Monday, October 5, 2015

China Hogs: Bigger Scale Needs Better Management

China produces about half of the world's pigs, but its farmers are still figuring out the business of commercial hog production. The average daily weight gain of hogs has risen dramatically from about 0.4 kg/day in the early 1990s to nearly 0.7 kg/day for "scale" farms (30 or more head), but improvement seems to have plateaued in the last few years.
Source: Calculated from China National Development and Reform Commission
production cost survey data.

A recent article in China Livestock and Veterinary News asserts that Chinese farmers are taking on bigger and bigger risks as the scale of hog farms grows larger. The author points out that farmers experience big losses from lackadaisical management and cutting corners in ways that result in spread of disease and poor performance. He hopes that calling attention to these "loopholes" will bring them "from tears to riches."

The author points out that modern livestock production is a high-tech industry, but few people involved in China's hog industry are highly educated. In particular, the author points out that few Chinese farmers use professional veterinarians for treatment or advice. When disease spreads, farmers "blindly" use veterinary drugs to treat animals. The author urges farmers to use high-quality personnel and to pay good wages to motivate them.

Chinese farmers rely too heavily on antibiotics, says the Livestock and Veterinary News author. They routinely use multiple drugs to treat diseases, prevent diseases, and to promote weight gain. Many farmers continue administering drugs right up to the time of slaughter, worrying that animals might get sick if the drugs are stopped. Farmers aren't aware that drugs should not be administered during the days prior to slaughter in order to eliminate residues from the animal's body before it is butchered and consumed by humans.

The article criticizes Chinese farmers for erroneously thinking that more drugs are always better, and for judging the quality of drugs by their price. Farmers aren't aware that different antibiotics are needed to treat different diseases. It is common for farmers to administer a drug for a few days and stop, or to switch from one drug to another before the results can be properly evaluated.

Dosages are often incorrect. Some farmers administer too much, thinking that higher dosages will always be more effective. A common rule-of-thumb is to double the dosage recommended by the manufacturer. In other instances the dosage is too low when the drug is mixed with drinking water or feed and farmers don't take into account the animals' loss of appetite when they are ill.

Another popular strategy among Chinese farmers is to buy the ingredients and mix drugs themselves on the presumption that better results come from using pure ingredients. Farmers are often unaware of proper formulations, either lacking instructions or ignoring them. Some factories provide instructions only in English to give the impression that they are sophisticated and high-quality, but none of the farmers can read them.

Some farmers use probiotics and antibiotics together, which kills off beneficial bacteria. Antibiotics can also kill live viruses in vaccines.

China relies on free government distribution of vaccines to control diseases, but there are a number of loopholes here pointed out by Livestock and Veterinary News. The author says that vaccine inventories are often overstocked because statistics used to distribute the vaccines are inaccurate. Thus, many vaccines are kept past their expiration date. Vaccines are not always kept at proper temperature because electricity supplies are unreliable or transportation equipment is not refrigerated. Tap water or water drawn from dirty rivers is often used to mix vaccines; distilled water, saline solution or other proper diluting agents should be used.

Many farmers don't understand the importance of disinfecting farm facilities, the author asserts. Many farmers just go through the motions of sanitizing their farms.

The author warns farmers not to move pigs into new facilities too quickly. Concrete must be fully hardened and disinfected twice before bringing pigs in. Otherwise, the floors could be too alkaline and give pigs problems with their feet. He also warns that floors that are too slippery could cause inflamed joints or laminitis.

The author points out that inappropriate feed rations are used for some animals. As with medications, farmers often ignore instructions recommended by feed manufacturers. Relatively little feed is formulated specifically for boars (since there aren't that many of them), so many farmers give their boars sow feed instead which does not give them the proper nutrients needed for good performance in what boars do. Many farms use the wrong feed for nursing sows which cuts down on lactation and delays the next breeding. Wet feed breeds mold that emits toxins and mosquitoes that spread disease during hot weather. Farms that feed animals by hand often refill troughs before they are empty, so the feed may stay in the trough too long and thus spoil.

