China's Subsidized Rice Glut

In a pattern being duplicated for many major commodities, Chinese authorities have been giving farmers subsidies and price supports to grow rice that can't be sold. Now authorities are having to subsidize construction of warehouses to store the subsidized rice.

According to Outlook (瞭望), a government-supported news magazine, rice-growing regions in southern China claim they don't have enough space to store the new rice crop. A big crop of early-season rice is expected this month. With abundant supplies of rice already in storage and downward pressure on prices from imported rice, officials anticipate that they will have to purchase significant volumes of the new rice crop and store it in reserves to prevent prices from falling.

The main early-rice provinces--Jiangxi, Hunan, and Hubei--still have a lot of early-season rice stored from last year, so there is not enough space for this year's anticipated purchases. Hunan's early-season rice harvest is estimated at about 8.5 mmt, with 5 mmt to be sold by farmers. They anticipate a 1-mmt storage deficit.

In 2013, China's rice production posted a tenth-straight increase in output. Yet supply exceeded consumption. Jiangxi and other southern provinces purchased a record amount of rice for reserves last year. Nationwide, Chinese authorities purchased 32.6 million metric tons (mmt) of rice to support prices--about 16 percent of the rice produced. This included 5.67 mmt from the early-season crop, 13.37 mmt from middle and late-season crops, and 13.57 mmt of japonica rice grown mainly in the northeastern region (plus Jiangsu and Anhui). Adding these quantities to the rice purchased in previous years, China has an "astonishing" amount of rice in storage.

In Yichun City, Jiangxi's largest grain-producing prefecture, state-owned companies have 1.5 mmt of grain in storage (about 600,000 metric tons have gone bad due to poor facilities), including a record volume of rice purchased in 2013. They only managed to sell 175,000 mt this year to clear out space for the new rice crop, but they anticipate having to purchase 675,000 mt this year.

The Jiangxi Agricultural Development Bank--which finances reserves--estimates that its customers are holding 11.25 mmt of grain. They estimate there is about 3 mmt of space left for the new crop--about half in granaries for reserves and about half in rice mills. They estimate that there will be a 2-mmt deficit if they have to buy rice to support prices.

The rice glut was reflected in Premier Li Keqiang's June 25, 2014 order to build more grain storage facilities, with special emphasis on rice-producing areas in southern and northeastern China. Storage was said to be seriously insufficient in some regions. Li called for making greater efforts to sell off existing reserves and old grain, building private and on-farm storage facilities, ensuring that grain-consuming regions hold at least a 6-month supply of grain in reserves, and checking granaries to verify they actually have the reserves they reported to authorities.

Premier Li's speech also ordered granaries to sell off old grain at a faster pace to make room for the new crop. However, injecting this old grain into the market is further depressing the market price.
In Hunan, the purchase price for early-season rice is now about 2400 yuan/metric ton, and old grain from reserves is selling for 2000-to-2300 yuan/metric ton. These prices are far below the minimum price of 2700 yuan set by authorities for 2014. Hunan authorities expect they will have to buy more rice this year to prevent the price from falling.

The Hunan branch of China's Agricultural Development Bank has allocated 8 billion yuan ($1.29 billion) to purchase an expected 3 mmt of early rice at the minimum price. This is 2 billion yuan more than in 2013.

The vice director of the Hunan Grain Bureau says they don't have enough space to store the new rice. He says farmers are having to line up and wait extended periods of time to sell their rice. This is the dreaded "hard to sell grain" (卖粮难) problem. Refusal of grain and payment with IOUs bred dissatisfaction among farmers during the 1990s and stability-obsessed authorities are trying to prevent it from recurring.

While the grain-storage alarm is partly aimed at getting subsidies to build new granaries, there does seem to be a serious rice glut. No one has pointed out the irony that Chinese officials have been heavily subsidizing production of early-season rice for the last three years, and all of this subsidized rice is going into subsidized government warehouses. Someone let me know when China has become a market economy.