Hainan's Banana Glut

Not everything is getting more expensive in China. The bottom has fallen out of the banana market. At their peak in Februrary, bananas in Hainan Province sold for 7.6 yuan per kg. Since the beginning of June, bananas have been in severe oversupply in Hainan and the price is now 0.25 to 0.60 yuan per kg.

A reporter drove out to Chengmai county on Hainan Island and saw large banana groves nearly ready for harvest, but no evidence of trucks to buy the fruit. A farmer told the reporter that the bananas will rot if no one comes to buy them in the next 10 days or so.

Another farmer said he contracted 1000 mu (about 165 acres) to grow bananas, of which 220 mu are ready for harvest. He rents the land for 450 yuan per mu [about $420 per acre, double what grain land rents for in much of inland China, but about average for fruit and vegetable land] and his total costs are 6700 yuan. He has to sell at 1 yuan per kg to cover his costs, so at current prices he will lose 0.7 yuan on every kilogram he sells. He's thinking about shipping his bananas to the Yingkou port [in Liaoning Province?] which would take about a month. He hopes the price might recover by then.

The reporter found that banana prices were way down in all the major banana-production areas of Hainan. One factor behind the plunging prices is cold weather that delayed the winter banana harvest about 20 days so that their harvest overlapped with the spring banana crop. Second, the summer is a low season for bananas since there are a lot of other kinds of fruit available, plus bananas from Guangxi and Guangdong and southeast Asia are available. Another issue is that media reports about ethylene-ripening of bananas scared consumers, although the chairman of the Hainan banana association says it's a natural process that does not threaten consumers' health.

One banana dealer named Huang said he filled 5 or 6 trucks with bananas, paying .2 to .6 yuan. He said, “We haven’t made any money on what we purchased; since mid-April this price has been dropping, and we lose money every day we buy."

A researcher from the Chinese Academy of Agricultural Sciences says they are working with the banana association to coordinate sales with processing companies in northern China.

At Haikou supermarkets the reporter saw bananas on sale for 2.18 yuan compared with the local purchase price of .4 to .6 yuan. A supermarket manager said the price will go down to reflect the market trend.

At a fruit stand in Hangzhou a sign offers a special price of 1.8 yuan per jin (3.6 yuan/kg), but the cashier says it's common for bananas to sell for 2 yuan at this time of year, sometimes as low as 1.5 yuan.

Fruit shops in Linyi of Shandong Province were selling Hainan bananas for about 2 yuan per jin (4 yuan/kg). The wholesale price is 25 yuan for a box of 12 kg (about 2 yuan/kg). The shopkeeper says the price of bananas in Hainan is about 0.7 yuan and it costs 1.8 to 2.0 yuan to transport them to Linyi. Bananas are highly perishable, only keeping about 3 days in the summer.

Poultry Smugglers Nabbed

Smuggling is a long-established business in southern China, with its porous coastline, a nose for cash, and disregard for authorities far away. Smuggling of food products banned by authorities or assessed with steep duties thrives, but authorities have been trying to crack down over the last couple of years.

On June 20, Guangxi Province's customs, quarantine and inspection authority and provincial antismuggling office jointly announced the seizure of 700 metric tons of smuggled frozen animal products.

Customs investigators found that the suspects had set up a trading company in 2008 that mainly did business trading chicken and duck meat. They contacted suppliers through the Internet, set the volume, price and products and had shipments delivered to the Vietnamese port of Haiphong. The goods were shipped from there to Mong Cai, a city on the coast at the border of Guangxi and Vietnam. From there, goods were shipped up the Beilun River into China, then loaded onto vans and finally consolidated in trucks to be driven by expressway to four refrigerated warehouses in Nanning, the capital of Guangxi. Then products were labeled and sent to various places for final sale.

Over the 3 years the smuggling group operated, it moved 32,170 metric tons worth 566 million yuan. On March 9, the customs bureau rounded up dozens of people involved in the operation in a raid of 3 warehouses. Over 400 metric tons of products and bank accounts valued at 5.6 million yuan were seized. On June 20, authorities publicly announced the destruction of 700 metric tons of suspected smuggled goods, mostly chicken feet, but also frozen chicken meat and beef. The products mostly came from the United States, the U.K., and Brazil. It was not clear why the announcement was over 3 months after the raid in March or why the quantity destroyed exceeded the amount discovered in March.

Last year, the dim sums blog reported that chronic losses in China's poultry industry blamed on imports prompted the antidumping investigation and countervailing duties.



Another article from March 2010 specifically blamed smuggled chicken for the industry's troubles. It announced, "Since 2008, the industry has been in great crisis," with many companies shut down, farmers losing their jobs, and investments idle. The article blamed the world financial crisis and pressure from large volumes of poultry imports and smuggling.

