Tuesday, March 21, 2017

China Target Price Held Steady Through 2020

China will hold its target price for cotton steady at 18,600 yuan per metric ton for the next three years--unless authorities decide to change it.

A Q&A released by China's National Development and Reform Commission on March 17 explained that this is part of a "deepening" reform of the target price subsidy for cotton. The target price will be set by calculating the average production cost for the past three years and adding a "reasonable profit"--a kind of cost-plus pricing. The target price will be set once every three years instead of annually, and there will be an upper limit on the amount of subsidy a single recipient may receive. The subsidy only operates in Xinjiang Autonomous Region (although a number of other provinces have distributed their own "target price" subsidies as well).
The Commission explained that the three-year cycle for setting the target price is intended to give farmers firmer expectations about the price. Yet, the Commission also said that the State Council can change the target price at will within the three-year cycle based on factors like changes in market conditions or the government's ability to bear subsidy costs. That would seem to undermine the firm expectations.

The target price replaced the temporary reserve program in 2014. When the market price is less than the target price, the government pays a subsidy to farmers based on the shortfall between the market price and the target price.The initial three-year pilot program is now complete. The new target price of 18,600 yuan/metric ton is the same as this year's target price and will apply for 2017/18, 2018/19, and 2019/20. The market price has been below the target price during each of the first three years of the pilot.

The Commission proclaims the pilot a success for having narrowed the gap between domestic and foreign cotton prices, protecting farmers' profits, giving subsidies directly to farmers, raising profits for textile producers, reducing production in marginal regions, shedding huge government reserves, and improving cotton quality. The Commission says that farmers are now producing cotton demanded by downstream users instead of growing poor quality cotton to sell to the government.

However, the Commission acknowledges some conflicts and problems related to the pilot. Farmers and enterprises were unsure whether the subsidy would continue after the end of the three-year pilot, the Commission said. The yearly determination of the target price failed to give industry participants stable expectations which was said to prevent stability of cotton production. The Commission said farmers need to have stronger incentives to plant cotton and further improve quality.

Futures Daily said there will be pilot programs for other experimental cotton subsidies as well, including "insurance + futures" in which producers pay a premium to an insurance company (actually about three-fourths of the premium is subsidized) and receive an indemnity payment if the market price is less than a target. A linkage between subsidy and cotton quality will be set up in another pilot. Authorities apparently are not in a big hurry to decide on an approach to subsidies. Futures Daily said authorities will accumulate experience with different types of cotton subsidies that will guide the approach to overall subsidies.

Meanwhile, a group of least-developed countries are still hammering on the "western countries subsidize cotton farmers" meme. At the WTO, Benin led a proposal for "urgent action" to limit subsidies by developed countries. Apparently, nothing was mentioned about China creating the world's largest subsidized cotton base in its central Asian Xinjiang region while essentially shutting down its imports from the "cotton 4" west African countries--Benin, Mali, Burkina Faso, and Chad--during 2015 and 2016.

Saturday, March 18, 2017

Toxic Pesticides in China: 35-Year-Old Problem

This month, China's Minister of Agriculture promised to eliminate toxic pesticide residues from food, a problem that was has spiraled out of control even though China's leadership recognized it as a problem in the 1980s.

At a press conference held in conjunction with the National Peoples Congress, Minister of Agriculture Han Changfu was asked what officials are doing to address the Chinese public's concerns about residues of pesticides and veterinary drugs in food. Minister Han noted that the issue of pesticide residues in food comes up at these press conferences each year. He emphasized that China is moving in the right direction but he acknowledged that toxic residues in food remain a prominent problem.

Minister Han said that 39 highly toxic pesticides had been banned in the last few years, and 12 had been restricted to nonfood crops. There are plans to ban three more toxic pesticides. He claimed the proportion of highly toxic pesticides had fallen from 35 percent in the 1990s to 3 percent now. The Minister said more effort will be made to test vegetables for pesticide residues, to monitor the pesticide industry, and to limit entry to the industry. Great idea! But it has taken 35 years so far to deal with this problem.