The Livestock and Veterinary Medicine author's emphasis on disease and vaccine issues is borne out by analysis of cost of production data from the China National Development and Reform Commission. The data show that veterinary expenses by Chinese hog producers have been on the rise. Expenses were about 5-10 yuan per head before China's PRRS (known as "blue ear disease") epidemic in 2006-07. Expenses rose sharply during that period, and have now risen to 20 yuan per head for "scale" farms and 15 yuan for "backyard" farms. "Scale" farms consistently spend more on veterinary expenses than do "backyard" producers. Presumably, these expenses exclude the cost of free vaccinations for classical swine fever, foot and mouth disease, and PRRS provided by the Chinese Ministry of Agriculture.
Source: China National Development and Reform Commission 
production cost data.

A comparison with data from USDA cost of production data indicates that Chinese hog farms spend more on veterinary expenses than U.S. farmers do. In 2014, U.S. producers spent an average of $1.14 per 100lbs of weight gain on veterinary items. Calculations using the Chinese data indicate that "scale" Chinese producers spent $1.49 per 100lbs of weight gain, about 25% more than U.S. producers. Chinese producers consistently spent 15%-30% more than U.S. producers on veterinary expenses from 2009 to 2014.

Mortality losses for Chinese hog producers are also up. And "scale" producers appear to have higher losses than "backyard" producers, despite their higher veterinary expenses. The Chinese production cost estimates indicate that "scale" producers were hit especially hard by the PRRS outbreak during 2006-07 and by China's piglet diarrhea epidemic during 2011. Expenses from death loss are consistently higher for "scale" hog farms than for "backyard" farms, seemingly confirming the Livestock and Veterinary News author's concern that Chinese farmers are taking on greater risk as the scale of farms expands.
Source: China National Development and Reform Commission 
production cost data.

It is imperative that China address these issues. China produces more than half the world's hogs but it also produces the most expensive ones. Comparing farm prices of hogs in the U.S. and China shows that Chinese prices have soared above U.S. prices and the ratio was about 2:1 in August 2015. EU prices have been a little lower than U.S. prices, so it's likely that China has the most expensive hogs of any major producer. Improving productivity and reducing disease losses are among the measures needed to reduce those costs.
Source: China National Development and Reform Commission 
and USDA, National Agricultural Statistics Service

Tuesday, September 29, 2015

China Corn Processing Giant Out of Dough

In northeast China's Changchun City, farmers, suppliers and construction companies gather at the gates of Dacheng Biotech Group to collect on unpaid bills. Most go away empty-handed from the mostly-deserted headquarters of Asia's largest corn-processor which has been idle most of this year.

The company is listed on the Hong Kong stock exchange and is Asia's largest "deep-processor" of corn, yet it has accumulated 80 million yuan in unpaid IOUs to farmers who sold corn to the company.

The money owed to farmers is a miniscule part of Dacheng's arrears. Voice of China reports that a company official says Dacheng is behind on RMB 9.8 billion in bank loans and owes RMB 1.2 billion to suppliers. They claim to have struck a deal to pay off debts to farmers by the end of the year.

After a string of bad business decisions and with demand for its main product shrinking along with the Chinese hog herd, Dacheng Group's cash flow has dried up. China's big four state-owned banks have stopped feeding loans to the company, and it is near insolvency. It has essentially been shuttered for six months. In March 2015, the company sent a report to the Changchun government and to its main lender informing them that it was idling its production operations.

A report from China Business Journal explains how the company got into its predicament. Dacheng Group was founded in 1996 as a starch factory. Its main products are lysine, an amino acid used in animal feed, and liquid glucose. Both products are made from corn, northeastern China's leading agricultural product. The company normally would use up to 8 million metric tons of corn annually.

The company listed on the Hong Kong stock exchange in 2001. It hit the big time when Jilin Provincial leaders chose corn-based biochemicals as one of two pillar industries to develop the regional economy (vehicles for special uses were the other one). After that, free land, loans, and preferential tax rates came the company's way.

An unnamed industry participant told China Business Journal, "The government ordered banks to give Dacheng money, and a considerable part of the loans had no collateral."

