China Grain Transport Subsidy

China is trying to move grain out of its northeastern provinces by offering companies from other provinces a subsidy to ship it home.

On November 27, the Ministry of Finance, National Development and Reform Commission, National Administration of Grain, and Agricultural Development Bank of China jointly issued regulations on the subsidy program. The subsidy is 140 yuan per metric ton for newly-harvested corn or japonica rice produced in three northeastern provinces--Jilin, Liaoning, and Heilongjiang--during 2013. Companies from any other province can get the subsidy if they buy the grain at the government's support price for the grains and ship back to their province. The subsidy recipients must submit documents showing plans for storing, processing, and selling the grain in their home province. They also have to submit receipts showing their purchase of the grain and payment for transportation. The program runs through May 31, 2014 for rice and June 30 for corn.

The subsidy is in large part a bribe to companies to buy grain made artificially expensive by support prices. Storage space for grain is tight in the northeastern provinces and officials are constantly voicing concerns about farmers being unable to sell their grain. They are unwilling to let prices fall since that would discourage farmers from planting grain and prevent their incomes from rising. Moreover, authorities already have large inventories of grain from last year that is falling in value as market prices fall.

The 140-yuan-per-ton subsidy is equal to about 6.4 percent of the "temporary reserve" support price for corn and 4.7 percent of the minimum purchase price for rice. This is in addition to producer subsidies paid to farmers (probably in the range of 70-to-100 yuan per mu) for the grain which translate to about 175-to-200 yuan per metric ton. Thus, total subsidies could be in the 10-to-12 percent range. It is unclear how much grain will receive this subsidy.

The subsidy discriminates against imported grain. The grain must be produced in northeastern provinces (other regulations recently explicitly forbid selling imported corn at the support price). The implicit intent of the program is to move northeastern grain to other parts of China, tamping down the inclination to buy much cheaper imported corn and rice.

The subsidy also is a revival of the past. In the 1990s China had a similar grain glut in the northeast and relied on a heavily subsidized state-run grain bureaucracy to market the grain. However, farmers often had their grain refused or were given IOUs. The direct payment to grain producers begun in 2004 was a shift of subsidies from grain bureaus to farmers. It took the funds used to subsidize the grain bureaucracy and divided it up among farmers as a (small) direct payment.

This new northeast grain transport subsidy appears to add a new subsidy for the vestigial grain bureaucracy that still exists to manage grain reserves. Although the  subsidy is available to all companies, the document implies that provincial grain bureaus acting at the behest of provincial officials are the main targets of the subsidy. Recipients of the subsidy must be approved by their provincial grain administration and other departments. Each province can designate one local enterprise to participate, plus an unlimited number of other enterprises who apply on their own. Scale requirements will rule out small trading companies; the recipient has to transport at least 5000 metric tons of grain to its province.

China Grapples With Grain Glut

Suddenly, China has a surplus of grain and authorities are struggling to prevent prices from falling. China's grain imports are surging despite the big harvest because Chinese prices exceed world prices.

Futures Daily recently pronounced that the arrival of China's new rice crop on the market is dragging down prices. The article estimates that China produced 11 mmt more rice than it will consume this year. Yet China is set to import 2-to-3-mmt of rice this year to surpass Nigeria as the world's leading importer. Customs statistics through October show China has imported over 1.8 mmt of rice in 2013, slightly behind the 2012 pace when it imported 2.6 mmt. These numbers don't include undocumented border trade which may push the annual total to 3 mmt.

China has had another big corn crop but demand is not robust. The hog and poultry sectors are recovering from a deep downturn earlier in 2013 and processors of starch and alcohol are operating at about half of their capacity.

The grain surplus is concentrated in China's northeastern provinces. The government has a "build some, move some, sell some" strategy for dealing with the surplus. This means building new storage capacity, subsidizing transportation of grain to the south, and auctioning grain from current reserves."

Authorities have launched programs to buy up corn, rice and soybeans in the northeast to prop up prices, but the bins still hold grain from last year's crop. Sinograin, the government's reserve-holding company, expects to purchase 60 mmt of grain in the northeast this year, but only has 40 mmt of storage capacity. They are renting warehouses and plan to build 20 mmt of open-air temporary storage facilities. These new storage facilities will be less susceptible to fire and rats than old ones.

New-style temporary grain bins were put on display in downtown Shenyang as a 

promotional activity in 2011. Source: Zhejiang Online.

The Chinese government has also launched a subsidy of 140 yuan/mt for enterprises from outside the northeast to compensate them for buying grain at the government's minimum prices in the region. This appears to be both an attempt to alleviate the northeast surplus and to open policy-purchase business to other companies besides Sinograin.

