Sunday, August 31, 2014

High Land Rent Discourages Grain-Planting

Chinese villagers have been renting out more of their farmland in recent years as officials encouarged liberalization of land markets. However, rents have been soaring and officials are concerned that land rental is discouraging production of grain which doesn't generate enough income to cover the high rents. 

The latest alarm is sounded by Economic Observer's report on a land rental survey conducted by Shandong Province agricultural officials. The report found that 19.6 percent of the province's farmland has been rented or transferred. The more alarming finding was that only 32 percent of land was planted in grain after it was rented out. That's less than half the 70 percent of the land  planted in grain before it was rented out.

The rental rates for farmland in China have soared. Until the early 2000s, farmland was viewed as a liability since villagers had to pay tax on it. Many charged no rent, letting their neighbors cultivate their land rent-free. Land-based taxes were eliminated by 2006 and replaced with subsidies, and land is now a valuable asset. Farmland rents have soared along with the general real estate market in China. Many companies have sought to rent farmland, sometimes as a speculative land grab, sometimes sincerely hoping to make money farming. Land rents have soared from zero to a few hundred yuan per mu to over 1,000 yuan per mu in many places in 2014. That's roughly equal to about $ 1,000 per acre.

According to USDA data, United States cropland rents also doubled from 2003 to 2013, but they still averaged only $ 136 per acre in 2013, far less than in China.

A Shandong news article reports that a fruit cooperative's rent rose from 800 yuan to 1,200 yuan over five years. Land rent comprises half of the cooperative's production costs now. They think the rent could go up to 1,800 yuan in a few years. The article also finds that net returns to a cooperative growing four crops of spinach and melons in greenhouses each year are seven times the returns earned by a well-known grain farmer.

In one village, a company offered to rent land at 1,200 yuan per mu, but villagers turned them down. They expected to get 1,400 yuan.

The Shandong article cites another example of a company that rented 5,260 mu (870 acres) of land to grow medicinal crops and set up a tourism project. The company expects to net 5,000 yuan per mu. Thus, they can afford to pay much more rent than a grain farmer earning 1,000 yuan or less per mu.

Another Shandong article gives the example of Mr. Liang who returned to his hometown to take up farming when his construction business slowed. He rented 195 mu of land (32 acres) at 1,300 yuan per mu. His plans to raise livestock fell through, and he grew corn and wheat instead. He didn't even make enough money to cover the rent. His rental contract linked his rent to that of a local industrial park. His rent was raised to 1,600 yuan this year.

The situation is not unique to Shandong. A 2013 survey in Xinxiang, a prefecture of Henan Province with over 5 million rural families holding land rights, found that one-third of its farmland was rented. Rents in Xinxiang were generally over 1,000 yuan per mu and as high as 1,400 yuan. The report also raised concerns about the conversion of land from grain to high-value crops. It noted that some local governments in Henan had set up funds to subsidize land renters, but it said funds for such subsidies were insufficient.

One of the Shandong articles worried that subsidies for grain farmers are only 200 yuan per mu (about $200 per acre). Moreover, the subsidies are not based on actual production. The reporter complained that many land-holders still got "grain subsidies" after planting vegetables, fruit trees, or nursery crops on their land.

In 2013, the average grain yield in China was 358 kg per mu (2,173 kg per acre). At a price of 2.2 yuan per kg, the gross income would be 787 yuan. Even with a subsidy of 200 yuan there is not enough money to pay a 1000-yuan rent...and this is at a price equal to over $9 per bushel of corn--double U.S. prices now. Will China choose a path of high prices and subsidies to ensure that its farmers keep planting grain?

Wednesday, August 27, 2014

Crackdown on Animal Drug Abuse in China

A crackdown by agricultural authorities and police in Qingdao indicates that abuse of veterinary drugs in the production of poultry and other livestock is rampant in China.

