neighbor in Henan Province focused on hog farming--reached out to offer help raising pigs but Mr. Wan Long refused. 

Despite the acquisition of Smithfield's considerable farming assets, Shuanghui seems to have made little progress backward-integrating into pig farming in China. Meanwhile, Muyuan has rocketed ahead of Smithfield to become the world's largest hog producer and is now engaged in downstream slaughter and processing. The younger Mr. Wan sees Muyuan and Shuanghui as direct competitors now. 

Wuhan Consumers Hoarding Food "Need a Sense of Security"

Chinese consumers have been clearing off supermarket shelves as they worry about new virus outbreaks and floods. Authorities insist supplies are ample and say there's no reason to hoard food, but citizens don't seem to believe them. 

China is experiencing its biggest covid outbreak since the 2019-20 Wuhan outbreak. Though cases are few, these are the most geographically widespread and the delta variant is more transmissible than last year's version. China's health commission reported 85 new cases of covid-19 on August 4, bringing the cumulative total to 1,285. New domestic cases were spread across Jiangsu (40 cases), Hunan (9), Beijing (3), Shandong (3), Henan (3), Yunnan (3), and Hubei (1). Twenty-nine cases from abroad were discovered in Shanghai, Yunnan, Fujian, Guangdong, and Shandong. 

The new covid outbreaks follow disastrous flooding in Henan Province July 17-24 that inundated fields, filled barns with mud, and drowned livestock. Storms from another typhoon followed soon after, dumping rain on 9 of China's eastern provinces. China's weather service has predicted more heavy rains for August and advises farmers to prepare.

Pig barns like this one in Luohe, Henan were flooded last week;
pigs couldn't sleep without drowning. 

Citizens of Wuhan began buying up rice, instant noodles and pork on August 2, according to China Grain Net. Chinese officials insisted that there is no reason to panic or store up food because supplies are ample, but the China Grain Net writer sympathized with Wuhan peoples' hoarding because "they need this feeling of security" having already been at the center of an epidemic.  

[Perhaps the bungled response to last year's initial pandemic in Wuhan and suppression of reporting on it undermined their confidence in government pronouncements.]

Market regulation bureaus in other places--Nanjing, Yangzhou, Hunan's Zhangjiajie and Zhuzhou, Hubei's Jingzhou, and Zhengzhou--announced crackdowns on price-gouging and hoarding of food, face masks, disinfectant, and medical equipment by merchants. Officials say they are inspecting supermarkets, food markets, and pharmacies and will penalize them for excessive price increases, charging extra fees, requiring purchases of unrelated products, faking cost invoices to justify high prices, and selling fake or inferior products. Prices must be displayed clearly.

All reporting on the impact of the Henan floods is dutifully quoting from an agriculture ministry press conference on the topic held July 30 that generally played down the impacts on agricultural markets. An official said just under 1 million hectares of farmland in Henan had been affected, with the harvest wiped out on 367,000 hectares. The official acknowledged that fields were draining slowly because rivers and drainage ditches were so full. Fall-harvested crops most affected are corn, peanuts, and soybeans, according to the official.

The head of China's market information office said wheat was not affected by the floods because it had already been harvested. However, he also warned that moisture and hot weather threatens to cause mold on wheat stored by farmers and traders. One market report said wheat prices had declined slightly because farmers and traders were eager to sell their wheat. 

An August 5 report tells a different story of a surge of orders received by flour mills that they are struggling to fill. Price increases of 2% to 9% have been announced, but market regulators are also watching them to keep price increases from getting out of hand. 

Agricultural officials have dispatched water pumps and drones to spray pesticide and fertilizer. They urged farmers to disinfect livestock farms, safely dispose of floating animal carcasses and medicate surviving animals. Wet conditions could make corn vulnerable to rot and disease, and officials recommend replanting fields with sweet corn or vegetables. An agricultural ministry corn analyst said a boost in imports could offset losses, but he insisted this is not a long-term solution.