China Likes Big Techno-Farms

Chinese officials view scaled-up techno-farms as their farms of the future. Small-scale peasant farmers still blanket the countryside, but subsidies are gradually tilting toward big farms. 

business propaganda outlet Yicai proclaimed recently that scaling up farming operations is the key to addressing a crisis of chronic low earnings from grain production that undermine incentives. Yicai insisted further that small-scale farms of 10 mu could never improve rural living standards. The Yicai article featured the head of a "cooperative" who had acquired 19,200 mu of land through "land transfer" as a technologically adept farmer superior to the small-holder peasants who still dot China's countryside. The cooperative had boosted wheat yields and quality, linked up with a flour manufacturer, and had plans to expand his business even more.

Yicai cited a 5-year-old Farmers Daily article that found 60 percent of China's cropland is farmed by small-scale farmers with holdings of 10 mu or less, while only 20 percent was farmed by scaled-up farms (the other 20% was not accounted for).

A recent Economic Daily discourse on "Rationally Maintaining Farmers' Net Returns to Growing Grain" pointed out that crop yields are highest for farmers cultivating 500 mu of land--about 10 times the typical holdings of small-scale farmers. The article's China Agricultural University authors gave examples of efficient farm producers: a "specialized rice cooperative" in Heilongjiang's Jiamusi City and an "agricultural services" company in Shandong's Gaomi City that cultivate the cropland of entire villages, bring in new seed varieties, mechanize the entire process, and fly drones over the fields to spray pesticides.

The fragmented nature of China's grain farms is cemented in place by its outmoded land policy that distributed plots of land to every rural family based on the number mouths to feed and number of laborers. Land can be temporarily transferred to other farmers but it can't be sold to other farmers. 

In contrast, pig farms are mostly independent of land-holdings and have consequently scaled up at a furious pace. Chinese officials love big pig farms with high-rise barns, automated feeding and temperature control equipment, data collection and artificial intelligence. They also love that they can call company executives to Beijing to lecture them about policy priorities, trot them out on stages, and feature them as models loyal to the leadership. 

After dead pigs floated into Shanghai in 2013, officials were ready with a plan to shut down small pig farms and replace them with big ones. During years that followed aggressive environmental measures eliminated millions of pig farms. In 2019, a long list of subsidies and loans to restore pork supplies after the African swine fever epidemic were given mainly to scaled-up farms. Muyuan Foods--now the world's biggest pig farmer--got big tracts of farmland to build giant pig barns despite a crackdown on diverting farmland from grain production. China had 21 million pig farms in 2020, less than half the 50 million in 2014 and a fifth of the 105 million pig farms China had in 2002. 

Source: China livestock industry yearbooks.

Priority initiatives to reduce soybean imports show how China is marginalizing small-scale farms by featuring complex techno-farming initiatives that are beyond the grasp of peasants.

A corn-soybean strip-cropping pilot program--one of China's top farming initiatives in 2022--is meant to increase soybean output without sacrificing corn by planting fields that alternate 2-4 rows of corn with 2-6 rows of soybeans. The technique has complicated requirements for row spacing, varieties that can tolerate dense planting and are resistant to lodging and shade-tolerant, special herbicides and different application times are needed for the two crops in the same field. Specialized machinery (which doesn't seem to be even available now) is needed for seeding, chemical application and harvesting. 

Last month, Economic Daily reported that production costs for the corn-soybean strip-cropping technique are extraordinarily high due to complex field management, specialized inputs and machinery required. High subsidies of 200 yuan per mu (about $170 per acre, plus additional subsidies for equipment purchase costs) are available only to large-scale farmers, cooperatives, and companies engaged in strip-cropping. Small-scale farmers are ineligible. 

This week China's agriculture ministry held a seminar to demonstrate progress on low-protein soybean meal diets for livestock, another measure to reduce soybean imports. The seminar featured presentations from giant companies like New Hope Group and Muyuan Foods. Official talking points on this initiative scold small and medium-scale farmers for judging feed quality based solely on its soybean meal content rather than designing feed rations based on diets that set minimum amounts for a half-dozen unpronounceable amino acids, fermentation processes, and distinctions between metabolizable versus digestible protein. 