In May 2014, the Qingdao Bureau of Animal Husbandry and Veterinary Medicine launched a six-month campaign to shut down illegal veterinary drug manufacturers and clamp down on illegal use of pharmaceuticals in the raising of poultry and livestock. One of the focal points of the crackdown is the city of Pingdu, major poultry-producing area. It is probably no coincidence that Pingdu was also the focus of a 2012 scandal when it was discovered that a major supplier to Kentucky Fried Chicken restaurants was raising chickens on as many as 20 drugs and failing to obey required withdrawal requirements before slaughter. At the time, Chinese news media focused blame for this "quick chicken" scandal on KFC while the core problem of on-farm veterinary-drug abuse received little attention. Authorities are now cracking down on problems, but the campaign is being conducted out of the public's eye with only modest publicity.

Officials celebrate their crackdown on veterinary drugs in Qingdao.

The crackdown includes shutting down black dens of illegal veterinary drug manufacturers as well as policing on-farm abuse of pharmaceuticals. It includes wide-ranging problems, such as production by unlicensed manufacturers, fake drugs, false or exaggerated claims, lack of testing documentation, absent or fake labels and registration numbers, and repackaging or reprocessing of banned substances. Livestock farmers are being watched for use of fake or forbidden medications, use of medications intended for human use, excessive doses, products that failed testing, excessive use of antibiotics, failure to stop drugs within required withdrawal periods before slaughter, illegal use of hormones, and adding illegal substances to feed and water. Many of these abuses were reported in the 2012 poultry-farming scandal uncovered in Pingdu.

During June 2014, Qingdao authorities staged an event where they destroyed a collection of illegal drugs seized from illegal manufacturers and farms. A worker gave examples of seized drugs: boxes that had no registration number or numbers borrowed from other companies; drugs from companies whose licenses had expired; products that claimed to treat numerous pig diseases when they actually were effective only for one.

The official warned that the drugs could harm humans who consume meat from the animals. He said that tests had detected ribavirin, an antiviral drug banned for use in animals. He claimed that the drug is retained in animals' bodies and can lead to antibiotic resistance if the meat is eaten by humans. He also warned against high levels of mold in animal feed which generates toxins that can harm humans, and may possibly be carcinogenic, according to the official.

Officials and police said they had dealt with 83 cases of illegal behavior related to veterinary drugs and feed additives since 2013. Four cases were referred to police and 13 people were arrested.

In August, Qingdao's Animal Husbandry Bureau reported taking actions to improve supervision of veterinary drugs and feed additives.  They formed a task force under the Bureau's vice director, set up systems to monitor manufacturers and farms, and planned to increase publicity and training.

The drug abuse problems are not unique to Qingdao. There was a brief national campaign in March 2014 and several other localities have launched crackdowns on veterinary drug manufacturers or included drugs in campaigns against fake farm inputs.

Building the world's largest livestock industry in a country that is also the leading producer of chemicals and pharmaceuticals is a dangerous recipe.

Wednesday, August 20, 2014

Taxes on Chinese Peasants Rebound

One of the Chinese communist party's great achievements during the last decade was to eliminate the "agricultural tax" and eliminate other taxes and fees on peasants. In an inspection of villages last fall, Chinese Ministry of Agriculture officials were alarmed to find a bevy of new fees and assessments being collected from rural residents. Officials warned local leaders to stop piling fees on farmers to prevent a revival of the "peasant burden" problem that caused widespread discontent during the 1990s. While it's easy to blame the resurgent taxes on greedy officials, it is unclear how all the new services and infrastructure mandated for the rural population are to be financed.

During October and November 2013, China's State Council sent inspection teams to 77 villages in Heilongjiang, Shandong, and Anhui Provinces to check up on the taxation of villagers. They interviewed peasants and inspected accounts. On August 13, 2014 MOA issued a document reporting on the problems and reminded local officials that eliminating financial burdens on peasants is the communist party's rural governance strategy.