This article estimates that 600,000 to 800,000 metric tons of poultry are smuggled into China through Hong Kong, Vietnam, and other countries each year, much of it from Brazil. It says:

"According to customs statistics, Hong Kong imported 810,000 mt of poultry meat in 2009, of which 430,000 mt came from Brazil. But Hong Kong consumes less than 150,000 mt annually. The remainder goes into China’s mainland. At the same time, analysis shows that over 200,000 mt of poultry meat from Argentina and the U.S. is smuggled into China."

The article cited plunging prices for ducklings and duck meat (this was published in "Waterfowl World" magazine) and "serious effects" on the whole industry chain. It worried that smuggling of U.S. poultry to evade countervailing duties would damage the industry.

The article's call for action points to the extreme difficulty of stopping smuggling. It calls for concerted action by multiple enforcement agencies, saying smuggling can be controlled "only if the public security, industrial-commercial bureaus, city management, health-sanitation, livestock, and technical supervision departments set up sustained inspection and investigation mechanisms and establish situation reporting and information sharing systems and strengthen market inspections." Good luck with that.

Well, at least they grabbed 700 mt in Guangxi.

Persistent "Farmers' Burden"

During the 1990s, the "farmers' burden" became a major source of rural discontent after the central government began concentrating funding on cities and rural officials acquired a taste for fancy cars, office buildings and banquets. The cancellation of the "agricultural tax," slaughter tax, and taxes on special agricultural products during 2004-06 was widely trumpeted as relieving the "farmers' burden," but the problem hasn't really gone away.

Last week, seven government departments jointly issued an order to crack down on fees and assessments to prevent the farmers' burden from rebounding. Among the departments were the Ministry of Agriculture, the State Council's Dispute Resolution Office, and National Development and Reform Commission. The Ministries of Finance and Education were also sponsors since one of the concerns is spending on education and other rural public works projects. A similar document was issued last year.

In 2007 there was an article warning that officials needed to be on guard against a rebound of the farmers burden despite the elimination of the agricultural tax. As an example, the 2007 article cited a key "poverty county" of Henan Province where officials had constructed opulent office buildings costing 1 million yuan that were not paid for and officials moved into luxury residences. One of the reasons given for the rebound of the burden was "institutional inertia." "Because of bloated staffing and financial stress in some regions" farmers were still assessed excessive fees. Another reason given by the article was that some local officials thought the "farmers burden" problem was solved by eliminating the agricultural tax. So they let up on keeping watch on local officials.

The new notice orders officials to set up monitoring systems to watch over financial transfers, public works projects and education programs and to watch for unreasonable fees. It specifically forbids mandatory subscriptions to newspapers or other publications. It floats the idea of eliminating animal inspection and quarantine fees.

Pork Gangsters

Monopolizing local pork markets seems to be a favorite activity of Chinese gangsters.

This month, a court in Guangzhou held a hearing for 18 members of a "gang of tyrants" who allegedly monopolized the pork market in the Haizhu district of that city. They allegedly conspired with 14 local suppliers of "safe pork" to sell underground pork to hotels. The gang set up a meat company with support from the head of the local commercial and industrial bureau. This venture allegedly evolved into a "triad-type" group, using force to keep other suppliers out of the market.

A prominent example was the head of a meat company in Chongqing, known locally as "the butcher of Chongqing," who received a death sentence for using force to monopolize the pork market and fix the wholesale and retail prices. He won the 2005 "Outstanding Young Farmer Entrepreneur" award and was a member of his district's communist party committee.


The "Butcher of Chongqing" is arrested

Supposedly, the Chongqing scheme was discovered when municipal authorities were investigating the "real" causes of rising pork prices in 2008. A citizen named Mr. Qian told an official that the real reason was that gangsters had monopolized the market. The official said, "Yes, you must be right. Many industries in Chongqing are monopolized by gangs."

In a number of cities, pork vendors have gone on strike, complaining about slaughterhouse monopolies that raised prices unfairly. Last December, a pork vendor in Dongguan City, Guangdong Province, left a message on the municipal bulletin board for complaints. He greeted Secretary Wang with a hearty "Ni Hao!" and hoped that the city's party secretary might see his message and do something about it.

His complaint: "In order to earn big profits, the Chashan Food Co. collaborates with triad gangs to monopolize the local pork market. The price of pork in Chashan is about 70-80 yuan/50kg higher than in surrounding areas. With commodity prices rising, Chashan Food Co. really is bleeding the common people of money. Since the price is so high, pork vendors can’t compete with other markets, so we have to go to legal wholesale markets to buy pork. Then the Chashan Food Co. sends gang members to track us down, seize our pork, and beat on our cars. I’m not just saying empty words; there is evidence for each incident. I have gone to the town and city administrative affairs bureaus, the city discipline commission, and the complaint bureau to report these incidents, but nothing has been done. I hope secretary Wang can give some attention to this problem. Thank you!"

