Thursday, February 16, 2017

High gluten wheat shortfall worsens

China has a serious shortfall of strong-gluten wheat this year, sending prices soaring, according to Grain and Oils News.

China's wheat predominantly has moderate levels of gluten which are suitable for traditional products like steamed bread, but western-style breads require flour with high gluten content. After decades of cajoling farmers to produce more of this type of wheat, it is still in short supply. This year's "central document no. 1" includes a directive to focus on producing high- and low-gluten wheat.

This year the shortfall is worse than normal for two reasons. First, there were widespread quality problems with the 2016 wheat crop due to rains and cloudy weather around harvest time. The weather problems affected the main strong-gluten wheat-producing regions, Henan and Hebei Provinces, Grain and Oils News said. The overall quality of wheat from last year's harvest is low.

A second reason for this year's shortfall is greater demand for high-gluten wheat due to stricter monitoring of flour millers. Authorities are cracking down on the use of a chemical additive that flour mills had used as a dough conditioner to take the place of scarce high-gluten wheat. The additive, azodicarbonamide, has been commonly used by flour mills in China. The country's food additive standard allows azodicarbonamide to be used in flour up to .045 g/kg. Its harmfulness to health is controversial but it has gotten bad publicity around the world and in China. Demand for strong gluten wheat has surged as millers give up use of the additive.

The price of one type of high gluten wheat, Xinmai 26, is up to 1.47 yuan/500g (about $422 per metric ton), according to a mill manager in Henan Province. Yet supplies are still hard to get so the price may be bid up further.

Analysts don't expect the shortage to be alleviated until the new wheat crop is harvested in the summer. So far, conditions for the winter wheat crop are favorable and a good harvest is expected.

Monday, February 13, 2017

Double Down on Corn-Buying Efforts in Jilin Province

Worried about the slow pace of corn purchases, officials in a northeastern China province have ordered local officials and companies to step up corn-buying efforts.

A February 3, 2017 circular issued by the Jilin Provincial government raised concerns that last fall's corn crop is being purchased at a much slower pace than usual. The 15.7 million metric tons of corn purchased as of last month's spring festival was much less than in previous years. Despite great efforts and special measures to ensure that farmers are able to buy this year's corn harvest, the document says there have been declines in price recently, buyers became cautious, and farmers are anxious to sell their corn. There has been a steady increase in unspecified new contradictions, new situations, and pressure on grain marketing.

Each local government and department must pay high attention, clearly recognize the new situation grasp the extreme importance, complexity, and arduousness of grain purchase and sale, and recognize the utmost importance of work on purchase and sale of grain, the document said. The circular calls for adopting "unconventional measures."

The document orders local officials and companies to double down on efforts to buy corn by encouraging diverse players to enter the market to buy grain. Officials must fulfill the obligations demanded by the provincial governor food security responsibility system. They should ensure implementation of subsidies for industrial processors and feed mills to buy corn. They should coordinate transportation of grain by rail and enforce the waivers of highway and bridge tolls for grain. Companies should process more, buy more, and build more storage facilities. COFCO's trading company, China aviation grain reserve company, and provincial grain companies are called upon to exercise their social responsibility to buy grain. The provincial branch of Sinograin is instructed to buy more grain when prices are falling and other companies exit the market, and to make large one-time purchases. Officials are instructed to form partnerships with purchasers and make credit available. Officials should arrange for technicians to advise farmers on preventing quality problems, but they should also encourage companies to loosen up quality requirements to allow farmers to sell corn with excessive levels of mold.

Bank Loans and Bulldozers for Agriculture

China is revving up its build-it-and-they-will come economic growth model to overhaul the countryside. China's Central Document No. 1 lays out an elaborate grand-sounding program for supply side structural reform of the countryside, but it boils down to doling out cash to mop up surplus commodities, bulldozing old stuff, pouring concrete, and creating a "market" for uncompetitive seed and farm equipment companies.

The cash sluice gate was opened by the strategic agreement signed between the Agricultural Development Bank of China and the Ministry of Agriculture in September 2016 which pledged to lend no less than 3 trillion yuan ($450 billion) to support agricultural modernization by 2020.
Created from Agricultural Development Bank annual reports,

According to the Ministry of Agriculture, the Bank had approved 24.7 billion yuan ($3.5 billion) in loans by the end of December and loans had been disbursed for projects worth 13.55 billion yuan ($2 billion). The Ministry said most of the loans were made to national-level dragon head enterprises for working capital to ensure they had enough funds to buy up crops from last fall's harvest. Companies got 100 million yuan each. The borrowers were given an extended repayment period to relieve them of financial pressure.