While the teams found that rural officials had done a lot to reduce financial burdens on their subjects and most peasants were satisfied, they also uncovered a lot of fees and assessments on villagers.

Some problems uncovered:

In some rural schools in Shandong, students are charged fees for school supplies and services of 100 yuan without issuing a receipt.

Some peasants are assessed with surcharges for electricity generation projects that are double usual electricity rates for home use.

In some areas, women of child-bearing age are charged 500 yuan for insertion of IUDs and village clinics are assessed fines of 1000-1500 yuan by county health authorities.

Some families find that an 8.94 yuan service charge is deducted by the postal savings bank from their 50-yuan award for having a single child.

In Shandong, some village authorities demand a 5000-yuan deposit from villagers building a new house.

In Shandong, village organizations and farmer cooperatives are charged fees for "statistical information advisory services" (2000 yuan) and fees for "training in safe production" (200 yuan). Some Shandong villages spent 3000 yuan to send officials to track down migrants and ensure they are following family planning regulations.

In Heilongjiang, village organizations are charged 500 yuan for a librarian training fee and a 190-yuan fee for making an official village rubber stamp. Some Heilongjiang villages spent over 40,000 yuan on enumerators for the population census, and some spent 5800 yuan on plaques and signboards for family planning.

In Anhui, some villages are charged a 720 yuan fee to send university graduates serving as village officials to the provincial communist party school for training. A security project in Anhui charges villages 10 yuan per family for an insurance premium, 26 yuan for personnel costs, and a 2000 yuan contribution from the village. Some Anhui villages spent 2000 yuan on a cook for the primary school.

Unaccountable officials are inclined to increase taxes to enrich themselves and make themselves look good. Villagers have little influence over their leaders, so central officials have to keep checking up on millions of low-level officials.

Yet, village officials are also in a tight spot. Central officials mandate improvements in services and endless programs for farmers and villages like cooperatives, schools, clinics, electric grids, and road for a poor, widely dispersed population. The costs per head are often high, and the mandates often come without funding. Who will pay for more services and infrastructure?

Thursday, August 14, 2014

Chinese Rice Mills Cry For Subsidies

Articles in two Chinese government-run newspapers warn that shrinking margins threaten to push rice mills out of business. The inferred implications of the articles are that mills need subsidies to stay in business and imported rice should be blocked to restore "order" to the market.

Two remarkably similar articles on the dire situation facing China's rice mills appeared a month apart in newspapers that serve as Chinese communist party mouthpieces. An investigation of rice mills in Jiangxi Province appeared July 23 in Chongqing Daily. A second article appeared in Farmers Daily on August 13, describing a very similar crisis facing rice mills in Liaoning Province. The two articles with different authors stated very similar findings from their "investigations" in opposite ends of the country: a major area for producing long-grain rice in the south, and a major medium-grain rice-producing area in the northeast. Their similarity suggests either the authors were working from the same propaganda playbook or one author copied from the other.

Both articles emphasize the "paddy strong, rice weak" pattern that has been a theme of the rice market over the last 2+ years. The price of unprocessed paddy rice has been rising faster than the price of milled rice products, narrowing profit margins for mills.

The article on Liaoning attributes the weak rice price to the weak macroeconomic environment in China. Farmers Daily says many construction projects have ground to a halt in Liaoning, so bosses have stopped making bulk purchases of rice to feed workers. The article says purchases by workplace and school cafeterias have dried up. Both articles also blame low-priced imported rice for the weak rice price. Imported rice from Vietnam directly competes with long-grain rice in the south. The Liaoning article claims that it also puts downward pressure on the medium-grain rice price in northeastern China.

Both articles attribute the rising price of paddy rice to the government's increased price support and rising production costs. A grain bureau official quoted in the Jiangxi article has another explanation. He says mills "blindly" expanded capacity beginning in 2010 to qualify for participation in government rice auctions.  Mills competed to buy rice to fill their processing capacity, thus bidding up the price of unprocessed rice.