According to one Chinese grain analyst, imported corn is 500-to-600 yuan per mt less than domestic corn, so he thinks the subsidy for buying corn from the northeast will not have much effect.

Another Futures Daily article forecasts that the government is about to roll back its interference with market prices. One futures market analyst said, "After a close reading of the 'Decision' [of the third plenum] I feel we are closer to the market dream and the futures dream."

"Ecological Migrants" in Guizhou

In past centuries the Han Chinese ethnic group settled the valleys of southern China, pushing weaker ethnic groups into the marginal lands on mountains and hills where they scratch out a living. Now Chinese authorities with a new appreciation for the environment are moving minority peoples off the mountainsides to urban enclaves, purportedly to rescue Chinese hillbillies from poverty and ease pressure on the environment.

Guizhou Province has announced a nine-year plan to move 2 million people off mountains and hills into urban enclaves and industrial districts. Mountains and hills cover 95 percent of the province and it has 10 million people. The description of the program complains that the plots of mountainous land cannot be formed into contiguous areas for commercial farming. Most of those being moved are members of the Miao (also known as Hmong elsewhere in Asia) ethnicity.

This year, Guizhou has moved 59,000 families. The 70,500 mu of land they formerly occupied has been "reclaimed" or returned to "ecological" uses. "Reclaimed" usually refers to land used for agriculture. The article features an "ecological migrant" named Liao who was moved to a district for rural migrants-turned-entrepreneurs where he started a business making lanterns. The article claims ecological migrants have an average family income of 5520 yuan, much higher than Guizhou's rural average of 767 yuan.

Guizhou plans to move 150,000 people in 2013. The actual number depends on funding availability in various localities. It seems each locality is responsible for funding its migrants. Localities are not given a quota of migrants that exceeds funds available to support the program. The article doesn't explain where these poverty-stricken areas are getting the funds for the program.

In one Miao "autonomous" county, migrants formed a committee to negotiate on housing construction, supervise program fund use and allocate new housing. In another district, migrants say officials came to seek their opinions on the program and sign agreements to move voluntarily.

This appears to be an enlightened experiment in environmental protection, poverty alleviation and self-governance. It bears some resemblance to the United States' movement of its Native American population on to reservations in the 1800s and paying hillbillies to move out of the mountains that became National Parks in the early 20th century. The more cynical observer might ask whether the vacated land in Guizhou is being used to develop plantations or logging operations or to sell carbon credits to overseas companies.

"Third Plenum": Where's the Agriculture?

The documents from this month's "third plenum" of China's 18th communist party central committee included many adventurous reforms. Chinese leaders propose to finally dismantle 1950's-era economic barriers between rural and urban sectors and give rural people stronger property rights. The document seems to lay out a vision for clearing small-holders off the land and facilitating their entry to urban life, with a new generation of larger-scale farmers filling the vacuum. However, the documents don't offer much detail on how this might be carried out. The character "农" appears 51 times in one section of the 20,000-character "decision" on the third plenum. The plenum's focus on cities and companies echoes the 1990s "Shanghai" leadership of Zhu Rongji and Jiang Zemin which gifted urban citizens with real estate wealth, reformed State-owned enterprises and gained WTO accession.

The third plenum prominently features the principle of market-directed resource allocation. But will officials find market-directed resource allocations in agriculture acceptable? When farmers have to pay high market prices that are needed to ration scarce resources like land and water, the farmers are likely to use those resources for activities that produce high value. The tendency for large-scale farmers who pay high rents to shift land into nongrain crops like vegetables and fish ponds is already a frequently-cited phenomenon. Moreover, the high cash expenses incurred by the new cadre of "professional" farmers makes it hard for them to earn a profit and creates a pressing need for production credit. Until now, small-scale Chinese farmers produced crops on a shoestring with minimal cash expenses for land and labor.

The third plenum amplifies themes that were set forth in the last "third plenum" in 2008--encouraging the formation of "family farms," large farms, cooperatives, and enterprises by creating open land markets. There has been much progress in promoting land markets since 2008 with Ministry of Agriculture statistics indicating that the share of cropland subleased or rented rising from 7 percent to over 25 23 percent since 2008 in 2013. While the 2013 third plenum emphasizes giving farmers stronger property rights, it does not appear willing to give farmers actual ownership of their land. This means sticking with the convoluted approach of separating land ownership rights from the rights to use land and reap its products. Land is still owned by an ill-defined "collective" while the rights to use it can be traded, rented, or leased. It seems unrealistic to expect a fairly sophisticated derivative market for land use rights to succeed in the barely-literate Chinese countryside.

