Wanted: Premium Rice Prices

The upcoming harvest of another summer rice crop is a reminder of the growing contradictions in China's agricultural policy. Officials entice farmers to keep growing poor quality rice they don't want to grow and that is no longer demanded by the market, but officials are afraid they won't meet their food security targets without this rice that no one wants to eat.

In a handful of hot, humid provinces of southern China, officials encourage farmers to grow two crops of rice--an early crop planted in the spring and harvested in mid-July followed by a late crop harvested in late fall. Two crops increases the physical amount of rice produced, but the early crop doesn't taste good, is shunned by the market and mostly ends up in government warehouses.

A Grain and Oil News article on prospects for the early rice harvest this month notes that production of the early rice crop has been gradually sliding downward because market demand is less than the supply. Now that farmers have full bellies and money in the bank, they are not inclined to invest the extra time and money to grow two crops; many have instead switched to growing a single rice crop that requires fewer trips to the field. The 30-million-ton early season crop is about 15 percent of China's rice output, but it is mostly shunned by the market because of its poor taste as consumers become more discerning about the rice they consume. The article says the early rice crop is mainly used in food processing or stored in government reserves.

In view of the excess supply of early rice, authorities have cut the minimum price two years in a row. The recent summer grain purchase work meeting anticipated that market prices for this year's crop will be less than the minimum price of 2600 yuan per metric ton, triggering more government rice-buying this summer.

Grain and Oils News observes that authorities are under growing pressure to dispose of rice stocks. Authorities have had a hard time selling their stockpiled rice; 25 auctions have sold only 1.87 million metric tons of early rice this year. No auction has sold more than 5.6 percent of the rice offered. 

A Farmers Daily article by Ministry of Agriculture economists in March also raised concerns about bulging rice inventories. The economists cited a 2016 survey that showed a 10-percent increase in rice stocks held by farmers that they interpreted as a sign that the bulging inventory phenomenon has spread to farmers who presumably are unable to sell all their rice. This article also observed the dichotomy between excess supplies of low-end rice and shortages of high-quality rice demanded by consumers.

Medium grain rice produced in northeast China--generally considered to be high-quality--is also in surplus, according to an analysis by a local Price Bureau in Anhui Province from last October. There is considerable pressure to de-stock medium grain rice, but doing so would push prices downward. This analysis also notes that farmers who produce high-quality varieties or have low moisture can get better prices, but they face little risk of a decline in price due to the minimum price program. In Anhui, farmers harvested and sold their rice as quickly as possible to get the guaranteed price (presumably so they can return to their off-farm jobs or mah jong games).

In Hubei Province rice inventories are generally low-quality due to hot weather and flooding last year. Analysts say supplies of quality rice are tight. The difference between China's rice prices and Asian export prices has narrowed; the price of Thai Grade B rice is above the price of Chinese early indica rice for the first time in nearly four years. Nevertheless, China's rice imports were 1.3 million metric tons during the first four months of 2017, less than 1-percent less than the pace set last year.On June 12, customs inspectors and police held a joint crackdown that nabbed 39 rice smugglers and destroyed 2000 tons of smuggled rice; preliminary estimates of rice smuggling were put at 300,000 metric tons.

The core problem identified by the economists writing in Farmers Daily is a rising cost structure that prompts officials to put a floor under prices. The Farmers Daily writers pointed out that China's production costs are higher than those of producers in Vietnam, Cambodia, and Pakistan. Imports from these countries tend to put downward pressure on prices for low-grade rice in China. However, officials don't want to let Chinese rice prices fall low enough to compete with international prices because they fear farmers would stop growing rice or protest over falling incomes. While they did cut the minimum price for early rice two years in a row, the cuts were small and cautious.

Chinese officialdom's strategy is to urge farmers to produce high-quality rice that will justify the high prices needed to cover rising production costs. Strategic plans and guidance documents are filled with exhortations to build brands, grow organic, and obtain certifications to get premium prices.

The Farmers Daily authors describe the minimum price policy as inappropriate for the growing market segmentation in the rice market. Higher quality rice sold to government warehouses at the minimum price doesn't get a premium to encourage improvements in quality. Instead, the authors suggest promoting vertical linkages between growers and rice companies, creating brands of rice, and using e-commerce to market high-quality rice.

Now China is attempting what might be called a "Great Leap Sideways." Just a few years ago, the "China Price" was the absolute lowest price for knock-offs and generic commodities. Now China is trying to re-position its products as high-end designer goods to justify high prices needed to cover rising production costs. That's quite ambitious for a country that was synonymous with food safety calamities a decade ago and whose rice, in particular, is still under a cadmium-tinted cloud.