Now that the bank has funded the procurement of the fall grain harvest, it will focus on funding the priorities in this year's "Document No. 1", most of which involve bulldozers, pipes, other construction, and funds for loan guarantee companies. The top priority is food security and improving grain quality, and the featured program is "construction of high standard fields" for grain, cotton, oil seeds, and sugar production. This is basically a construction program covering a large contiguous area that levels fields, builds irrigation networks, access roads, levels fields, and builds sheds for tractors, grain dryers and anything else needed.
An airport road financed by the Agricultural Development Bank.

Most of the other priorities in the Document No. 1 are construction projects: agricultural industrial parks, science parks, service centers for land transfer, wholesale markets and warehouses,  and organic farming projects. Other loans will be for farm machinery and seed companies, databases for new "functional grain production areas," smart farming, drones, etc. Most will be funded by loans from the Agricultural Development Bank of China. Grants from the central government to grain-producing counties and other "awards" will help pay the interest.

The bank is branching out to fund a major push for poverty alleviation which aims to move 10 million people out of poverty this year. The program is a combination of physically moving people out of poor areas and starting up industries in poor regions. The bank is also making loans for clearing out shabby houses and constructing apartments to urbanize the rural population.

Since this is a socialist country where there is no private ownership of land, no one can be expected to make investments in it. Therefore, it becomes the government's responsibility to collect the money and make the investments. In practice, the economy becomes a scramble among officials for the funds, and the winners are those with the best connections and the most red envelopes. When the construction binge results in products unneeded by the market, a second round of cash follows to buy up the unneeded commodities and store them.

China Ag Imports Shrank in 2016

China narrowed its foreign trade deficit in agricultural products during 2016, according to figures reported by its Ministry of Agriculture. Data for January-December 2016 show the value of imports was $111.57 billion, down 4.5 percent from the previous year and the value of exports was $72.99 billion, up 3.3 percent. The deficit of $38.58 billion had narrowed by 16.5%, according to the Ministry of Agriculture's estimates.

China agricultural imports and exports, 2016

Exports Imports Net
(Billion US dollars)
72.99 111.57 -38.58
Change from previous year (percent) 3.3 -4.5 -16.5

The volume of soybean, wheat and rice imports for January-December 2016 was up, and the volume of pork imports doubled. Imports of corn, cotton, and sugar fell by about a third. Imports of yarn were also down. Imports of substitutes for corn--barley, sorghum, distillers dried grains, and cassava--all fell dramatically. Beef and milk powder imports rose, but lamb/mutton imports were down slightly. China exported 395,000 metric tons of rice (up 37.5%), 113,000 metric tons of wheat (down 7.4%), and 4,000 metric tons of corn (down 63%). Sunflower oil imports surged by 47% while imports of other vegetable oils shrank by double digits. (Other sources show sunflower oil shipments from Ukraine and Russia account for most of the sunflower oil increase).

China imports of main commodities, 2016
Commodity Import volume Change from prev.yr.

1000 metric tons Percent
Wheat 3,412 13.5
Corn 3,168 -33.0
Rice 3,562 5.5
Barley 5,005 -53.4
Sorghum 6,648 -37.9
Distillers dried grains 3,067 -55.0
Cassava 7,704 -17.8
Cotton 1,240 -29.5
Yarn (cotton substitute) 1,968 -16.1
Sugar 3,062 -36.8
Soybeans 83,913 2.7
Rapeseed/canola 3,566 -20.2
Other oilseeds 2,050 na
Palm oil 4,478 -24.2
Rapeseed oil 700 -14.1
Sunflower oil 957 47.0
Soybean oil 560 -31.5
Pork 1,620 110.0
Swine offal 1,491 82.5
Beef 580 22.4
Lamb/mutton 220 -1.3
Milk powder 846 15.2

The Ministry gave only a partial accounting of the value of imports and exports by category. Oilseeds and livestock were the two largest agricultural import categories by value, but together they accounted for 54 percent of the total import value. The value of oilseed imports declined, reflecting lower prices. The largest agricultural export item reported was vegetables, but their $14.7 billion value accounted for only 20% of the total agricultural export value. Vegetable export value was up 11%. Fruit was the second-leading export item listed, yet China's fruit imports were also significant. The value of fruit imports was roughly equal to the value of grain imports last year.

China agricultural import and export value, 2016

Category Imports 

Change (%) Billion
Change (%)
Oilseeds 37.0 -3.5 1.4 -3.0
Vegetables 0.5 2.0 14.7 11.0
Fruit 5.8 -1.0 7.1 3.6
Cereal grains 5.7 -39.2 0.5 13.6
Livestock 23.4 14.5 5.6 -4.2
Edible oils 5.1 -15.5

Cotton 1.8 -34.7

Sugar 1.2 -34.0

Thursday, February 9, 2017

China MOA S&D Estimates (Feb 2017)

The Ministry of Agriculture's China Agricultural Supply and Demand Estimates for February 2017 made only slight changes for the 2016/17 market year.