Long-forgotten "Number 1 Documents" on rural policy issued by communist party leaders during the 1980s had already recognized toxic pesticides as a serious problem:
  • The first "Number 1 document" issued in 1982: "Put more effort into producing efficient, low toxicity pesticides, struggle to eliminate highly-toxic pesticides."
  • The 1983 "Number 1 document" contained similar language: "...eliminate highly toxic, low-efficiency pesticides as soon as possible."
When they said "as soon as possible," did they really mean "in 35 years or so"?

Mention of pesticides disappeared from "Number 1 documents" in 1984-86. The problem persisted, and measures were taken to deal with it. In the early 1990s, a "Green Food" certification was introduced to quell concerns of trade partners that Chinese food exports were tainted with pesticides and pollutants. Japanese companies procuring vegetables and fruits from China during the 1990s introduced measures to control use of pesticides. In 2001, the Ministry of Agriculture launched an action plan for "nonpolluted food" (无公害, which translates directly as "without public harm"), featuring certifications that production areas were free of toxic pesticides and pollutants and a network of testing centers intended to ease domestic consumers' concerns about pesticide residues.
Farm for producing "vegetables without toxic pesticide residues" in 2006, 
in the vicinity of the farms caught growing ginger with toxic pesticides in 2013.

By the time China's leadership started issuing "number 1 documents" again in 2004, food safety had become a major concern and pesticide residues were the top problem.

The document issued in 2004 focused on how to boost rural incomes and contained no mention of pesticides. But toxic pesticides and measures to deal with the problem appeared in all but three Number 1 Documents from 2005 to 2017.
  • 2005: "ban the production, sale and use of highly toxic, high-residue pesticides."  
  • 2006: nothing
  • 2007: "Actively develop new-type fertilizer and low-toxicity, high-efficiency pesticides"
  • 2008: "Accelerate research and development on high-efficiency, safe pesticides"
In 2007, the State Council launched a food safety action plan which said, "It is imperative to ban the unlawful production, marketing, and use of five kinds of highly toxic pesticides, such as methamidophos." The Minister of Agriculture in 2007 bragged that Chinese food exports had a lower rejection rate in Japan than products of the U.S. and E.U. Yet, in 2008 pesticides were back in the spotlight after a high-profile incident in which Japanese consumers were poisoned by dumplings laced with toxic pesticide, so...
  • 2009: "Launch special rectifications; resolve to stop illegal use of pesticides and veterinary drugs."
  • 2010-11: nothing
  • 2012-16: each document advocated promotion of low-toxicity, efficient pesticides.
In 2013, another scandal caught the public's attention when it was revealed that farmers in China's Shandong Province routinely used a toxic pesticide to produce ginger for the domestic market. Farmers didn't use the pesticide for exported vegetables which received greater scrutiny.

In 2016, China's Ministry of Agriculture launched a campaign to achieve zero-growth in pesticide and fertilizer use by 2020. This objective was included in the 2016 and 2017 Number 1 documents.
  • 2017: "Establish a complete chemical fertilizer and pesticide industry production supervision and product traceability system: place strict limits on entry to the industry."
The 2017 document contained an entire paragraph on "clean production" and green measures, greater prominence than in any previous document. Minister Han said at his news conference that they had begun training farmers in vegetable producing counties about how to use pesticides "rationally" and "scientifically." Another campaign is developing prevention and treatment teams to address pest and disease problems. Great, but these things have been done before.
Lab in Jiangsu Province for testing fish for veterinary drug residues in 2007. Spotless! Unused, maybe?

At the same press conference this month, the Minister promised to crack down on use of clenbuterol in livestock production. Authorities in China banned this substance 17 years ago, and clenbuterol was specifically targeted in the 2007 food safety action plan. Ten years ago the Ministry claimed that its testing had detected no clenbuterol for three years in a row. Yet, in 2011 a clenbuterol scandal implicated what is now the world's largest pork company. The following year, 2012, the Number 1 Document called for "Strict control of feed additives." This month, the Minister also singled out for rectification the use of two veterinary drugs--malachite green and nitrofurans--used in fish-farming. These were specifically targeted in the 2007 action plan. The objective of the State Council's food safety action plan a decade ago was stated as follows:
"By the end of 2007...the problems caused by the use of unlawful and banned pesticides, veterinary pharmaceuticals, and feed additives should basically be resolved."
While we're at it, we will point out that 1980s-era documents raised other concerns that have since risen to crisis levels: declining soil fertility, excessive chemical fertilizer use, and disappearance of organic matter from soils. These are also major problems the current generation of agricultural officials in China is trying address after years of neglect. The directive in the 1986 Number 1 Document,
"We must make efforts to raise the productive capacity of land...by reversing the neglect of organic fertilizer and increasing organic matter in soils," 
is identical to mantras recited by China's agricultural officials today.