The third plenum proposes to address the shortage of credit in rural China by allowing land-holders to use land-use rights as collateral for mortgage loans. The immediate question is whether a banker would accept temporary rights to products from small plots of land in some remote gulch as security for a loan. If the borrower defaults--quite common when prices of many commodities fluctuate wildly--and the banker takes possession of these rights, what will he do with them (assuming he can even find the plots of land)?

While rights to land may be traded and marketized, officials still have tremendous power over the determination of land values because rural land is carved up into different designated uses: cropland, housing, construction and forest land. Maintaining the "cropland" designation depresses its value. Conversely, requisitioning "cropland" and redesignating it creates massive increases in wealth. There is still huge incentive for land grabs.

The mortgage proposal also is emblematic of the weakness in the legal system that undermines long-term investment. Mortgaging rural land is actually illegal, according to China's land contracting law and its property law. In 2009, China's Bank Regulatory Commission initiated some rural land-mortgaging experiments even though they were illegal. One central government official warned publicly that mortgaging was illegal but the experiments continued anyway. The same official warned earlier this year that mortgaging programs were experimental and not official policy. Now mortgages are a featured measure in a major policy document. This demonstrates that what is legal depends upon the opinions and whims of those in charge, regardless of the "law." And what officials give, they can also take away. Without the long-term legal protections of ownership, why would anyone make long-term investments that raise the productivity of land?

Investment and a growing stock of fixed assets are the key to higher agricultural productivity. To achieve sustained investment, individuals have to make the investments on their own volition based on the expectation of future returns. Rural Chinese people have capital but they invest it primarily in rebuilding their houses, starting nonfarm businesses or investing in get-rich-quick schemes. Since the people who "own" the land are not inclined to invest in it, the third plenum advocates "encouraging" and "guiding" entrepreneurs and companies from cities to invest in agriculture--people who don't have a clue about how to grow crops or raise animals. 

Finally, the third plenum also portrays a new seriousness about an "ecological civilization" and environmental protection. This is overdue, but it may be a rude awakening for China's livestock sector which has prospered by moving from animals scattered in backyards to giant CAFO operations. Manure that once was spread on fields now washes into waterways, creating a nation of bright-green rivers and lakes choked with algae nurtured on massive amounts of nitrogen. If regulations are enforced on locating livestock farms away from human habitations, roads, other farms and markets, they will be forced far into the hinterland. It will be hard to find space for 400 million pigs. If farms have to treat their manure and bury their dead animals properly they will face higher costs.

The third plenum reforms look good on the drawing board, but it's not clear that China's new leadership really appreciates what lies ahead. Agriculture is a complex biological, physical and social process that can't be easily drawn out on a whiteboard in Beijing.

Soybean Support Price Held Steady

China's National Development and Reform Commission announced that the 2013-14 support price for soybeans in the northeastern provinces would be set at the same level as last year, 4600 yuan per metric ton. The November 15 announcement is a departure from past years' practice of raising the minimum price each year to help farmers cover rising costs.

According to one grain analyst from an official think tank, "With international prices falling, the government did not raise the soybean price this year." Chicago soybean futures prices have fallen 6.8 percent since August.

As it is, Chinese soybean prices are said to be 10 percent higher than "American soybean prices," encouraging more imports.

Chinese authorities had announced increases in minimum prices for wheat, rice, and corn this year. Many had expected an increase in the soybean support price to 4,700-4,800 yuan.

China's soybean production has fallen three years in a row. China's National Grain and Oils Information Center estimates that Chinese soybean production fell 6.5% in 2013 to reach 12 million metric tons. With costs rising and the price steady at best, another decline is likely in 2014.

Holding the line on the soybean support price may also be a symbolic action reflecting the principle of letting markets decide resource allocation that was emphasized in last week's "third plenum" document.

Another analysis suggests that the steady support price might address the "price without a market" phenomenon in which enterprises are unwilling to buy soybeans at the (high) support price. It is estimated that the government has accumulated soybean reserves in the northeast totaling 8-to-9 million metric tons, equal to about two years of production in Heilongjiang Province. Procurement for the reserves has fallen from about 3 million metric tons annually in 2010 and 2011 to just 1 million tons in 2012. The inventory remains high despite the government's efforts to move the reserves to other provinces or auction them off during the summer. Another increase in soybean price would have left farmers unable to sell their soybeans.

Stamping Out Swill-Feeding of Pigs

Many local authorities in China are trying to stamp out the practice of feeding restaurant waste to pigs. The practice illustrates the tension between biosecurity and utilization of food waste while the campaign against it illustrates the vagueness and arbitrary nature of law enforcement in China.