Both articles say mills are experiencing shrinking or negative profit margins. Many are closed or operating below capacity. Some mills operate at night when electricity rates are lower. Others automated packaging to save on labor. Nevertheless, many medium and small mills have unpaid debts and are having trouble getting credit. The Liaoning article says large mills continue operating at a loss to maintain their customer base. One industry expert says a shakeout of mills is on the horizon. The prospect of mills closing is said to be a pending disaster for farmers.

Both articles suggest that rice mills need subsidies to survive, but they are vague about the type of subsidy. Both also emphasize the importance of large mills as industry leaders and mention "disorder" in the market. Both mention that some large mills got subsidies to buy automated equipment or to build grain storage facilities.

The articles probably have been planted to justify subsidies for rice mills to build storage facilities, following up Premier Li Keqiang's announcement of such subsidies last month (see last month's post on "China's Subsidized Rice Glut."

A second reason for the articles may be to justify measures to block imported rice to restore "order" to the market as preparations are made to buy a new rice crop at inflated prices. Good Morning, Vietnam!

Tuesday, August 12, 2014

Mysterious Target Price Subsidy Experiments

In January 2014, China's central communist leadership's "Number 1 Document" officially announced a plan to launch experimental target price subsidy pilots for soybeans in northeastern provinces and for cotton in Xinjiang "Autonomous" Region. This subsidy will calculate the difference between a "target" price and the market price, then pay farmers a subsidy to make up the difference.

In April 2014 authorities announced the target prices: 19,800 yuan/metric ton for cotton and 4,800 yuan/metric ton for soybeans. However, no other details about have been announced. Which market price will be used to calculate the subsidy? How will the government verify the price and the amount planted/produced/sold by subsidy recipients? How and when will the payments be issued to producers? What happens if buyers prefer to purchase imported commodities?

Today's Economic Observer notes that none of these details have been announced with the harvest of the cotton and soybean crops is a little more than a month away. The article reports on what officials are saying about the mysterious new subsidy experiments.

Typical of Chinese government programs, central authorities sketched out the general terms of the program and told local authorities to figure out how to implement it. China's National Development and Reform Commission, Ministry of Finance, and Ministry of Agriculture set the terms of the pilot programs in April, but later made revisions. Local authorities had to figure out tricky issues like how to determine "the market price" when prices vary from region to region and over the course of the season. Officials were reportedly considering using prices reported on tax invoices to calculate the subsidy, but they worried that this would lead to misreporting of prices to defraud the subsidy program. Another major concern was how to issue the payments in a way that would ensure farmers actually get the money.

Reportedly, local officials are worried that farmers could experience lower incomes with the target price subsidy, and this is the main factor that has delayed finalization of the details. Economic Observer learned that local authorities have set the terms of the target subsidy pilots and they are now waiting for approval from the State Council.

According to Economic Observer, Chinese officials hope that the target price experiments will be successful so they can replace the failed price support programs used for other major crops: rice, wheat, corn, rapeseed, and sugar. Economic Observer says that minimum price and temporary reserve programs have led to large gaps between Chinese and international prices, diverted much of the grain supply into government reserves, and created huge financial burdens. Economic Observer reports that 70 percent of wheat inventories in Henan are now in government reserves, and it is estimated that costs of purchase, storage, interest and subsidies for wheat held in reserves total 400 yuan/metric ton, nearly 20 percent of the purchase price.

Officials hope they can gradually shift from price supports to target price subsidies to eliminate price distortions and aid farmers more efficiently. Interestingly, officials said almost exactly the same thing ten years ago when they set up the current system of decoupled subsidy payments and minimum prices.

What if target price experiments don't work? Professor Li Guoxiang of the Chinese Academy of Social Sciences has taken part in many meetings to discuss the target price subsidy program. Economic Observer quotes him as saying the new subsidy is a major systemic transition, but "there is a lot of risk behind it."