Minister Han is probably sincere about his resolve to eliminate toxic pesticides, as were leaders a generation ago who wrote the 1982 document. But the decades-long saga of Chinese pesticides shows that what government leaders say or do often has little bearing on what actually occurs on the ground. Problems can build up for years before decrees from Beijing filter down to the grass roots. Problems have to build up to crisis levels before local officials fall in line behind their central government comrades to take part in the dragon dance.

Thursday, March 9, 2017

China MOA S&D Estimates (Mar 2017)

China Ministry of Agriculture's supply and demand estimates (CASDE) for March 2017 were unchanged from the previous month except for a small reduction in the 2016/17 sugar production estimate.

Corn has been major a agricultural talking point for officials this week at the National Peoples Congress in Beijing: the necessity of allowing corn prices to fall, the need to get supply aligned with demand, and the monumental task of whittling away the corn reserves. The CASDE led off with a similar review of this year's corn supply and demand numbers, noting that the reduction in corn production in 2016/17 and the rebound in feed and industrial use will close the gap between corn supply and demand. The CASDE estimates would result in a further increase in corn reserves of 4.4 million metric tons during 2016/17. The CASDE authors observed that feed consumption is currently restrained by effects of avian influenza and low swine inventories, but they did not change their feed consumption estimate for 2016/17. The 2016/17 corn import estimate is unchanged from last month at 800,000 metric tons, down from 3.2 million metric tons in 2015/16.

China corn supply and demand (Ministry of Ag, March 2017)
Item Unit 2015/16 2016/17 Feb 2016/17 Mar
Planted area 1000 ha 38,117 36,026 36,026
Harvested area 1000 ha 38,117 36,021 36,021
Yield Kg/ha 5,892 5,978 5,978
Production MMT 224.58 215.33 215.33
Imports MMT 3.2 0.8 0.8
Consumption MMT 194.09 211.22 211.22
--Food MMT 7.65 7.82 7.82
--Feed MMT 121.01 133.53 133.53
--Industrial use MMT 54.17 58.25 58.25
--Seed MMT 1.66 1.61 1.61
Loss and other MMT 9.56 10.01 10.01
Exports MMT 0.01 0.5 0.5
Surplus MMT 33.73 4.41 4.41

Separately, Minister of Agriculture Han Changfu led off an interview with China's Central Television yesterday with the "hot topic" of corn. He stressed the importance of the 30-million-mu (2 million ha) decline in corn planting in 2016 for restoring equilibrium between supply and demand, and he said they hope for a further 10-million-mu (667,000 ha) reduction in corn planting in 2017. The Minister recommended that farmer friends plant whatever is profitable, but cautioned against piling into new crops (i.e. creating new surpluses of other commodities).

The CASDE noted that grain bureau statistics showed that 75 mmt of corn from the 2016 harvest had been procured in northeastern provinces as of February 28, 2017. This was lower than a year ago, but comparable to earlier years. They expect corn prices to remain steady.

Soybean estimates are also unchanged from February. CASDE expects imports to reach 85.31 mmt for 2016/17. The soybean write-up also mentions impact of avian influenza and low hog numbers on feed demand but did not change its estimated 85.5-mmt crush volume for 2016/17. More domestic soybeans are moving out of the northeast as transportation bottlenecks have eased and transport costs have fallen, but prices for domestic soybeans are still strong.

China soybean supply and demand (Ministry of Ag, March 2017)
Item Unit  2015/16  2016/17 Feb 2016/17 Mar
Planted area 1000 ha 6,590 7,156 7,156
Harvested area 1000 ha 6,590 7,150 7,150
Yield Kg/ha 1,762 1758 1758
Production MMT 11.61 12.57 12.57
Imports MMT 83.23 85.31 85.31
Consumption MMT 96.67 99.87 99.87
--Crushing MMT 82.89 85.50 85.50
--Food MMT 10.35 11.18 11.18
--Seed MMT 0.54 0.61 0.61
Loss and other MMT 2.89 2.58 2.58
Exports MMT 0.11 0.2 0.2
Surplus MMT -1.96 -2.19 -2.19

Cotton estimates are also unchanged this month. There is no mention of prospects for cotton auctions which have resumed after the end of the cotton procurement season. CASDE expects cotton stocks to decline by slightly less than 2 mmt in 2016/17, but the 9.13 mmt carry-out will still be 120 percent of annual consumption. Imports of cotton are estimated at just 900,000 mt this year.