The problem is that big farms have high capital requirements, high costs, and cannot operate on a shoestring as small-scale peasant farmers have done for decades. The giant pig farms are losing billions of dollars. One promising pig farming company went bust in 2018, and the number-2 pig-farming company now appears on the brink of bankruptcy.

According to Economic Daily, farmers are not able to cover the costs for soy-corn strip-cropping even with the high subsidies.

The Economic Daily and Yicai articles pointed out that land rental costs are an obstacle to profitability for scaled-up farmers. Economic Daily authors said they learned that Heilongjiang Province land rental rates went up from 500-600 yuan per mu in 2020 to 700-800 yuan per mu in 2021, while rent in Henan Province on land used for wheat-corn crops is 800 yuan. 

The cooperative head interviewed by Yicai said the 800 yuan land rent currently paid was "reasonable" but claimed that he would not be able to make money if rent was boosted to 850 yuan. Another farmer in Inner Mongolia interviewed by Yicai rented 6000 mu of "sandy" land from animal herders to plant soybeans and sorghum. He complained about the high expenses of 900-950 yuan per mu for land rent plus inputs and services and the land's vulnerability to windstorms. He complained that the rent exceeds the cost of inputs for the crops and he only nets 170 yuan per mu. 

An Anhui farmer interviewed by Yicai warned that many entrepreneurs who ran restaurants, bathhouses and other businesses think they can easily make money in farming. He recalled a wave of such farmers 10 years ago who quickly went bust. The farmer commented that a new wave of 1000-mu and 10,000-mu farms has recently appeared, lured by rising corn prices and subsidies, loans and financial awards from local governments. The article warns that these farmers could encounter big losses if corn prices don't keep rising and if subsidies are not sustained permanently.

Yicai concluded that more subsidies are necessary. China will get around World Trade Organization limits on subsidies by using insurance programs that guarantee farmers a minimum income. Provincial and central governments will subsidize 70 percent of the premiums in most farming counties and 60 percent in rich eastern provinces. Agricultural insurance is considered a "green box" support measure that is exempt from WTO limits, so there is plenty of room for growth, Yicai said. The program is supposed to cover all major grain-producing counties this year.

China has been experimenting with subsidies for large-scale farms over the past decade. The "land fertility subsidy" created in 2016 by consolidating other subsidies has a chunk reserved for scaled-up farms. Some provinces have subsidies specifically for scaled-up farmers or "awards" to offset the expense of land rent. 

A new income insurance scheme, "insurance plus futures," is touted as China's new approach to subsidizing grain farmers. The mechanism involves subsidized premiums for insurance that pays farmers if crop prices fall below a certain target. It involves complex hedging in futures and options markets that are beyond the comprehension of nearly all Chinese farmers. 

Gyrating Pork Prices Vex Chinese Officials

China's August 2022 CPI report said pork prices were up 22 percent from a year earlier, the largest increase of any component of the price index. The Statistics Bureau reckoned that the 10-percent increase for the broader meat category contributed 0.32 percentage points to the 2.5 percent year-on-year rise in consumer prices.

A year ago, the August 2021 CPI report said pork prices were down 44.9 percent from a year earlier, the largest decline of any component of consumer prices. In August last year, the meat component of the CPI pulled down the 0.9-percent CPI change by 1.2 percentage points. 

According to agriculture ministry wholesale market price monitoring, August 2022 pork prices averaged 33.88 yuan per kg (about $2.23 per lb). That was higher than any historical pork price excluding the once-in-a-lifetime prices during Sept 2019 to January 2021 when African swine fever cratered pork supplies. 

Data from China Ministry of Agriculture and Rural Affairs market monitoring.

Chinese officials have been spooked by the gyrations in pork prices. In a July macroeconomic analysis by the State Council's Development Research Center think tank, three economists investigated the lurking risk of a new rapid surge in pork prices. They zoomed in on the possibility that "excessive shedding of production capacity" due to rising feed costs, a broken financing chain for some large-scale hog producers (e.g. Zhengbang), and over-zealous environmental regulators shutting down pig farms.