Monday, August 11, 2014

China Tightens Scrutiny of Imported Grain

China's inspection and quarantine authority issued a document ordering port officials to increase inspection and testing of imported corn, sorghum, and barley used for feed. While it purports to be a response to quality problems discovered in grain shipments, it is probably a disguised strategy to slow down imports that undermine officials' efforts to dispose of their huge, high-priced domestic grain stockpile.

The document issued by the General Administration for Inspection and Quarantine (AQSIQ) was dated July 29, 2014 and comes eight months after officials began rejecting all corn shipments containing any trace of MIR 162, a genetically modified corn variety that China's Ministry of Agriculture has not approved for import. The document showed up on several web sites August 11, but doesn't seem to be on the AQSIQ site.

The document observes that grain quality problems have become increasingly evident since imports of corn, sorghum, barley and other grains began increasing rapidly during the first half of 2014. The document cites frequent detections of genetically modified varieties, disease, toxic weed seeds, fumigants, and other hazardous substances. The document worries that most feed importers are small enterprises that lack knowledge of feed safety hazards. Therefore, inspection and quarantine authorities need to intervene to "protect consumers' health and the security of the production environment."

The document ordered port authorities to enforce GMO regulations according to law. It reported that MIR 162 has been detected in a cumulative total of 920,000 metric tons of corn, and most of the shipments were turned away. Local authorities are requested to strengthen inspection and testing of imported grain for GMOs, conduct tests before shipments are unloaded, and turn away shipments where unapproved varieties are detected.

The ban on MIR 162 alone wasn't enough to protect the corn market. Chinese buyers started importing sorghum as an alternative to corn. Since sorghum can't be caught in the GMO net, authorities are now ordering port officials to carefully scrutinize imported grain for a laundry list of potential violations.

The document demands that port authorities step up their inspections for a litany of other problems, including plant disease, biotoxins, pesticide residues, heavy metals, seed coating agents, fumigants, other residues, serious moisture, mold, excessive impurity content, chemical treatments, or quarantined insects.

AQSIQ calls for raising the level of honesty among foreign and domestic grain enterprises. Problems are to be reported to AQSIQ which will compile a black list of violators and send out alerts to potential buyers. Authorities will conduct more stringent inspections of companies considered "high risk."

The heightened concerns about alleged threats from imported grains are ironic given the growing attention on problems with domestically-produced Chinese grain. An auction of wheat produced in Henan and Anhui Provinces is scheduled for August 15, 2014. The announcement lists 500,000 metric tons of wheat with mycotoxins exceeding allowable levels (真菌毒素超标小麦). Feed mills and ethanol processors are eligible to buy the wheat.

On July 18, 500,000 metric tons of mycotoxin-contaminated Henan and Anhui wheat harvested in 2010 was put up for auction, of which 116,000 mt was sold at an average price of 1740 yuan/mt ($281 per mt). The price of this poisonous wheat is about 30 yuan less than the current cost of imported corn--if it can get past the customs inspectors' gauntlet of tests and inspections.

A July 17 article, "Hazardous Grain" in China Weekly magazine warned of "invisible mycotoxins," heavy metals in soil, and a soil-contamination survey by Renmin University that found excessive toxins in 11-to-43 percent of samples from 27 provinces.  A Renmin University Professor said, "Basically all of the soil in north China is contaminated." The Communist Party Secretary of Chinese Academy of Agricultural Sciences ascertained that mycotoxins are a serious problem in China's grain.

The general manager of a Beijing company that makes food safety testing equipment told China Weekly, "I’m afraid the next few generations will have to repay the environmental debts of the last 30-plus years.

Wednesday, August 6, 2014

China's Badly Timed Corn Imports

Chinese authorities are obsessed with stockpiling commodities to "stabilize" markets. However, their auctions of 2-to-3-year-old imported corn during July reveal their bad sense of timing: they imported corn during years of high prices and are selling it when global prices are low. This misjudgment is costing the Chinese treasury -- and corn users -- hundreds of millions, perhaps billions of dollars.