In another Guangdong City, Jieyang, in Kuitan Town, a complaint was posted in 2010 that a gang headed by "bully" Huang Weiming monopolized the pork market using violent threats. One guileless country bumpkin, unaware of Huang's racket was visiting a neighboring county and discovered pork was much cheaper there. He bought some and brought it back. As soon as he stepped off the bus, one of Huang's enforcers noticed him, brutally beat him and forced him to pay several thousand yuan. Huang made enough money to build himself a big mansion downtown. His brutality raised the hackles of the local citizens; no one could resist going into a tirade at the mention of his name.

Also last December, a resident of Shantou in Guangdong Province complained on an electronic bulletin board, "Recently I returned to live in Chaoyang [a district of Shantou] and noticed that the prices here are even higher than in Shenzhen. I checked online and found Shantou has the highest pork prices in the country."

In her online research, she discovered another netizen's explanation for the high prices: many industries in Shantou are monopolized by gangs and there is collusion between merchants and officials. The web-posting she found alleged that the gangs had monopolized the local pork market in Chaoyang. Anyone found to have bought pork from another area or from an underground butcher would be beaten half to death. She hopes someone will do something about it because prices are so high.

One netizen in response to this post sarcastically wrote, "Now is the golden age we've been waiting on for 1000 years."

Another response quoted the aphorism, "The mountains are high, the emperor is far way." This saying means that you can do whatever you want when the governing authorities are far away and oblivious to what happens at the local level. This is especially true of southern regions like Guangdong.

But really, if we take a step back it's hard to tell the difference between these gangsters and the ruling communist party. The party is also in the business of creating monopolies and enforcing them with brute force as needed. In nearly every industry of the food sector there is a movement to shut down small operators in the name of raising food safety or environmental standards. The Ministry of Commerce's plan for the pork industry involves carving up provinces into segmented pork markets with each monopolized by a designated slaughterhouse. These big capital-intensive operations need large volumes to justify their overhead, so they need to have their smaller low-cost competitors shut down so all the hogs and sales go through the city's flagship slaughterhouse. Another example is the dairy industry, where vast numbers of milk processors have been shut down in a re-licensing campaign this year. Small corn-starch processors are also being shut down.

And, of course, in the political arena the party is in the monopoly business. The recent posting here about churches celebrating the party's anniversary reveals the strategy of monopolizing a social/religious organization by enticing pastors who join the monopoly with money and prestige while threatening those who don't cooperate with arrest and fines.

Is the "emperor" really that far from the gangsters, or are they one and the same?

Pork Policies: Don't Panic!

The Ministry of Agriculture announced six policies to address soaring pork prices. In August 2007, the last time pork prices shot up like this, the government also announced a series of subsidies and ordered banks to lend to farmers and pork processors. The big expansion of industry capacity that followed drove prices down to loss-making levels two years later.

The policies announced this time are actually resolutions to implement already-existing programs and don't portray the sense of panic the government showed in 2007. These policies are being introduced by the Ministry of Ag, not the State Council. Maybe the government learned from its intervention mistake last time around.

The first two measures are to pay out existing subsidies that were introduced in 2007--subsidies for fine breeds, "awards" to hog-surplus counties, building above-scale hog farms, and setting up "demonstration farms" that show surrounding farms how to do things right.

The second measure is an emphasis on disseminating technology and advice. The "sunshine project" for rural training is to offer hog industry training and veterinary and scientific personnel are "to be brought into play", probably by giving training courses.

An intriguing measure is the command to bring order to the breeding industry, including a strict crackdown on sale of low-quality breeding hogs. "Strengthen breeding farm quality testing, raise the quality of breeding farms, oversee the issue of business licenses and management of breeding farms, strengthen county breeding propagation farm oversight."

The fifth measure is to strengthen disease control and prevention. Make sure pigs are vaccinated for foot and mouth, highly-pathogenic blue ear disease, swine fever and other diseases. Tighten monitoring and quarantine in marketing. Special attention is given to advance monitoring of "vertical transmission" of disease from breeding farms.

The sixth measure is to improve monitoring of production and information guidance.

Party Like It's 1921

Just about every company, bank, and organization in China is celebrating the communist party's 90th anniversary.

An interesting celebration was held by Beijing's officially-sanctioned christian churches. On June 11, a festive "praise music concert" was held at the Century Theater in Beijing where all the praises were for the communist party.

The meeting, described as full of cheering with a theme of "one heart, one direction," was attended by officials of Beijing's Religious Affairs Bureau, city communist party officials, pastors of Three-Self Patriotic Association churches, and 1700 believers.