China cotton supply and demand (Ministry of Ag, March 2017)
Item Unit 2015/16 2016/17 Feb 2016/17 Mar
Begin inventory MMT 12.8 11.11 11.11
Planted area 1000 ha 3,267 3,100 3,100
Yield Kg/ha 1,510 1,523 1,523
Production MMT 4.93 4.72 4.72
Imports MMT 0.96 0.90 0.90
Consumption MMT 7.56 7.59 7.59
Exports MMT 0.02 0.02 0.01
End Inventory MMT 11.11 9.13 9.13

Vegetable oil production is unchanged at 25.89 mmt. Consumption is estimated at 31.43 mmt and imports at 5.6 mmt. Rapeseed growing conditions in China are said to be favorable and similar to last year.

China edible oils supply and demand (Min Agriculture, March 2017)
Item Unit 2015/16 2016/17 Feb 2016/17 Mar
Production MMT 25.3 25.89 25.89
--Soy oil MMT 14.74 15.17 15.17
--Rapeseed oil MMT 5.6 5.61 5.61
--Peanut oil MMT 3.01 3.18 3.18
Imports MMT 5.81 5.6 5.6
--Palm oil MMT 3.39 3.25 3.25
--Rapeseed oil MMT 0.77 0.75 0.75
--Soy oil MMT 0.59 0.58 0.58
Consumption MMT 31.17 31.43 31.43
--Urban MMT 20.41 21.4 21.4
--Rural MMT 10.76 10.03 10.03
Exports MMT 0.11 0.13 0.13
Surplus MMT -0.17 -0.07 -0.07

Sugar production is in its peak season, with 20 sugar cane mills in operation and most beet processors in operation. A 200,000-metric ton reduction in sugar cane output was made as farmers are holding back a larger portion of sugar cane for future production to take advantage of strong prices.

China sugar supply and demand (Ministry of Ag, March 2017)
Item Unit 2015/16 2016/17 Feb 2016/17 Mar
Planted area 1000 ha 1423 1433 1433
--sugar cane 1000 ha 1295 1270 1270
--sugar beets 1000 ha 128 163 163
Yield



--sugar cane MT/ha 60.3 60 60
--sugar beets MT/ha 53.85 52.5 52.5
Sugar output MMT 8.7 9.9 9.7
--sugar cane MMT 7.85 8.85 8.65
--sugar beets MMT 0.85 1.05 1.05
Imports MMT 3.73 3.5 3.5
Consumption MMT 15.2 15 15
Exports MMT 0.15 0.07 0.07
Surplus MMT -2.92 -1.67 -1.87

Saturday, March 4, 2017

Corn Reform Succeeds but Reserves Loom Over Market

China's corn market reform has succeeded beyond expectations but a full year's supply of corn in reserves still looms over the market, according to the Ministry of Agriculture's lead corn market analyst.

In an interview with China Times, Mr. Xi Gensheng of the Ag Ministry's Research Center for Rural Economy judged the cancellation of the country's corn floor price policy last year as a clear success by eliminating distortions in the market. Xi noted that the corn price in China has fallen faster than expected--to an average of 1400 yuan per metric ton in production regions, down from last year's floor price of 2000 yuan. The normal geographic pattern of prices in China--lowest in the northeastern provinces, highest in the south--has been restored. The price decline erased a big gap between Chinese and international prices that had persisted for three years. Xi said the sale price for corn is now 1600 yuan--lower than the 1709 yuan/metric ton estimated cost of imported corn.

Mr. Xi pronounces the decline in corn planting last year as a breakthrough in "supply side reform." Noting that the Ministry of Agriculture has a bigger estimate than the Statistics Bureau for last year's decline in area planted in corn, Xi exclaims, "Whether [the decline in corn area] is 20 million mu or 30 million mu, both exceed the target of 10 million mu."