During July 2014, Chinese grain officials auctioned a total of 2 million metric tons of imported U.S. corn. Demand for the corn was strong because there is no other source of U.S. corn due to the ban on a genetically-modified variety (MIR 162) that China's Ministry of Agriculture has not gotten around to approving. Another 500,000 metric tons of imported corn was due to be auctioned today.

The auctioned corn was imported during 2011 and 2012--presumably by COFCO on behalf of grain reserve managers--and stored in various southern provinces. (COFCO controls most of China's import quota.) The auctions reveal that most of the corn imported during 2011 was stored in reserves. In July, 1.3 million metric tons of corn imported during 2011 was auctioned. Another 500,000 metric tons--mostly from 2011--was auctioned today. This suggests that all of the 1.75 mmt corn China imported in 2011 was stored in reserves. The other 745,000 mt of imported corn was purchased in 2012. This shows that China's imports do not necessarily reflect a deficit between supply and demand.

China imported corn during years of high prices in 2011-12 and sold it during 2014, a year of low global prices. China does have tight corn supplies now but the shortage is artificially created by storing much of the domestic supply in reserves and banning most imports this year.

The July auctions of  2011 imported corn sold to Chinese purchasers at an average price of RMB 2,204 per metric ton. That's about 4-percent higher than the average cost of imported corn in 2011 (RMB 2,119 per metric ton). That does not appear to even cover the interest cost. There should also be a 13-percent value-added tax due when the reserve corn is sold. The 2012-imported corn was only slightly better, selling at 7 percent above the estimated purchase cost.

The loss is actually much bigger since the corn could have been imported this year at much lower price. The price of U.S. corn plummeted when the drought in the Midwest U.S. eased last year, so lots of cheap corn is available on the global market. For example, South Korea has imported 2.5 mmt of U.S. corn so far this year at an estimated cost equal to RMB 1780 per metric ton. According to a calculation by the Dalian Futures Exchange, the theoretical cost of importing U.S. corn into China is RMB 1771 per metric ton, 14 percent less than the average cost of the 2011-12 imported corn.

If China's reserve-management geniuses had imported the corn this year instead of during 2011-12, they could have saved RMB 287 ($56) per metric ton. Importing 2 million metric tons of corn during a year of high prices cost them RMB 574 million ($93 million) extra.

The cost is even higher if one considers the larger quantities of domestic corn being auctioned. Yesterday, Chinese authorities tried to auction 2.7 mmt of corn from Heilongjiang but only 21 percent of the corn found buyers. The price averaged about RMB 2,200 per metric ton, 24 percent above the theoretical cost of imported corn. That price was equal to about $9 per bushel, more than twice what U.S. feed mills are paying for corn now.
Satellite image of Heilongjiang Province grain storage facility. Note 2 rows of steel bins at top edge, smaller temporary steel bins in the center, and rows of old thatched-style temporary bins below. Circles in the empty space at the center of the compound indicate more temporary bins were located there at some time.
Source: Google maps (satellite image).

No one has apparently raised concerns that the imported corn auctioned now contains the forbidden MIR 162 corn variety. It was approved in the United States in April 2010 and was marketed to U.S. farmers beginning in 2011. Chinese quarantine authorities did not bother to stop any shipments containing MIR 162 until November 2013. The imported corn held in reserves since 2011 and 2012 being auctioned now in China probably contains the banned variety that is shutting down imports. If Chinese authorities were consistent and also banned this reserve corn, they would take an even bigger loss. So maybe they are once again just looking the other way as banned corn enters the market.

The idea that stockpiles can be managed to stabilize prices is predicated on the assumption that government bureaucrats can outguess "the market" on where prices will go. The bad timing of Chinese grain reserve managers shows that this assumption is false.