This week, an article on a reporter's discovery of swill-fed pigs on the outskirts of a city in Shandong Province was widely posted on Chinese news sites. The reporter found a villager on the outskirts of Zibo City who raises about 100 pigs on garbage from restaurants. The reporter said he was kicked out of the farmer's home but he found another villager nearby also swill-feeding pigs.

The farmer visits a restaurant daily to pick up waste on his 3-wheeled motorbike. He pays a varying price depending on the quality of the slop, but it can amount to thousands of yuan paid to the restaurant annually. He generally buys a piglet for 700 yuan and spends 900 yuan on slop to raise it to market weight. The price for pigs is about the same as that for other pigs. His net earnings are about 300-400 yuan per head higher than using conventional feed.

Restaurant waste tends to produce fatty pigs, and the reporter learned that the swill-fed pigs are actually valued by people in "the south" who don't like pigs raised on grain because they have little taste and are too small. Some of the swill pigs are sold in the local Zibo market too.

The disadvantage to swill-feeding, said the farmer, is that they are more prone to disease. The reporter said the farmer had recently lost about 30 pigs to foot and mouth disease. The farmer said he sells diseased carcasses for varying prices--some for 100 yuan, some for 80, and some couldn't be sold at all.

Mr. Zhang is stopped in Qingdao carrying barrels of restaurant waste and tofu dregs. 

A reporter just happened to be there.  Source: Kaixian TV

A TV report in Qingdao showed police stopping a man named Zhang who was collecting restaurant waste to feed to pigs. Mr. Zhang came to Qingdao from Rizhao, a city about 50 miles south, to do construction work. Earlier this year he rented some land outside the city to raise chickens. However, feed was too expensive so he started collecting restaurant waste to feed pigs. He claims he didn't know this is illegal.

These articles appear to be a propaganda campaign against swill-feeding. The articles make the practice sound disgusting but they don't establish that it is illegal. According to a footnote accompanying the Zibo article, feeding swill to animals is not entirely illegal. China's 2006 livestock law says it is illegal if the swill is not treated at high temperature. Swill-feeding was common in the United States until the 20th century when everyone knew the term "slopping the hogs." It was only banned recently in England and Australia because the practice was linked to outbreaks of foot and mouth disease. The ban is vigorously debated there with environmentalists supporting the practice for utilizing waste.

Animal Feed Output Plunges in 2013

Statistics from China's Feed Industry Association show that the country's output of manufactured animal feed plunged by 8.7 percent during the first three quarters of 2013 compared with same period last year.

The feed and livestock sectors were hit by a series of unfavorable incidents during the first half of 2013:

• The "quick chicken" incident late in 2012 revealed that many chicken producers were abusing pharmaceuticals, discouraging poultry consumption.
• In March an outbreak of avian influenza prompted closure of poultry markets, slaughter of birds and scared consumers from eating poultry.
• Pigs were in over-supply after a big build-up of inventories in 2012, putting downward pressure on hog prices after spring festival. 
• The discovery of thousands of dead pigs floating in Shanghai's Huangpu River in Feb-March discouraged pork consumption and prompted a crackdown on small pig farms. 
• Periodic reports of sale of meat from diseased pigs also cut into consumer confidence.
• Numerous cattle and sheep were killed by winter snow storms
• Hot temperatures, rain and typhoons during the peak season for fish-farming cut into aquaculture feed demand.

Production of feed for all types of livestock except aquaculture were down, suggesting generally weak demand for animal protein. Even aquaculture feed's growth was tepid in comparison with previous years' growth. Feed for meat poultry was down 16.3 percent due to the deep freeze in the poultry market caused by the avian influenza outbreak. Swine feed output was down 7%, a dramatic turnaround from torrid growth in 2011 and 2012. 

China animal feed production, January-September 2013
Type of feed	2013 output million metric tons	Change from 2012 percent
Swine	53.0	-7.0
Egg layers	22.4	-7.8
Meat poultry	39.0	-16.3
Aquaculture	16.9	2.4
Ruminant	5.4	-5.3
Other	2.3	-8.0

Sum of numbers exceeds reported total of 133 mmt.

Source: China feed industry association.

The feed industry association said feed additives and premixes were one bright spot in the industry. In order to economize on costs, many farms bought grain directly from farmers or bought premix and additives to mix feeds on-farm instead of buying compound feed from mills. 

The disease and floating pig incidents brought pressure to close down small farms and consolidate livestock. On October 8, the state council issued draft regulations for prevention of livestock pollution that are designed to "raise the threshold" for livestock farming. The government is pushing industrialized business models and increased scale of operations. A 2013-2020 plan for cattle and sheep industries called on each locality to boost "company + farmer" models.