Below the optimistic headline, Mr. Xi noted that there is still a mismatch between corn supply and demand in China. Xi estimated that the temporary reserve of corn still holds 230 million metric tons, which he describes as about equal to a year's production of corn and a record high.

Last year 42 million metric tons of corn reserves were sold--through auctions (21.8 mmt) and a one-time "rotation" of grain (20 mmt). Xi expects multiple measures and channels to be used to dispose of the remaining corn stockpile: by improving the auction system to sell more corn, favorable tax treatment for processors, giving tax rebates for exported corn products, subsidies to processors, transportation subsidies, supporting hog industry expansion to use up the corn, and considering an expansion of fuel ethanol capacity.

While lower prices that reflect market conditions are a guiding principle of supply side reform, Xi notes that Chinese leaders are warily watching the impact on rural income to ensure social stability.

Xi Gensheng estimates that the reduction in corn prices has cut profits for corn farmers. He observed that gross income for corn growers fell 205.64 yuan per mu in 2015 when the floor price for corn was reduced 10%, and he estimates that this year's price decline could reduce gross income by a further 300 yuan.

This year the government has issued corn producer subsidy funds totaling 39 billion yuan to three northeastern provinces.  Xi estimates that the payments to corn producers amount to 130 yuan per mu, much less than the decline in their income from lower corn prices. Mr. Xi said that disputes are common over who is entitled to the corn subsidy: the lessors who rent out the land or the large farmers who grow the corn. Producers outside the northeast do not get these subsidy payments. He also notes that the lack of coordination between the corn producer subsidy and soybean target price subsidy may impede corn area adjustment in Heilongjiang, the largest soybean-producing province.

(A separate article reported that rice vs. corn profitability was a consideration in reducing this year's minimum price for rice. It was feared that a huge surge in surplus medium grain rice production in the northeast region could result if the rice price was kept stable while the corn price is plummeting.)

Xi worries that large-scale farmers are under cost-pressure due to farmland rental costs. In Heilongjiang, he estimates corn farmers are losing 200 yuan per mu. In Shandong Province, corn farmers are losing 10-50 yuan per mu and some large farmers receiving lower prices are losing 200 yuan per mu. Large-scale farmers who don't get subsidies are giving up their rented land, Xi said.

If costs of land rent set by long-term contracts pose a "systemic risk", Xi speculates that the government may step in to "rescue the market."

Sunday, February 26, 2017

China: Milk for Well-Off Society

Officials have launched a campaign to promote China's domestic dairy industry as an essential foundation of the country's all-round well-off society. One of five initiatives to revive China's dairy industry, donations of milk to students in poor rural areas were the focus of the kick-off meeting held in Beijing on February 21, 2017.

Vice Minister of Agriculture Yu Kangzhen urged attendees at the meeting to "learn from the guiding spirit" expressed by General Secretary Xi Jinping during his January 24, 2017 inspection of an infant formula factory in Hebei Province. At the inspection, Xi pronounced, "Let the motherland's next generation drink good milk powder; this is of great concern to me."
General Secretary Xi Jinping tours farm supplying milk powder factory

According to the Ministry of Agriculture Press Office, China is in a stage where it is approaching the achievement of an "all-round well-off" (xiaokang) society by 2020, and dairy consumption is one of the important indicators of rising living standards. According to Press Office's account, "A well-off society cannot be without milk, and over a billion Chinese people cannot be without their own dairy industry,"
"Revive the nation's dairy industry; serve the well-off society."
While China's dairy consumption has risen greatly, per capita consumption is still only one-third of the world average and half the Asian average. It was pointed out at the meeting that only 20 million of China's 140 million students in primary and middle school are able to drink milk. The meeting emphasized an initiative to increase school milk donations in poverty-stricken regions.

The campaign will include publicity campaigns to encourage milk consumption. Donated school milk will labeled as part of the "China well-off dairy campaign." Eighteen fluid milk products and three milk powder products valued at 55 million yuan have been chosen for distribution to 110,000 students by various Chinese companies.