The chairman of the Beijing Three-self Patriotic Association gathered the pastors on stage and gave a brief speech that made it clear who (or what) they should worship. The chairman began, "For 90 years, the communist party has united all peoples and circles of society, never ceasing to give attention and support to Chinese christianity."

He then reminded the pastors who butters their bread: "Especially in this new period, the party and government have helped each church to expand and refurbish buildings, nurturing new pastors, enthusiastically developing social service work, embarking on a suitable socialist path."

As long as you cooperate, we'll give you a hand: "While the life and work environment of church workers has been improved, their position in society and political treatment has been improved as well. This proves that the Chinese communisty party has in good faith supported the development of Chinese christianity, forming a lasting bond between the communist party and christians, a mutual dependence for solving problems, one heart and one direction with the party and government.

The christians' task is to improve China with help from--the party: "As long as we adhere to the leadership of the party, persist in serving the development of the party and the government, unswervingly following the 'three self' principles [self-governing, self-supporting, self-propagating], we can certainly create a brilliant new tomorrow for China."

A 150-voice choir launched into the hit song "Entering a New Period" which was said to reflect the feelings of the majority of christians under the leadership of the communist party. Other songs of devotion included, "Offer a Bunch of Camelias to the Party," "Fatherland, What a Mother," "Song of the Guerillas," and "I Offer Oil to the Fatherland."

The show concluded with "Prayer for Tomorrow," a song that "used Christian words to express their hope for a world of peace and love."

No one needed to mention the consequences of not following the party's leadership.

Meanwhile, the Three-Self Association has been putting pressure on members of Beijing's Shouwang Church which refuses to join the Association. Members of Shouwang arrested this month for meeting illegally outdoors (after being booted from their rented space) said Three-self members showed up at police stations to "educate" them about their misguided ways.

Hog Cycle History

This chart showing cyclical movements in hog prices over the past decade was posted on the boyar.cn site to place the current rise in prices in historical context. The Chinese hog price has tended to rise and fall in 3-year cycles.

Since July 2010, the hog price has been on the upswing for 12 months, reaching near 15 yuan at the chart's end in May 2011. The article describes the current cycle as having its own unique character of "inflation combustion" and insufficient supply driving prices upward.

The 2004-06 cycle was also driven by inflationary pressures in its early stages, says the article, while that cycle's downturn was due to disease outbreaks--similar to 2010. The sharp rise in prices during 2006-08 was due to insufficient supply. The article suggests that the current upswing in price is similar and will take 2 years to play out. The article suggests that hog prices will continue rising until April or May of 2012 before beginning to fall.

The article attributes the current rise in price to low hog inventories resulting from low prices in spring and summer of 2010. Many farmers and companies "learned a lesson," discouraged by disease risk and low prices. A year later, there are fewer finishing hogs available. Furthermore, feed, labor, and vaccine costs are up, and interregional shipments of pigs are down due to rectifications following the clenbuterol incident in March.

The article says that future supply will be "fine tuned" by sales of reserves and imports (smuggling). Yes, it said "smuggling" in parentheses; the same language appeared in at least one other article this week.

China's Population Sprawl

Population statistics are among the dodgy numbers that the "dim sums" blog is named for. China's population census numbers released a few months ago revealed that the population was nearly half urban. This census was the first to count migrant workers where they live instead of where they are officially registered. Migrants were only counted if they lived in a place 6 months or more.

So far, only a few numbers from the census have been released in brief communiques. An unofficial table of unknown origin posted on several web sites titled "2010 Census Data, Ranking of Cities by Population" reveals the difference these migrants make in China's urbanization.

It's surprisingly difficult to find an accurate list of city populations. Two rankings, one based on 2008 data and another based on 2004 data posted on online bulletin boards give wildly differing results. "City" population figures often include outlying rural areas under the city's administration. In the 2008 ranking, for example, Chongqing is counted as the largest "city" with 28 million people, but most of those are in the countryside and millions of them are actually working and living elsewhere as migrants. Other relatively small cities that crack to top tier of cities include Zhoukou in Henan (9.9 million, ranked no. 7) and Weifang of Shandong (8.8 million, ranked no. 10). Neither of these places are particularly large cities--most of this population is in the densely populated and far-flung surrounding countryside. The 2004 listing appears to count city populations--Chongqing has 12 million in this listing and neither Zhoukou or Weifang appear in the top 100.

The 2010 census listing gives quite a different picture. The top two cities by far are Shanghai (22 million) and Beijing (19 million)--no surprise there. What is striking is the appearance of Guangdong's factory towns among the most populous cities. Below, the 2010 census listing is compared with a ranking of city population based on the earlier 2004 ranking:

Guangzhou (ranked 4th, 11.1 million in 2010 vs. 6.2 million in 2004 ranking)
Shenzhen (ranked 5th, 10.4 million vs. 1.4 million)
Dongguan (ranked 6th, 8.2 million vs. 1.6 million)
Foshan (ranked 9th, 7.2 million vs. 4.4 million)
Shantou (ranked 16th, 5.3 million vs. 1.2 million)

These 5 cities are basically a sprawling territory of wall-to-wall factories just over the Hong Kong border. Their combined population is over 42 million, 27 million more than in the 2004 ranking.

