Limits on Foreign Investment in Grain/Oil Processing

China's National Development and Reform Commission released a revised list of industries in which investment by foreign companies will be limited. The new list adds a number of grain and oilseed-processing sectors. The previous list compiled in 2007 included soy and rapeseed oil processing. The new list expands the scope of ag-processing sectors covered by foreign investment limits to include rice-milling, wheat flour-milling, industrial corn processing, and processing of oils from peanuts, cottonseed, teaseed, sunflower, and palm kernels. The limits take effect January 30.

According to China Grain Net, the limits are motivated by several concerns. Authorities have been alarmed by a rapid expansion of foreign-owned processing capacity in recent years. This led to excess capacity in some sectors. "Disorderly" competition in some industries led to fluctuations in prices of grains and oilseeds. China Grain Net says the limits on foreign investment are intended to increase the government's ability to control markets and maintain "grain security."

Last year, the China Grain Net put out reports complaining that foreign companies had entered the wheat and rice milling industries and outbid state-owned companies for grains, driving prices up.

The China Grain Net article explaining the foreign investment reports on massive capacity expansion in grain and oilseed processing industries to explain why the government feels they need to limit foreign investment. The article emphasizes the large percentage increase in multinational company capacity. In the rice-milling industry the article reports that capacity shot up by 50 million metric tons (MMT) in 2010. The article emphasizes that foreign capacity rose 57% that year. But it fails to mention that the increase in foreign company capacity accounted for only 1.3 mmt of the 50 mmt increase in rice-milling capacity. The expansion of domestic capacity far exceeds the expansion of foreign capacity in all industries except corn processing where the government has been trying to clamp down on capacity for the last four years.

The article reports that capacity utilization is low in all grain and oilseed processing industries. But the data clearly point to over-expansion by domestic companies as the source of the excess capacity problem.

China grain and oilseed processing capacity, 2010
Product	2010	2009	Change	Change	Utilization
	MMT	MMT	MMT	Percent	Percent
Rice	250.0	200.0	50	25	40%-45%
Multinational	3.6	2.3	1.3	57
Domestic	246.4	197.7	48.7	25
Flour	165.0	125.0	40.0	32	65%-70%
Multinational	7.4	5.3	2.1	40
Domestic	157.7	119.8	37.9	32
Corn industrial products	70.0	58.0	12	21
Multinational	16.0	10.0	6	60
Domestic	54.0	48.0	6	13
Oilseed processing	137.0	115.0	22	19	Oilseeds, 55%-60%
Multinational	37.0	30.0	7	23	Oils refining 45%-50%
Domestic	100.0	85.0	15	18
Source: Dim sums blog, data from China Grain Net.http://www.cngrain.com/Publish/Vision/201112/512910.shtml MMT=million metric tons.