In 2006, Jilin authorities issued a document conferring special status on two projects: the airport for Changchun (Jilin's provincial capital), and a giant corn industrial park near Changchun. The park's plan was to make chemical fibers and plastics out of corn. In 2009 they ordered Dacheng to relocate to the industry park with free land and other inducements. When the park was still unfinished and underutilized in 2012, another of its subsidiaries was ordered to move there too.

In 2010, another of Dacheng's subsidiaries was awarded "high-tech company" status, bringing another tax break.

The company's business reportedly began going downhill after its chairman died three years ago. Since then, the company has had three CEOs, none of whom could turn the company around. Observers say the company expanded too rapidly and was too eager to diversify into ventures at the request of the government. It failed to upgrade the quality of its products, neglecting to transition into higher-margin crystallized sugar. Dacheng admitted to having serious excess capacity for lysine production, and it expanded production of starch that was earning minimal profits.

According to China Business Journal, aggressive expansion ate up the company's cash, and it built up short-term liabilities to finance investments with long-term payoffs.

The way forward for Dacheng is unclear. It's rumored that the local government wants COFCO--the state-owned agribusiness conglomerate--to acquire Dacheng but banks reportedly oppose the move. The Changchun government has reportedly given the company some subsidies to keep it going.

CJ Group, an offshoot of the Korean Samsung conglomerate, is reportedly interested in acquiring Dacheng. CJ Group would become the world's leading lysine producer if it acquired Dacheng. The companies have had a partnership since 2006 and the CJ Group president reportedly traveled to Changchun to meet with the governor of Jilin. (CJ Group has its own problems--its CEO was arrested in Korea last year and his sister has taken over.) An unnamed industry person warned China Business Journal that a Korean takeover would mean that Chinese people lose pricing power for a critical feed additive, and "when we eat pork or chicken, it would not be at the same price as now."

A provincial investment group acquired a 49% interest in Dacheng during August and China Business Journal says it is reportedly negotiating with other Chinese companies to make a further move.

Dacheng's plight comes at a bad time for China's corn industry which is already suffering from a severe corn glut.

Sunday, September 20, 2015

China to Reform Bloated Farm Subsidies

Chinese authorities are intent on overhauling their bloated farm subsidy program after it spiraled out of control in its first decade. They urgently need to move on to a new generation of subsidies, but they have encountered unexpected problems in trial programs.

Economic Observer reports that agricultural subsidy programs are in the midst of a major reform. Business Reference News reports that the 13th Five-Year Plan (2016-2020) will alter grain subsidies and reform the fiscal system for disbursing the funds.

Economic Observer says there has been a lot of criticism of agricultural subsidies for their cost, ineffectiveness, and complexity. There are 50 major agricultural programs, and according to some estimates their annual cost is over 1 trillion yuan (nearly US$ 160 billion). There have been a number of motions and proposals to reform agricultural subsidies put forward at National Peoples Congress sessions during the last several years. At this year's session, the chairman of Wahaha Group called for a reform that would reduce the financial "albatross" and shift the program from a general entitlement for the rural population to one that benefits real farmers.

Officials have been experimenting with farm subsidy reforms. While the new programs look good on the drawing board, they underestimate the cleverness of farmers, local officials, and businesses to find loopholes.

Economic Observer learned that the experimental "target price" program for cotton met with many unexpected difficulties this year. Besides being extremely complicated and costly to implement, it gave cotton warehouses designated to buy cotton a kind of monopoly which enabled them to depress the price paid for the cotton. This raised the gap between the "market" price and the target, and thus expanded the subsidy payment. There were also reports of collusion between farmers and cotton dealers to maximize the subsidy payments.

One of the big criticisms of "grain" subsidies is that payments go to rural land-holders whether they plant grain or not. Many rent out their land to actual farmers who don't get any subsidies. This year, a new pilot program will lump three grain subsidies into a single payment, and it will take subsidies away from those who don't grow crops and instead give payments to new "appropriate scale" farmers who rent land from dozens of land-holders. However, Economic Observer learned that land-holders in Shanxi and Henan Province are raising the rents they charge to the "appropriate scale" farmer-tenants in order to recover their "lost" subsidies. Thus, the additional subsidies to "appropriate-scale" farmers may be eaten up by the higher rents they have to pay.