In contrast, the 2010 census ranking shows Chongqing is a big city of 7.5 million, but not the massive 28 million often attributed to it. Chongqing is ranked 8th and similar in size to Foshan--a city you've probably never heard of unless you deal with export manufacturers, saw the movie Yip Man, or went to the women's world cup of soccer a few years ago. Foshan has nearly the same population as Nanjing and is slightly bigger than Wuhan, Xian, and Hangzhou.

In Shandong, Jinan and Qingdao--the best-known cities--have populations of 2-to-3 million. Weifang has over 2 million--much less than in the 2008 listing cited above, but still nearly the same as Qingdao. Shandong has four other cities with populations in the 2-to-3 million range: Zibo, Yantai, Zaozhuang, Linyi.

The source of these 2010 data is not given, and they are not official (the listing appears to be printed from an excel spreadsheet). The numbers do not match up exactly with city communiques (see below). But they do reflect China's new urbanization better than the previously-available statistics.

Beijing's statistics bureau has released a communique on its population figures from the 2010 census. The total population of Beijing is reported to be 19.6 million (800,000 more than in the 2010 ranking discussed above). Of those, 7 million came from other provinces or muncipalities--in other words they are migrants.

Shanghai's census communique reports a population of 23 million, of whom nearly 9 million are from outside Shanghai.

Guangzhou's communique reports a population of 12.7 million, nearly 1.7 million more than the mysterious 2010 listing, but does not report "outsiders."

Shenzhen's communique reports a population of 7 million (3 million less than the mysterious ranking!) and notes that the population officially registered in Shenzhen is 1.2 million.

Foshan's communique reports a population of 7.2 million that matches the ranking.

The populations of these cities increased more than one-third from 2000 to 2010. The number of migrants in Shanghai increased by 5.5 million between the 2000 and 2010 censuses. The number in Beijing increased 4.5 million.

Migrant populations are still understated. People who had lived in a place less than 6 months were not counted in that city's population and it seems unlikely they would be counted in their home town since they weren't there when the census-takers came around.

Chongqing's terse communique reported that the administrative region's population was 28.8 million but little else. Chongqing's leaders are probably embarrassed that Chongqing's population is 1.1 million LESS than the 2000 census population (30.9 million).

The 2010 census was also the first to count foreigners but they are a relatively small proportion. Beijing had 107,300 overseas Chinese and foreigners who had lived in the city at least 3 months. Of those, 8500 were from Hong Kong and Macao, 7770 were from Taiwan, and over 90,000 were from foreign countries.

It's still unclear as to exactly how big Beijing is. Only 16.9 million lived in cities and towns of Beijing while 2.7 million lived in the countryside. Beijing's 19.6 million would be roughly equivalent to what U.S. statisticians call a "metropolitan statistical area." The 16.9 million includes the Beijing city proper as well as the satellite cities around Beijing.

The core districts of Beijing city (Chaoyang, Haidian, Shijingshan, Fengtai) accounted for only 48.7% of the population--that would be about 9.5 million. The outlying cities (Shunyi, Tongzhou, Fangshan, Changping, Daxing) account for 30.8% that might be considered cities in their own right.

As for Weifang, in Shandong, its communique reports a population of 9.1 million people sprawled over the city and its surrounding area. The population includes about 2 million in four urban districts of Weifang city, eight sub-cities and counties with populations of 600,000 to over 1 million, and three development zones with about 250,000 people combined.

Food Safety Video

A good video from Al Jazeera's China correspondent on some food safety topics that have been covered on this blog -- fake beef made from pork and organic food cooperatives.

Flour Mills: Quality and Competition

One of the blow-by-blow reports on the wheat harvest posted on the cngrain.com web site last month reports on quality issues and competition in the flour-milling industry in Bozhou, a city in western Anhui Province.

Mr. Liu, the manager of a flour mill in Bozhou, says the supply of wheat is tight. The cost of buying wheat is high--1.05 yuan/jin--leaving little room for profit. He says they are buying wheat now, but being careful to make sure the wheat is good quality. Liu says the company is concerned about the quality of their flour and the quality of wheat is the key.

In recent years his company set up a 2000 mu quality wheat seed base to supply farmers with seed. When the wheat is harvested they buy the wheat at a high price. This way maintain wheat quality, and guarantee a raw material supply. According to him, other large mills in the area all use this method.