The economists said another price spike was unlikely because big farms that can withstand cyclical pressures are squeezing out small independent farms. They were pleased to report that 

• scaled-up farms producing 500 head or more had increased their share from 53% to 60% between 2019 and 2021. 
• Sows held by scaled farms increased by 4.4% between April 2021 and June 2022 while sows held by small independent farmers had fallen 11.6%. 
• High-productivity second-generation sows increased from 50% of the herd in May 2021 to 88 percent in February 2022 as low-productivity third-generation sows have been displaced.

Somewhat more alarming was the financial data for pork companies:

• While 21 publicly listed hog companies produced 15% of hogs last year, 14 of them reported losses totaling 53.97 billion yuan
• 20 companies posted losses in the first quarter of 2022 totaling 18.94 billion yuan
• 14 companies have debt-asset ratios over 60%, and four have ratios over 80%.
• The report singled out Zhengbang Sci-Tech, the no. 2 pig producer, for its particularly dire financial straits.

The DRC economists judged that the likelihood of a rise in pork prices is low since pork consumption is under pressure due to closure of food service during pandemic lockdowns and a general decline as consumption diversifies away from pork. They said per capita pork consumption fell from 42.6 kg to 40.1 kg between 2014 and 2021. 

After rolling out a dozen policies to accelerate recovery of pig production exactly 3 years ago, the economists now recommend another round of loans and other support policies to prevent excessive exit from the industry. They called for increasing the corn import quota and simplifying procedures to reduce feed prices. They also called for expanding imports of other feed grains like barley and sorghum, distillers dried grains, and oilseed meals while pursuing low-soybean meal feed rations.

What the DRC economists did not bother to ask is why pork prices have surged to an historical high when demand is decidedly lackluster. Doesn't it suggest a supply shortfall? 

The National Development and Reform Commission held meetings in the summer with big hog-producing and pork companies, industry associations and other government departments to warn against hoarding and price manipulation. Authorities learned that the current supply of fattened hogs is sparse due to a reduction of capacity when companies were losing money last year. Companies said they would have to slaughter immature pigs in order to ramp up supplies immediately. 

The NDRC's September meeting once again had an upbeat assessment, concluding that pork supplies are ample and prices will be stable. 

The DRC economists called for cracking down on false information, hoarding and speculation. They meant this for companies, but the government should also stop putting out fake statistics, rosy outlooks, and stop hoarding grain.

Indian Rice Replaced China's Expensive Corn...until now

China's expensive corn is upending agricultural markets in unexpected ways. India banned exports of broken rice last week and imposed a 20-percent export tax on most other types of rice to pre-empt food security risks. Booming demand for broken rice has been blamed on the war in Ukraine as importers sought out replacements for Ukrainian corn. That's true, but China's demand for broken rice has been on the rise for two years, driven by spiraling Chinese corn prices.

Customs data show a relentless growth in Chinese imports of broken rice--a type of grain typically used as an industrial or feed raw material and often imported by African nations. China's broken rice imports tripled from about 200,000 metric tons per quarter in 2020 to around 600,000 metric tons per quarter in 2021. With the onset of the Ukraine war, imports accelerated again to 800,000 metric tons in 2022 Q1 and over 1.2 million metric tons in 2022 Q2.

Back in 2020, China imported broken rice mainly from Vietnam, Myanmar, Thailand and Pakistan. Following an agreement to open China's market to Indian rice signed in 2018, China began importing broken rice from India for the first time in decades in December 2020. China's imports of Indian broken rice zoomed to over 1 million metric tons in 2021. This year, China imported 1.45 million metric tons in the first seven months of 2022. So far this year, nearly 60 percent of China's broken rice imports have come from India. 

China also cut its tariff on broken rice imports to 5 percent in 2018. That means Chinese importers can buy broken rice from abroad at a relatively low tariff without limit. In past years they had to beg the government for a tiny sliver of the annual tariff rate quota in order to buy any kind of foreign rice. 