Downward Pressure on Chinese Grain Prices

By all accounts, China has had a good fall grain harvest but prices are down and farmers are holding on to their grain.

The "voice of China" broadcast reports that grain prices are down all over China. A farmer named Liu in northern Jiangsu Province harvested 2500 kg from his five mu of land (less than an acre) but "has no joy from his harvest." Traders offered 1.25 yuan per jin and he wasn't satisfied even with the government's support price of 1.35 yuan. He drove into town on November 1 to try his luck at private grain depots but came back disappointed.

With expenses rising each year, farmers need an ever-higher price to cover their costs but prices are down this year.

In Henan Province, most farmers have wire corn cribs in their yards filled with newly-harvested corn cobs. Very little has been sold because the price is just 1.07 yuan or so. Farmer Liu Xinzhong planted 900 mu (about 150 acres) of corn and harvested 1300 jin per mu. He pays rent of 500 yuan per mu (about $500 per acre) for nearly all of his land (he "owns" 10 mu). If he sells corn at the current market price, he would lose 400,000 yuan (about $65,000).

Farmers in Henan say the corn price was about 1.2 yuan per jin before the harvest (for old corn), but now the price has dropped to 1.04 to 1.05 yuan.

Officials have announced the start of price support purchase programs for rice in five southern provinces. However, for corn there has been no news about the start of price support purchases in northeastern provinces. The price support programs don't normally operate outside the four northeastern provinces.

There has been no news about soybean price support purchases either. The current market price in Heilongjiang province of 4200-4600 yuan/metric ton is below last year's support prices of 4600 yuan/mt. Market participants think the soybean support price might be held at last year's level or even reduced.

Government officials, including vice Premier Wang Yang and the grain bureau's communist party secretary, have been giving speeches and going on inspection tours to forestall the payment of farmers with IOUs and preventing difficulties selling grain.

Imported U.S. corn is said to cost about 1900 yuan per metric ton at the port. In southern China that's about 500-to-600 yuan less than domestic corn prices.

With rising costs, can China keep raising prices above international prices? Economist Li Guoxiang of the Chinese Academy of Social Sciences says China needs to consider the ability of consumers to bear higher prices. Competition from imports keep prices from rising too high. Li thinks China will ultimately have prices a little higher than international prices but it will not follow the example of Japan which has rice prices ten times the world price.

China's Vegetable Oil Prices Slide

Prices for vegetable oil in China are being cut during a seasonal lull in demand and the market impact of plentiful global oilseed supplies are transmitted to China.

China's Daily Business News reports that major cooking oil brands are preparing their second round of major price cuts and promotions for 2013 (the first was in May). The wholesale price for Jinlongyu (Arawana) brand of soybean oil has been cut 1.15 percent to 172 yuan for a case of four 5-liter bottles. Jinlongyu peanut oil is being cut 2.33 percent to 430 yuan per case. News media in five different provinces report that cooking oil prices are falling.

A Guangzhou news site reports larger cuts in retail prices. Jinlongyu soybean oil is being cut from 78 yuan to 68 yuan per bottle, a 12.8-percent reduction. Eagle brand peanut oil is being cut from 105 to 95 yuan, a 10-percent reduction.

An oilseeds analyst consulted by Daily Business News attributed the decline to a glut of soybeans and peanuts coming on the market after harvest, soft demand after the National Day holiday, and companies wanting to clear out inventories. The analyst blames excess capacity in the soybean processing industry--the analyst estimates capacity at 126 million metric tons, nearly double current production.

The United States is having a big soybean harvest, and Chicago futures prices for both soybeans and soy oil fell. Canada also had a big canola harvest this year. Daily Business News notes that China's rapeseed (canola) imports are surging, also contributing to plentiful supplies and putting downward pressure on Chinese veg oil prices.

Meanwhile, there are more articles on crises in China's soybean industry. Ninety percent of domestic crushing enterprises are said to be idle and farmers are said to be abandoning soybeans in favor of more profitable corn and rice. Heilongjiang's "non-GMO" soybeans are said to be facing "potential extinction." A Grain and Oils News reporter traveled through northeastern provinces and said it was hard to find soybean fields; one crushing plant affiliated with the Jiusan Group operated at only 30 percent of capacity last year because it couldn't get enough soybeans.

Relatively weak food prices across the board in China contradict international news media stories this year reporting food-price inflation. Many of China's major food retail prices turned down in mid-October data released by the National Bureau of Statistics (declines in veg oil prices hadn't shown up yet). Weak international prices due to big harvests are being transmitted to the Chinese market and domestic demand is still not that robust.