The company buys its wheat from traders who buy directly from the farmers. The traders supply them with good quality wheat, but the price is high. Says Liu, "Most of the time traders give us samples of the wheat. If it meets our quality standard we buy it.”

With large numbers of flour mills competing to buy wheat, there have been instances where companies engaged in panic-buying at high prices and lost control of quality. According to Liu, last year some companies bought wheat that cost them 1.08 yuan per jin after adding interest and storage costs. They lost money at these prices. The current price is 1.05 yuan. Even worse, they didn't control the quality, did not store it well and "had some problems."

According to Liu, the local flour industry has excess capacity and low profitability. The government set designated sales for some large companies and placed a limit on the flour price. Recently, the price of bran (the by-product used in animal feed) went down, eroding profitability. This put pressure on small mills to cut back production or shut down. Large companies receive government support. Liu says his company receives support from the Agricultural Development Bank of China to buy a certain amount of wheat, "as long as we don't panic-buy."

According to the article, the industry re-shuffling process is speeding up with guidance from the government.

Garlic Prices Crash

Trucks in Jinxiang County's garlic exchange.

Last year at this time, soaring garlic prices were almost a national crisis in China. This year garlic prices are falling.

On a Hangzhou web site, a reporter asks, "Have you noticed lately restaurants have been serving larger portions of garlic in dishes?" According to the article, last year when garlic was expensive, restaurants stopped serving garlic in stir-fried vegetable dishes and Sichuan-style restaurants substituted huajiao for garlic as a flavoring in hot pot.

In Hangzhou restaurants garlic is now back in the stir-fry. A restaurant boss said garlic prices started going down in April.

A vegetable vendor in a Hangzhou market said, “Last year, at its peak, the retail price was 7 or 8 yuan per jin. In March it started falling. Now it’s about 4 yuan.”

According to the Zhejiang price net, Hangzhou’s average wholesale price in late March was 5.35 yuan per jin, but on June 1 it was 2.8 yuan. The retail market price peaked at 6.75 yuan and on June 5 it was 3.75 yuan.

A big garlic harvest is the reason for the decline. In Jinxiang County of Shandong, for example, farmers expanded planting of garlic by 100,000 mu this year from last year's 650,000 mu. The yield per mu was up several hundred jin from last year's 1000 jin too. Production in the county may have doubled. As they say, "the cure for high prices is high prices."

Another article in Shandong's Qilu Evening News interviews farmers in Jinxiang county trying unsuccessfully to sell their garlic. Last year after the garlic harvest, traders came to their door "blindly" buying garlic at 2.5 yuan per jin. Speculators were investing in garlic.

This year, Mr. Zhang and Mr. Wang have sat in the Jinxiang market for several days trying to sell a load of garlic they bought for 1.5 yuan per jin. No buyer will give them 1.6 yuan, so they may have to take a loss.

Shepherd Subsidies

China continues its agricultural subsidy binge by announcing a new animal-grazing subsidy program. The grassland protection compensation mechanism was announced in May and it is set to cover 1 billion mu of grassland in 8 provinces and autonomous regions and benefit 1 million members of animal-herding families. (English Peoples Daily article is here.) As usual, details of the program are sparse and vague, but the main idea is to compensate herders for reducing the number of sheep/cattle they graze so that grasslands can recover from overgrazing.

The program will herders give 6 yuan for each mu of pasture they are forbidden to graze animals on. There is a 10 yuan per mu subsidy for planting improved varieties of grass. There is also a 500 yuan payment to compensate herders for high costs of fuel and forage. There is also a subsidy for fine breeds of animals. Moreover, there will be awards to provinces that do "outstanding work" on improving pasture and raising incomes of herders. Special funds from the Ministry of Finance of 13 billion yuan per year ($2.1 billion) will be allocated for the program.

The program pays herders to reduce the number of animals they graze, moves them to new locations, and encourages grazing on enclosed pastures instead of the traditional nomadic mode.

A herder in Inner Mongolia said, “Our family of three will get 3000 yuan per person each year, a total of 9000 yuan. Although the pasture is reduced and we raise only a few sheep, our income will not be affected. After 4 or 5 years the pasture will be improved and we will have more space for development."

As usual, this subsidy program has a mash-up of objectives. China has a serious problem with degraded grasslands due to overgrazing and it makes sense to reduce the number of animals. On the other hand, it is also advertised as a program to increase income of herders, apparently spreading the grain subsidy model to a neglected population. This program has all the same elements of the grain subsidy program: a small direct payment, a quality seed/fine breed subsidy, a subsidy for input costs, and financial transfer payments to local officials. The funds are almost equal to the initial amount spent on grain subsidies--13 billion yuan per year.