China's taste for India's broken rice exactly corresponds to a price inversion between Chinese corn and imported broken rice. Chinese corn prices were $100 to $200 less than the unit value per ton of imported broken rice during 2019 when China was still dumping its massive corn reserves into the market. During 2020, Chinese corn prices began climbing while India offered discounts on broken rice sales. By early 2021, Chinese corn was about $40-$50 more expensive than imported broken rice, and the business boomed.

In a news report 6 months ago, Indian and Pakistani traders attributed China's "exceptionally vigorous" demand for broken rice to tight supplies of Black Sea corn and wheat. They cited Chinese demand for spurring a boom in prices for broken rice that inverted the spread between 100% and 25% broken rice. In late February, Indian 100% broken rice was quoted at $310 per ton fob, up $29 from the beginning of the year. Chinese corn was over $415 per ton at that time.

Xi's "China Dream" for Soybeans

A revival plan for China's soybean industry bears all the marks of Xi Jinping's broader "China Dream" of a glorious rejuvenation of Chinese culture and economic leadership. The doctrine asserts that it is now time to throw off foreign domination of an inherently Chinese commodity. China will create a market for soybeans with distinct Chinese features that will pull along suppliers in Eurasia and Africa, with processing led by Chinese companies and with prices determined in Chinese markets. 

Economic Daily led off the month of August with a brief article, "Who has the power to set prices for domestic soybeans?" (reposted on the Chinese commerce ministry's web site) and followed up with a 12,000-word "Investigation of the Soybean Issue" feature article (Harbin TV version with photos). Many articles described the experimental corn-soybean strip-cropping technique rolled out this year. Several addressed non-GMO futures market topics, and the feed industry association ordered up training to promote substitutes for soybean meal in animal feed. 

The articles envision China carving out a non-GMO segment of the global soybean market where China will be the key player. China will procure non-GMO soybeans from its own farmers and from trade partners around the world, Chinese companies will produce and export soy-based food products, and a Chinese futures market will set the prices for non-GMO soybeans, thus regaining China's "right to speak" in the worldwide soybean industry. 

Economic Daily attributed this year's renewed attention to self-sufficiency in soybeans and oilseeds to "special instructions" issued by Xi Jinping conveyed in a speech by Vice Premier Hu Chunhua at a May meeting in Heilongjiang Province, China's top soy-producing region. (In a March 7 post, the dimsums blog noted China's dashed hopes of becoming a non-GMO soybean exporter, soaring Chinese soybean prices, and this year's self-sufficiency push.)

Typical of Xi thought, the soybean strategy is predicated on a narrative of unfair American domination. Economic Daily moans about the unfairness of global prices being determined in American markets when China has become the largest importer and Brazil the largest exporter. The writers blame unfair prices for undermining incentives to grow soybeans in China. Economic Daily complained that low soybean prices, in turn, resulted in farmers abandoning crop rotations, and this resulted in a corn monoculture that degraded China's soil quality. 

Like other Xi Jinping initiatives, the soybean narrative looks backward to find innate historical Chinese greatness that has been suppressed by foreigners. Economic Daily points out China's role as originator of the soybean and was top exporter 100 years ago. Economic Daily dredges up a 2000-year tofu history traced to a king in the Western Han dynasty that supports a leading role today for Chinese soy products.

Automated packaging of soymilk mix at a factory owned by Beidahuang, a company
controlled by the State farm system in Heilongjiang Province. Source: Harbin TV.

Self-reliance and independence are other watchwords of Xi thought. Economic Daily crows about China having created two "independent" soybean markets, claiming that non-GMO soybeans are the "competitive advantage" of China's food processors. The authors note that imported non-GMO soybeans are prohibited for use in food products, and they observe that products with a "non-GMO soybean" label can be found in "many supermarkets" in Beijing. 

A May 2022 market commentary on first quarter soybean imports explained that Americans have mastered soybean pricing by ensuring that soybeans throughout the world are priced with reference to the Chicago market. The commentator alleges that Americans keep non-GMO artificially expensive in order to create more demand for their cheaper GMO soybeans. The commentator expressed his hope that non-GMO soybeans would retain their high price and thus bring high returns (...to Chinese soybean farmers but not to Chinese food processors or consumers).