This is one of five campaigns to revive the Chinese dairy industry:
  1. Pasture and fodder improvement. Expand quality alfalfa production and shift land from producing corn to fodder crops.
  2. Raise good cows. Develop healthy farming, including county-wide standardized, scaled-up dairy farm initiatives and efficient, green development.
  3. Produce good milk. Upgrade quality and safety systems, develop quality-safety monitoring plans for fresh milk and conduct specialized remediations.
  4. Create brands. Form domestic dairy brands and manage the "D20" summit of the top 20 companies.
  5. Tell the dairy industry story. Develop the "well-off dairy industry" campaign, revive consumer confidence, promote dairy consumption.


Farm Consolidation Undermined by Falling Grain Prices

As grain prices fall and profits shrink, some of China's new large-scale farmers are walking away from land rental contracts or demanding lower rents.

Corn prices in China were down 20.5% from a year ago in January 2017, according to the latest monthly Situation and Outlook Report from the Ministry of Agriculture. The National Development and Reform Commission has just announced that minimum prices for rice will be reduced in 2017. With shrinking profits and other unanticipated problems, quite a few of China's large-scale tenant farmers are returning their rented farmland to village collectives or asking for lower rents.

An article in the magazine Liaowang (Outlook) describes the situation in several counties of Shandong Province. One farmer in Wucheng County said he lost 16 million yuan growing corn and wheat on 8,749 mu (1,440 acres) of land he rented on a 10-year contract. He gave back the land and will now concentrate on his furniture business in Beijing.

One farmer told Liaowang he refused an offer to rent 800 mu of land from a nearby village because he was certain he would lose money. No one in the village wants to farm, so they are trying to rent out the village's entire allotment of farmland.

A farmer in Shandong's Jining City said he wants to give up farming the large parcel of land he has rented so he can focus on his off-farm job. He's worried neighbors will make fun of him if he leaves the land fallow, so he let other farmers cultivate the land rent-free to avoid embarrassment.

A Wucheng official says his county had six farms of 1000 mu (165 acres) or more in 2015, but only one was left at the end of 2016. The number of farmers with 500-1000 mu fell from 23 to three.

The Liaowang author reports that local officials are worried that rural villagers may become disgruntled if they fail to receive the promised rental proceeds. They also worry that abandonment of land may threaten food security.

"Fight to maintain food grain planting area; prevent large 'landslides,' holding on to food security as the bottom line" was the first directive in the Ministry of Agriculture's instructions for officials on preparation for the 2017 crop-planting season. "Landslides" presumably refers to widespread collapse in grain-planting.

"Villagers feel helpless," according to Liaowang. One villager said the large farmer who rented their land said he would refuse to pay the rent this year if they did not let him out of his contract. "There was nothing we could do," the villager complained.

The farmers had entered into rental contracts several years ago at rents that were based on the high grain prices prevailing at the time. Many farmers interviewed by Liaowang said they had negotiated their rent down by 100-200 yuan/mu because they can't make money if they have to pay high rents.

One leader of a "cooperative" said the land rent went as high as 1200 yuan/mu in 2012 when the corn price was 2.6 yuan/kg. Rents fell to 1000 yuan in 2014 when the corn price fell to 2.2 yuan/kg. Now, with the corn price down to 1.5 yuan/kg, rents are 800 yuan/mu.

The problem is not confined to corn farming. An article on rice farmers says the reduction in rice price just announced seems small, but it could mean large losses for farmers who have 1000 or tens of thousands of mu. On the other hand, small-scale farmers say the price cut will have little impact on their income because they earn most of their money from off-farm jobs. In Jiangxi Province's Gao'an City, farmers say the cut in rice price may reduce their income by 10-20 yuan per mu, but they can easily make that up by working off-farm.

In Hebei Province, one farmer who rented a village's land to raise medicinal crops for herbal medicines disappeared without paying rent. Another farmer discovered that wells and other infrastructure were not adequate to support large-scale farming operations.

In Jilin Province, on the other hand, it is reported that some corn producers are taking advantage of lower rent by expanding the scale of their farms. In this region, land rent peaked at 530 yuan/mu or even 1,000 yuan/mu in 2014, but rent has fallen to 200 yuan/mu this year--about the same as ten years ago. One farmer in Jilin's Gongzhuling City is reportedly expanding his operation from 2,700 hectares last year to 10,000 hectares this year [comment: this seems like an implausibly large farm].