The program reportedly has been in the works since last fall, and is the latest of several environmental compensation programs announced over the last few years. The timing of the announcement prompts some cynicism--it coincides with unrest in Inner Mongolia during May. An article about the program features Inner Mongolia specifically. The head of the autonomous region’s government said, "the state pays a lot of attention to Inner Mongolia’s grassland region" with funds of 4 billion yuan for Inner Mongolia.

While this program aims to restore grasslands, another program aims to expand corn production in Inner Mongolia. What sort of uncultivated land might be found in Inner Mongolia to grow more corn? Grassland, perhaps?

Soybeans Lose Ground in Heilongjiang

According to the report from a China Grain Net crop tour, Heilongjiang's crop area is undergoing a big adjustment this year. Soybean area is said to be down 25 percent this year, but area is up for all other major crops.

Total grain planted area is expected to reach 204.46 million mu, up 1.3 million mu from last year.

Corn: 84.14 million mu, up 5.67 million mu (up 7.2%)
Rice: 48.51 million mu, up 3.89 million mu (up 8.7%)
Wheat: 6.02 million mu, up .35 million mu (up 6.4%)
Potatoes: 4.86 million mu, up 1.26 million mu (up 35%)

The article attributes the change to prices of different commodities rising to differing degrees. While grains bring relatively low profits, farmers are accustomed to planting grain [so they keep doing it by inertia].

Spring planting was done early this year. After harvest last year, 126 million mu of the province's land underwent some kind of soil preparation, including 63 million mu of sub-soil preparation. This is part of a government campaign to raise productivity.

Production costs are estimated to be up by 20%. The largest increases are in land rent and labor. State-owned farms have higher costs than individual farmers. Due to lack of labor, some farmers are planting rice directly in the fields instead of transplanting them.

What? Loans have to be repaid?

Some state-owned grain companies are grinding to a halt as the government's own policy bank tightens its lending standards. This illustrates the planned-economy role of banks as ATMs for state enterprises. If China's banks become real banks that make loans based on risk and repayment prospects, the remnants of the centrally-planned economy (still lumbering along on life-support from the "banks") will come crashing down.

The state grain-procurement bureaucracy was reformed/privatized during the last decade, but business as usual continued to a large extent for the state-owned grain companies. The key to the survival of these companies was a stream of cheap cash from the Agricultural Development Bank of China (ADBC). The bank now appears to be tightening credit standards.

An article from Guizhou Province reports that only four of the province's state-owned grain enterprises have gotten loans from the ADBC, and the loans are only 5% of what they "need." None of them have gotten loans from commercial banks.

The lack of funds is slowing the state-owned companies' purchase of summer-harvested grain. According to the article, this year Guizhou Province plans to purchase 32,350 mt of wheat, 34,800 mt of early rice, and 49,700 mt of rapeseed. At the end of May only 5000 mt of wheat, 350 mt of early rice, and 3220 mt of rapeseed had been purchased.

According to an official with the Guizhou Province grain bureau, the state-owned enterprises’ loan difficulty mainly is due to widespread historical account problems [unpaid loans] which eroded their credit standing with ADBC. Generally, commercial banks charge higher interest rates and the procedures for applying for loans are difficult, and approval is not so easily obtained. Policy-style grain purchase loans have a relatively low interest rate, so the enthusiasm for this business is not high. Some state-owned enterprises are restructuring their business and have not obtained funding.

The ten state-owned grain enterprises in Gansu Province's Baiyin City also reported difficulties getting loans in December 2010. They said they needed 70 million yuan to buy about 28,000 metric tons of grain each year, but they could only get 47 million yuan.

In Baiyin, the ADBC's policy changed and it became difficult to obtain loans; some enterprises hadn't gotten any loans at all. In two counties the grain enterprises had restructured, creating new companies that hadn't gotten any loans. In another county, the ADBC branch had decided that old unpaid loans had to be repaid before new ones could be given; it has essentially stopped lending in this county. In another county the ADBC requires the state-owned grain enterprises to supplement ADBC loans with funds of its own; in this county "the grain enterprises' loan difficulties are big." The Baijin district-level grain reserve company's loan application was still undergoing risk assessment, but the city-level reserve had already gotten 8.26 million yuan to increase the reserve by 3500 mt.

This has something to do with the ADBC's new rule that clarifies the boundary between policy-type loans for purchasing grain and commercial-style working capital loans. Normal grain purchase business is to be supported with commercial-type working capital loans. If more funds are needed, policy-type loans may be given. How this works is not clear, but an official at an ADBC branch in Henan said, "Commercial-type loans must be fully collateralized and the assessment is strict; loans for purchasing [grain] have loose requirements." A new regulation on working capital issued by the China Bank Regulatory Commission appears to be the driving force behind this.

This slow-down of grain-buying is not happening everywhere. Reports on the wheat harvest report that enterprises are purchasing the newly harvested wheat 24 hours around the clock. There seem to be funds to carry out the decree that local grain reserves be expanded.