The subsidies are also hard to keep track of. With over 50 major agricultural programs, and the costs of each supported by budgets of multiple government departments at the central, provincial, and county levels, the accounting is a tangled mess and money often fails to arrive. A Chinese Academy of Social Sciences scholar revealed to Business Reference News that the initiative to consolidate three grain subsidies into a single payment is closely related to a major fiscal reform to simplify tangled government accounting that has received a lot of criticism for many years. He said that agricultural subsidies have been the biggest fiscal headache.

The National Development and Reform Commission's plan is to implement "target price" subsidies for corn, soybeans, cotton, rapeseed and sugar after successful experimentation, then introduce them for wheat and rice. However, cotton and soybean production both plummeted in the regions where the target price subsidies were trialed during 2014/15. The pilot program for consolidating grain subsidy payments is planned for national implementation in 2016--after just one year as a pilot program. This program could be disastrous if "appropriate scale" farmers have to pay higher rents while crop prices are declining.

Saturday, September 19, 2015

China Cuts Corn Price Floor 11%

Chinese authorities lowered their floor price for corn for the first time since the program began as they battle bloated stockpiles and surging imports of corn-substitutes.

A September 18 document from China's Grain Administration announced a "temporary reserve" price for corn of 2000 yuan per metric ton for 2015/16. This is an 11-percent cut from the 2014/15 level and a return to the level set in 2011/12. This year's price floor is equivalent to $8 per bushel, more than twice as high as corn prices in the United States.

The beleaguered temporary reserve program will operate only in China's four northeastern provinces from November 1 to April 1 (about a month earlier than in previous years). This year, the program will set a single floor price for all four provinces instead of setting different levels for Heilongjiang, Jilin, and Liaoning/Inner Mongolia as had been done since the program was first launched in 2008. The discount/premium for different grades is 50 yuan/metric ton.

Reflecting the concern about moldy corn in the stockpile, the program requires that corn purchased must be properly dried and meet national standards for moisture and mold. It also includes vague language demanding that local governments finance purchase of substandard corn to fulfill their obligations under the "governors responsibility system" for food security.

Reflecting the lack of storage space, the program gives instructions for renting warehouses and it sets subsidies of 70 yuan/metric ton for construction of open-air or temporary storage. The document authorizes three state-owned companies (COFCO, Chinatex, and China Aerospace) to supplement Sinograin in purchasing corn. The purchasing cost (presumably subsidized) is set at 50 yuan per metric ton.

The cut in corn price was forced by mounting stockpiles as corn production rose, consumption tailed off, and high Chinese prices attracted imports of substitutes -- sorghum, barley, distillers grains, and cassava. The government purchased and stockpiled successively-larger volumes of corn over the past three years. Auctions of the corn attracted little interest because prices were too high.

The "temporary reserve" of corn has swollen to 158 mmt according to calculations by Chinese analysts who added up purchases and sales over the years. However, the total corn reserve is 200 mmt--nearly an entire year's supply and more than a year's consumption--according to a National Development and Reform Commission official's speech to a corn industry conference this week. The official described that total as "far beyond the reasonable level" and he said it shows clearly that supply exceeds demand. The NDRC official raised concerns that some production areas have so much corn that officials are unable to buy it, can't store it, can't sell it, and budgetary shortfalls threaten "trouble after a big harvest."

At the same meeting, the deputy director of the National Grain and Oils Information Center surmised that China has reached "a new plateau in which supply will exceed demand" and there will be downward pressure on prices for several years.

The 2000-yuan/mt price floor is slightly below current corn prices in the northeastern region. Prices there currently range from 2040 to 2140 yuan. Normally this region--the major surplus area--has the lowest prices for corn but prices are artificially high due to the stockpiling program that operates only in that region. Corn prices in parts of Henan, Hebei, Shandong, Shaanxi, and Anhui Provinces are around 1900 yuan, and 2000 yuan in southern Jiangsu. There may be further downward pressure on prices once the newly harvested corn comes on the market.