The May commentary pointed to an arrangement to set the price for a 2000-ton shipment of Canadian non-GMO soybeans with reference to the Dalian futures price as a symbolic restoration of China's price-setting power in the soybean market. 

Economic Daily lauds the Dalian Commodity Exchange's (DCE) "No. 1" non-GMO futures contract as the world's largest futures market for food-use soybeans. Twenty years ago, DCE created the non-GMO futures contract--settled almost exclusively with Chinese soybeans--while the "No. 2" soybean contract has no restrictions. A DCE official said the exchange provides price information about China's high-quality high-protein soybeans and envisions the exchange becoming a "fair and just" non-GMO soybean import and trading mechanism that will restore China's pricing power in soybean markets.  

Xi's theme of China disseminating its culture abroad to make the world better is reflected by the Peoples Daily's "Planting Soybeans Gave Us New Hope," describing Tanzanian villagers' enthusiastic discovery of Chinese soybean milk and great improvements in yields and income from production techniques taught by Chinese scientists. 

Data on GMO and non-GMO soybean imports posted online last week reveal that China's non-GMO soybean imports are a dribble. In July 2022 China imported 88,900 tons of non-GMO soybeans and nearly 7.8 million tons of GMO soybeans. Russia was the main source of non-GMO soybeans. The second-largest supplier was Canada. The United States supplied both GMO and non-GMO soybeans, according to this data. The combined volume coming from "Belt and Road" countries Kazakhstan, Ukraine, and Africa was about equal to the amount of non-GMO soybeans imported from the United States. South American countries supplied only GMO soybeans to China.

The data also reveal that the "fair and just" "China price" for non-GMO soybeans is far higher than in the rest of the world. Unit values per ton calculated from the July customs data revealed that prices of imported non-GMO soybeans vary widely, from just $400-$500 per metric ton for Kazakh and Russian soybeans to over $800 per ton for soybeans from Ethiopia, Benin and Tanzania. The numbers suggest that Americans can supply China with non-GMO soybeans more cheaply than African countries. U.S. and Canadian non-GMO soybeans averaged about $760, less than unit values of African soybeans. In contrast, wholesale market prices for Chinese soybeans reported by China's ag ministry averaged $1098 per ton in July. Brazil's GMO soybeans averaged $736 per ton in the July customs data.

Today's Dalian futures prices are about 5,700 yuan for non-GMO soybeans and about 4,700 yuan for GMO soybeans for delivery in January 2023. That implies that market participants expect a 20-percent premium for domestic soybeans after the upcoming harvest.

Economic Daily acknowledged that Chinese non-GMO soybean prices had risen dramatically over the past two years. To combat the incentive to substitute GMO for non-GMO soybeans due to the price spread, Chinese regulators are stepping up their scrutiny of wholesale markets and food manufacturers to root out any non-GMO soybean use in foods. 

Economic Daily's "Investigation" acknowledged that the high cost of Chinese soybeans is ultimately due to low yields, and celebrated stories of new seeds that purportedly provide a quantum leap in yields. The seeds are bred and supplied by Chinese companies.

High prices are not enough to make soybeans profitable in China. Economic Daily also celebrates big subsidies for soybean growers this year that include a direct payment to soybean growers, a crop rotation subsidy for farmers, insurance that guarantees a net return for soybean and other grain producers, and transfer payments to soybean-producing counties. A massive corn-soybean strip-cropping experiment targeted to reach 5 million mu (824,000 acres) this year is subsidized at 500 yuan per mu ($440 per acre).

The non-GMO soybean strategy is in line with Xi Jinping's vision of inevitable future Chinese glory based on tales of past Chinese greatness. The inherent greatness of China means that any successful competitor must be guilty of exploitation and cheating. 

It would be fine to create an independent market for non-GMO soybeans with premium prices, but it's not clear what is unique about these soybeans and what benefit consumers get from them. The differentiation seems to be based entirely on manufactured fears of genetic modification and stories about American domination. 

Traders would flock to China's markets if they had the same transparency, reliable government data, a freely traded currency, and consistent enforcement of laws and contracts that are the foundation of markets in Chicago, London, Switzerland and Tokyo.