While the tighter lending environment in Guizhou has reduced purchases by state-owned enterprises, private companies are still buying grain. The Guizhou grain bureau official said that nearly all the grain and oilseeds coming on the market in Guiyang were supplied by private companies; little was being sold by state-owned companies. No mention of where the private companies got their funds to do business. The official says grain reserves are plentiful so he reassures us there should be no effect on grain prices.

Pork: Sky-High and Underground

Pork prices have been climbing for months and accelerated in May. Pork prices are now 40%-45% higher than a year ago (when they were depressed) and are now near or at the historical high reached in 2008. Most reports indicate the high prices are due to short supplies--similar to the situation in 2007--and (also like 2007) there is no single factor creating the shortage. The surge in prices has its roots in 2010, but there are some indications that the March "lean meat powder" scandal has helped drive prices even higher.

An article from Shanxi Province says that the region has a short supply of hogs. According to interviews with hog-producing companies, the short supply can be traced back to a period of declining prices and serious losses during late 2009 and the first half of 2010 which induced many farms to sell their hogs and quit the business. In addition, the article cites the effects of "disease no. 5" (a euphemism for foot and mouth disease) which killed many sows last year. The article says sow inventories are now down 30%-40% from a year ago. The real impacts of this chain of events became evident in mid-March of this year.

An article from Nantong, in southern Jiangsu Province, tells a similar story of disease and depressed prices in 2010 from which "many farmers learned a lesson" and quit the industry. In Nantong, prices for various cuts of pork went up especially rapidly--10% to 12% during the month of May.

The Nantong story also draws a link to the "lean meat powder" incident. It cites the effect of regulations after the incident that reduced the number of hogs coming from outside the region as a reason for the rapid increase in pork prices. One of the revelations of the "lean meat powder" scandal was that hogs tainted with "lean meat powder" were being shipped to Jiangsu Province as inspectors either looked the other way or were fooled by truck drivers who submitted their own urine when pigs were tested for clenbuterol. One of the rectifications was to crack down on interregional shipments of hogs. A restriction on supply in Jiangsu means the price goes higher.

A very different angle appears in a story from Zhuhai in Guangdong Province (includes photos). From March 15 (the day the "lean meat powder" scandal became public) until early May, the Zhuhai meat association and a group of "volunteers" were checking the city's markets for pork from underground slaughterhouses. They found that half of the 335 meat counters in the city's 17 markets were selling illegal pork. They estimated that 500 illegally-slaughtered hogs end up on Zhuhai dinner tables each day.

Stories about underground butchers are common, but interestingly the Zhuhai story links an increase in underground slaughter to the tight supply of hogs following spring festival this year. The article says volume of slaughter at Zhuhai's four officially-designated slaughterhouses was down 18% this year. It blames rising prices and improper supervision for the "flood of underground slaughter."



This is one of three underground slaughterhouses near Fuzhou raided in May. Yuck! Like the Zhuhai crackdown, the Fuzhou raids were also organized by the city's legal designated slaughterhouses

Is tighter regulation pushing the pork trade underground? Are tighter inspections after the "lean meat powder" incident making farmers more fearful of getting caught, and therefore more inclined to sell to underground butchers? Can underground butchers bid more for hogs than designated slaughterhouses since they don't bother paying for inspections, licenses and the overhead of a big mechanized facility?

The leader of the underground butcher crackdown is the secretary of the Zhuhai meat association. I bet the secretary is also connected with the designated slaughterhouses. While this appears to be a food safety campaign, there are some clues that it is also an attempt to protect the monopoly of the designated slaughterhouses.

The secretary seems quite annoyed with the underground slaughterhouses. He complains that all four of the designated slaughterhouses operate at a loss. He points out that the official slaughterhouses have to pay inspection fees of 30 to 35 yuan per head. Still, he claims the underground slaughterhouses have higher costs. He estimates that higher labor and transportation cost, costs of pumping water into the pigs, and the risk of getting caught and penalized adds up to extra cost of 45 yuan per head for the underground butchers. "Where's the profit in that?" he asks with exasperation.

Despite the higher costs, the secretary says that underground pork is slightly cheaper, and many consumers like to buy it unknowingly.

While the "lean meat powder" scandal seemed to blow over without much problem (the slaughterhouse in Henan implicated in the incident just reopened and the chairman of Shuanghui is inviting consumers to come visit his factory), its effects may be more subtle but still significant.

A couple of lessons here...
It's virtually impossible to completely regulate and control markets in China. You can only do it by sharply curtailing liberty and handing out harsh punishments.
Regulating the pork industry entails higher cost and curtailing domestic supply.
Also, note that pork prices have shot up to where they were in 2008...wasn't the hog price alert frozen pork reserve program supposed to eliminate these fluctuations in prices?