The cost of imported grains is still less than the 2000-yuan floor price. The cost of U.S. corn is estimated at 1658 yuan and distillers grains is 1639 yuan, including duties, taxes and unloading fees. Imported U.S. sorghum is estimated at 1825 yuan.

The temporary reserve program has disrupted corn marketing in China by elevating prices in the main surplus region. There is incentive to ship corn from low-price areas into the northeast to sell to the reserve instead of shipping it south. Shipments from the northeast to the south shrank this year as more northeastern corn went into the reserve. At ports in southern China's Guangdong Province the price is 2300-2310 yuan/mt--kept relatively low by availability of imported substitutes. Prices are 2500 yuan or higher in Shanghai, Zhejiang, Hubei, Hunan, and as high as 2800 yuan in Yunnan.

Further west, high prices for corn and plunging prices for cotton stimulated a surge of western-China corn production. At a panel discussion held at this week's corn industry conference, a feed industry executive from Sichuan said feed mills there had stopped buying corn from the northeast this year, instead purchasing locally or shipping in corn from Xinjiang.

In his speech to the corn conference, the NDRC official suggested that China intends to move away from interfering with farm prices while experimenting with measures to regulate the flow of imports. Support for farmers will be decoupled from market prices by moving to "target price" subsidies once experience from pilot programs has been evaluated.

Instead, officials intend to shift their heavy-handed tinkering to imports. The NDRC official called for a "global vision" on food security which entails "coordinated" use of domestic and imported resources. He offered a number of vague principles for "managing" imports, making them more predictable and stable, diversifying imports, estimating the volume of imports needed for each commodity, stronger testing of imported commodities, "integrating" imports with reserves, and improving the registration and monitoring of imports.

China's Minister of Agriculture made similar comments in his recent discourse on sustainable agricultural development. The Minister said, "We don't oppose imports." Rather, he said, the key is to better regulate to flow of imports and exports to optimize the development of domestic production and domestic industries.

Tuesday, September 15, 2015

Study Xi Jinping's "Rural Thought"

President Xi Jinping is trying to engineer an historic overhaul of China's rural economic and political system. He appears to be adopting approaches that echo the Mao era, which is ironic since Xi's challenge is to uproot deeply-entrenched institutions put in place by Mao himself.

Earlier this month, a "Xi Jinping San Nong Thought" seminar on rural affairs was held in Beijing in conjunction with the celebration of the 60-year anniversary of the "war to resist Japanese aggression." Xi was not there personally and the seminar had no connection to the war or the Japanese. A procession of reliable apparatchiks gave speeches explaining "Secretary Xi Jinping's" concern about agricultural and rural problems and his approach to addressing them.

Xi was not physically present at Minister of Agriculture Han Changfu's Q&A with unidentified journalists on September 14 either. But Xi's name was invoked five times by Minister Han in his discourse on China's new strategy to make agricultural and rural development sustainable. Initiatives to restructure agriculture, integrate agriculture with industry and services, provide rural financial services, attack rural poverty, and overhaul the agricultural market system all have Xi's fingerprints and represent a grand strategy to completely re-engineer China's agricultural and rural economy.

The title of the "Xi Jinping San Nong Thought" seminar, sponsored by the Peoples Daily official news media organization, is inscrutable to the uninitiated. "San nong" refers to three Chinese words sharing the character "nong"--agriculture, the countryside, and rural people. Exhortations to "study" (学习) Xi's "thought" (思想) appear to subtly link Xi to "Mao Zedong Thought" of the 1960s and '70s which is still recited by officials as the foundation for communist party dogma. However, Xi does not dare take on the title of "chairman"--officials refer to him as "General Secretary" (of the communist party) or "Comrade."