Many villagers are taking their large-farmer tenants to court. An article in 21st Century Business News yesterday reveals that the uptick in farmland transfers has produced a surge of disputes that are being investigated by courts around the country. In many instances, new companies or city-based entrepreneurs found that farming is not as easy or profitable as they thought and defaulted on rental contracts when their farming businesses failed. Belly-up farming schemes include fruit trees, seedlings, plants for herbal medicine, and rural tourism. Minister of Agriculture Han Changfu acknowledged the surge in legal disputes and said more efforts are needed to deal with relations between traditional villagers and new-type farmers, clarify each party's property rights, and effectively avoid and settle land disputes in order to ensure agricultural growth and social stability.

The Liaowang article includes a plea for subsidies to large farmers, including a proposal by local officials for a target price subsidy for grains. The Jilin article praises the province's early efforts to target subsidies to large-scale farmers, including machinery subsidies, loans for maintaining profits from land (土地收益保障贷款), technical services, and subsidies for adoption of no-till farming. The Jilin article did not mention producer subsidies for corn which would bring in a tidy sum of 150,000 yuan ($21,740) for a 1000-mu (165 acre) farm.

Who is entitled to the original grain subsidies introduced in 2004 has become a thorny issue as more land is transferred. In Shandong Province, the "grain" subsidy of 125 yuan/mu is distributed based on area planted in wheat but it has been unclear whether the subsidy goes to the villager who has contract rights to the land or the tiller of the land who rents the operation rights. The Liaowang article reports that one large farmer in Shandong's Linba county is due to pay 900 yuan/mu in rent for his land this year, but his actual cost of land will be reduced this year because he will get the 125-yuan grain subsidy--in the past the subsidy was paid to the villagers with contract rights who rent out the land to him.

The structures built on the land can also be a problem. The farmer who gave up his rented farm in Shandong's Wucheng County gave away the buildings on his land to friends for free.

Once again, Chinese officials are learning that farming is an inherently risky business. Prices do not rise forever. Officials got themselves into a serious mess by trying to build an agricultural pricing system based on an assumption of ever-rising agricultural commodity prices that seized up when global prices started falling several years ago. Now it turns out their plan to pay villagers dividends for "operation rights" to their farmland is based on unrealistic expectations for farming profits. Classical economists explained centuries ago that land rents in farming are determined by farm prices which go up and down. Owners of land--the factor of production with inelastic supply--are always the big winners when farm prices rise and losers when prices fall. Unrealistic expectations for farm profits also exposes a hole in the plan to mortgage operation rights. Bankers will be hesitant to voluntarily make loans securitized by farmland operation rights if the rights are likely to fall in value and have no secondary market.

No chance of privatizing land ownership, though. Minister of Agriculture Han said collective land ownership must remain the foundation of China's countryside.

Wednesday, February 22, 2017

China Flour Mills Under Pressure

Profit margins for China's flour mills are under pressure from high wheat prices and weak flour prices, according to an analysis last week by Agricultural Futures Net.

The peak season for flour demand around the Chinese new year has now passed, and flour mills have been slow to restart production after the holiday due to slim profits. Some have taken the opportunity to retool machinery.

The cost of raw materials is up. Flour mills are paying an average of 1.33 yuan/500g for wheat, up from 1.19 yuan/500g last year. Wet weather in parts of China's wheat belt last summer have reduced the supply of good quality wheat in China this year.

Flour prices have not risen to match the rise in wheat prices. Salesmen reportedly have not been getting as many orders as they normally do at this time of year. The competition for customers has led to price wars for flour. The average ex-factory price for flour is reported to be 1.7 yuan/500g in Shandong, Hebei, and Henan Provinces, down from 1.8 yuan/500g a year ago.

Mills also rely on sales of wheat bran--the byproduct of flour-milling. Normally, flour and bran prices move in offsetting directions but recently both prices have fallen. About 80% of bran is used for making pig and poultry feed and the rest is used mostly to grow mushrooms. Feed demand is weak due to the campaign to demolish pig farms to comply with directives to create pig-free zones near cities and environmentally vulnerable bodies of water. The wheat bran ex-factory price is .70-.74 yuan/500g.

The Agricultural Futures Net analysis says China's flour milling industry suffers from severe excess capacity and may be facing a shake-out of small mills.  Large companies with financing and technological advantages are expected to survive while smaller mills may shut down.