Like Mao, Xi's "thought" is expressed by short, pithy couplets that are self-evident and are used as slogans or mantras to communicate official communist party dogma. The seminar kicked off by reminding officials that they can't neglect the countryside as they pursue shiny cities, airports, and trains. The first guiding thought is Xi Jinping's paen to the communist party doctrine of pursuing an "all-round well-off society" pronounced at a December 2013 meeting:
"If you want to know whether we're well-off or not, take a look at the countryside." 
During an inspection tour of Jilin Province this year, Xi put his own spin on the "san nong" doctrine with his "three can nots":
"Agriculture cannot be ignored; we cannot forget farmers; we cannot be indifferent to the countryside."
Another set of couplets obliquely spell out Xi's emphases on nationalism, strong governance, the physical appearance of the countryside, as well as the importance of integrating the rural economy with the broader economy:
"For China to be strong, agriculture must be strong;
For China to be beautiful, the countryside must be beautiful;
For China to be rich, the countryside must be rich."
His exhortation to maintain basic food security is embodied by this mantra:
"The food bowl of the Chinese people must always remain firmly in their own hands."
All of these sayings of Comrade Xi were cited at the seminar on his "thought."

Authorities seem insecure that there are still pockets of severe poverty--mostly in the countryside--after years of rapid economic growth, and officials worry that big gaps between cities and countryside and coast versus interior could fragment the country and lead to disorder.

Xi's rural doctrine emphasizes knitting together the country by making it easier to rural people to enter cities, breaking down distinctions between rural and urban real estate markets, setting up multi-province "corridors" of development, and forming economic linkages between agriculture, industry, and services. Manifestations of this doctrine are ambitious strategies to reform the urban hukou system, a plan to overhaul the system of agricultural markets (the topic of Xi Jinping's doctoral thesis 15 years ago), and an initiative to boost links between farmers and agricultural processing.

Xi calls for following a road to agricultural modernization that includes "efficient industry, safe products, resource conservation, environmental protection and environmentally-friendly production"--aspects that fell by the wayside in the single-minded pursuit of breakneck growth over the past two decades. Finally, another emphasis is a "beautiful countryside" which includes cleaning up trash and upgrading toilets in villages.

The doctrine calls for upgrading competitiveness of farms and businesses by increasing scale, using the latest technology (notably, "genetic modification" is identified as the first technology to pursue), with an emphasis on information technology both for production and marketing. The signature initiative is the push to create a new class of commercial-scale farm operators and create supporting infrastructure--banking and insurance services, technical advice, and a new subsidy system.

Officials are acknowledging and tackling long-neglected institutional bottlenecks.
  • The lead-off speaker at the Xi Jinping Thought seminar identified weak rural governance as a barrier to building a well-off society, said that many rural institutions lacked institutional design and legal rights are ill-defined. 
  • A set of articles in Farmers Daily last week pointed out that incomplete land rights and inflexible banking institutions prevent successful integration of farmers with industry and services which are needed to ensure that income flows to rural areas.  
  • Minister Han's discourse on sustainable development acknowledged that great improvements in production had been achieved at a high cost of environmental and resource degradation.
Fundamentally, Xi is attacking Mao-era institutions that are toxic to economic growth, outdated, and create disparities that threaten to undermine the Party's governance:
  • The urban-rural household registration system
  • collective rural land-ownership
  • taxation of agriculture to subsidize industry
  • provincial self-sufficiency 
These 50-year-old institutions erected barriers to movement of people and goods that prevent establishment of a national, cohesive, self-sustaining economy. The countryside was the locus of economic growth during the 1980s when Deng Xiaoping used it as a giant laboratory to demonstrate the benefits of a market economy. During the 1990s, Jiang Zemin and Zhu Rongji concentrated on reforming state-owned industry and created a generation of urban real estate tycoons. Hu Jintao and Wen Jiabao addressed rural atrophy by eliminating taxes on peasants and starting to pour money in the "new socialist countryside." Now Xi is attacking the institutions that preserve fiefdoms and keep the economy reliant on the easy but unsustainable wealth created by building things and exporting goods to wealthy countries.

The Mao-era institutions created a spoils system that generates considerable wealth for officialdom through real estate deals and cronyism between local industry and officials. With the hukou system, city officials got an underclass of cheap labor but could dodge budgetary costs for schools, social insurance and housing since rural migrants were officially the responsibility of the rural county where they were registered. Just as Mao created a larger-than-life image while hammering opposition to put these institutions in place, Xi appears to be using a similar style to move aside entrenched interests and dismantle these growth-killing institutions.

Looking deeper, it appears that Xi's approach will replace one set of cronies with new ones. There is no coherent theory behind Xi's thought other than a vague, undefined exhortation to "reform." Xi wants to maintain and reform anachronistic institutions from the planned economy like COFCO, state farm entities, and supply and marketing cooperatives set up to serve communes during the 1950s, and make them models for the new economy. Many operators of the new-style farms and cooperatives are rural officials. There is no sign of permitting private banks in the countryside. The Xi Jinping seminar noted that the majority of communist party branches are in the countryside and strict governance of the party is a vital task. Private companies and tycoons are welcome as long as they finance the massive investment in fixed assets needed in the countryside as their "social responsibility."

Saturday, September 12, 2015

Cracks in China's Non-GMO Soybean Strategy

Genetically-modified soybeans are illegally grown in parts of China's major soybean-growing region, according to a report from China Business Journal, a news media outlet. On September 9, the provincial agriculture commission announced an investigation of illegal soybean cultivation and says the culprits will be "severely dealt with."

A food processing company that buys soybeans in Heilongjiang Province told China Business Journal that it discovered GMO soybeans during 2013 and 2014 when it tested samples it had purchased in the province's Suihua prefecture. The company claims that GMO soybeans are widely grown in counties of that region.

No one knows where the seeds came from. One Heilongjiang field manager reports that seed from a trade show was surreptitiously sold. According to China Business Journal, Monsanto says they have never sold GMO seed in China. Other reports say that stealing and propagating seeds is commonplace in China. Chinese authorities have periodically reported intercepting seeds mailed into the country.

Some commentators speculate that the news is being spread by people who want to undermine China's ban on growing GMOs. Some cited Brazil as an example where an end to the ban on GMOs was similarly forced by widespread flouting of the ban by farmers. A farmer told China Business Journal, "We are all waiting for approval to plant GMO soybeans because everyone says they're much easier to grow."

This is the latest evidence of cracks in China's strategy of preserving GMO-free status for most food crops while allowing a controlled flow of imported GMO crops from other countries. The leakage of GMO soybeans into food processing industry was exposed this summer. The widespread planting of GMO corn in some areas is an open secret, and the Ministry of Agriculture promised to check for GMOs in domestic corn.

China has tried to compartmentalize soybeans: domestic soybeans are supposed to be non-GMO, while imports of GMO soybeans are permitted after the variety is approved by Chinese officials. By this strategy, Chinese officials hoped to preserve China as a reservoir of non-GMO soybeans. This strategy is now under stress due to huge price gaps between domestic and foreign soybeans and related products.
Data source: China National Bureau of Statistics retail price data.

National Bureau of Statistics data illustrate the divergence in prices between the two main food products using soybeans as raw material. Since 2013, the price of tofu -- made from non-GMO domestic soybeans -- has marched steadily upward. Over that same period, the price of soybean oil used for stir-frying has tumbled along with prices on the global market (see chart).

An important product of soybeans is the meal left over after oil has been extracted from the beans, a key ingredient for animal feed. Soybean meal prices have been on a long slide as supplies outpaced tepid demand from the livestock sector hit with avian influenza, shrinking hog herds, and disruptions of fish-farming last year. Since 2013, the prices of both major products made from imported soybeans have fallen--soybean oil 22% and soybean meal by 18%. Meanwhile, tofu prices marched upward by a cumulative 12%.
Note: Prices converted to an index where January 2013=100.
Data source: China National Bureau of Statistics and Ministry of Agriculture.

There has been a related divergence in prices of soybeans used for the different products. On September 11, 2015, the average price paid for soybeans to be used for food products like tofu was 4300 yuan per metric ton in China's main soybean-producing region, while the price for soybeans for oil-processing there was 3850 yuan per metric ton.

Imported soybeans are even cheaper. On Sept. 11, the price for imported soybeans arriving at Chinese ports -- Guangzhou, Qingdao, and Tianjin -- was 3150 yuan per metric ton -- that's 700 yuan ($112) less than the price of Chinese soybeans used for the same purpose, and 1250 yuan less than the price of soybeans used for manufacturing tofu, soybean milk, soy sauce, etc.

The gap between domestic and global prices gradually brought about the bifurcation of China's soybean industry over the past decade. Processors facing sinking prices for cooking oil and meal are under strong pressure to cut costs by using cheaper imported soybeans. Processors making tofu and other food products are more insulated from imports, and they have paid a growing premium for domestic non-GMO soybeans.

The divergence of Chinese and global prices since 2013 has created such huge price gaps that holes are developing in the compartmentalization. The incentive to "cheat" by using cheaper GMO soybeans for purportedly non-GMO products has increased along with the 25-percent price gap. The incentive for farmers to grow GMO soybeans has also strengthened.

At the farm level, growing soybeans for oil and meal in China has become a mostly unviable business. Farmers are moving out of soybeans, producing food-grade beans at a premium, moving over the border to grow them in Russia, or looking for ways to cut costs and make a profit--such as growing herbicide-tolerant GMO soybeans that require less work to keep weeds down.

Economics may also undermine China's similar strategy to cordon off its wheat and rice sectors for food security purposes. Authorities have indicated that they intend to continue supporting prices of those crops given their importance as staple foods.

Wheat and rice prices have followed a steady-upward climb similar to that for tofu. As Chinese officials pull the props out from under prices of other commodities, similar imbalances will manifest. For example, rapeseed production is plunging as its price falls and farmers shift to wheat which still has a support price.
Data source: China National Bureau of Statistics retail prices.

The bottom line is that a large country cannot successfully compartmentalize certain segments of its economy to open some to foreign trade while sheltering others from the global market. Leaks develop and officials must take ever-more complex measures to plug them. Chinese leaders tried to use soybeans as a single release valve for its excess demand for farm commodities while insulating domestic producers from the world. Now the flow through the release valve is too strong to control and cracks in the dike are forming.

Wednesday, September 9, 2015

Farm Prices Under Pressure in China

As China's fall harvest arrives, there is strong downward pressure on farm commodity prices. Downward pressure in international markets and weak demand in China are driving prices down as attempts to wall off the Chinese market from the world are crumbling.

News reports say the government is deliberating on how much to cut this year's support price for corn from last year's prices of 2220-2260 yuan/metric ton in northeastern provinces. However, early-harvested spring corn from Shaanxi and Xinjiang is already selling below 2000 yuan/mt. Prices are at or below 2000 yuan in in north China (Henan and Hebei) where some private warehouses are selling off their old corn from inventories to clear out space for the new crop--and perhaps they also anticipate a slide in prices. Chinese futures prices for January corn are trading even lower--well below 1950 yuan.

According to one calculation, the cost of U.S. corn arriving in China was estimated at 1593 yuan/metric ton, which was 119 yuan less than a year ago. China's imports of corn during July reached 1.11 million metric tons--nearly all from Ukraine--and imports of corn and its substitutes were at record levels in July.

In the final week of August, there was tepid interest in corn auctioned from Inner Mongolia reserves offered at 2350 yuan/mt. As market prices fall, interest in buying the government's expensive corn inventories wanes.

The temporary reserve program for corn operates only in the northeastern provinces (Liaoning, Jilin, Heilongjiang, Inner Mongolia). With expectations that the temporary reserve program will prop up prices in that region as prices fall elsewhere, corn processors in the northeast are at a disadvantage and have idled production lines. High prices from the northeast also attract shipments of corn from north China to arbitrage the artificial price difference.

China's wheat market is also under downward pressure. There were virtually no sales from the latest auctions of wheat reserves. Now, even the price of relatively scarce high-quality wheat is falling due to weak demand. Medium and small flour mills are operating at about 30% of capacity. According to Futures Daily, wheat traders in Henan Province say they have not been paid for quality wheat they sold to mills this summer.

Others in the industry say that there is still an insufficient supply of quality wheat in the domestic market. There is reportedly strong demand for imported wheat that has recently arrived at Chinese ports.