The estimate of China's corn imports for 2016/17 was cut to 800,000 metric tons, down from 1 million metric tons last month. The CASDE has shaved their estimate of corn imports from 2.4 million metric tons estimated in July and August last summer to 1 million metric tons November-January, and now 800,000 metric tons. The report's authors attribute the lower import number to China's corn prices gradually falling in line with international prices after elimination of the temporary reserve policy. CASDE says the price of imported corn with 1% tariff for arrival in southern China was 1700 yuan per metric ton in January 2017, which they say exceeds the cost of domestic corn by 120 yuan. They expect the price of imported corn to be in the 1650-1750 yuan per metric ton range during 2016/17. The average wholesale price in production regions is estimated at 1500-1650 yuan.

Estimated industrial processing of corn for 2016/17 was raised by 500,000 metric tons due to higher rates of production than expected. Total consumption of corn is estimated at 211.22 million metric tons. Production is estimated at 215.33 mmt (lower than the National Bureau of Statistics estimate of 219.55 mmt). CASDE estimates that production of corn will outpace production and inventories will rise by 4.4 million metric tons during 2016/17.

China corn supply and demand (Ministry of Ag, Feb 2017)
Item Unit 2015/16 2016/17 Jan 2016/17 Feb
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 1.0 0.8
Consumption MMT 194.09 210.72 211.22
--Food MMT 7.65 7.82 7.82
--Feed MMT 121.01 133.53 133.53
--Industrial use MMT 54.17 57.75 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 5.11 4.41

The soybean yield for 2016/17 was raised by 10 kg to 1758 kg per ha due to good growing conditions in eastern Heilongjiang Province that offset reduced yields due to drought in some other areas. Soybean production was estimated at 12.57 million metric tons for 2016/17. The output of high quality soybeans was lower than expected; more poor quality soybeans were used directly as feed. Imports of soybeans are estimated at 85.5 million metric tons.

China soybean supply and demand (Ministry of Ag, Feb 2017)
Item Unit  2015/16   2016/17 Jan  2016/17 Feb
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 1,748 1758
Production MMT 11.61 12.5 12.57
Imports MMT 83.23 85.31 85.31
Consumption MMT 96.67 99.77 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 2.48 2.58
Exports MMT 0.11 0.20 0.2
Surplus MMT -1.96 -2.16 -2.19

Cotton production and import estimates are also unchanged. Cotton production is estimated at 4.72 mmt, a little lower than the National Bureau of Statistics estimate of 5.4 mmt. Imports are estimated to be 900,000 metric tons, slightly more than the tariff rate quota. Cotton consumption was raised to 7.59 mmt due to improved global economic conditions since the third quarter of 2016 that is expected to raise demand for textile exports. The ending cotton inventory will be drawn down by year 2 million metric tons during 2016/17 to 9.13 million metric tons, but still more than year's consumption.

China cotton supply and demand (Ministry of Ag, Feb 2017)
Item Unit 2015/16  2016/17 Jan  2016/17 Feb
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 7.54 7.59
Exports MMT 0.02 0.01 0.02
End Inventory MMT 11.11 9.18 9.13

Soybean oil production was raised slightly by 10,000 mt.

China edible oils supply and demand (Min Agriculture, Feb 2017)
Item Unit 2015/16  2016/17 Jan  2016/17 Feb
Production MMT 25.3 25.85 25.89
--Soy oil MMT 14.74 15.16 15.17
--Rapeseed oil MMT 5.6 5.61 5.61
--Peanut oil MMT 3.01 3.18 3.18
Imports MMT 5.81 5.65 5.6
--Palm oil MMT 3.39 3.3 3.25
--Rapeseed oil MMT 0.77 0.8 0.75
--Soy oil MMT 0.59 0.58 0.58
Consumption MMT 31.17 31.41 31.43
--Urban MMT 20.41 20.8 21.4
--Rural MMT 10.76 10.61 10.03
Exports MMT 0.11 0.13 0.13
Surplus MMT -0.17 -0.04 -0.07

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

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

Tuesday, February 7, 2017

China's Farm Policy Math

According China's Grain and Oils News, the Heilongjiang Branch of China's Grain Reserve Corporation procured 35 million metric tons of grain in 2016. This branch claims to now have an inventory of 150 million metric tons of grain reserves purchased on the government's behalf.

The Heilongjiang grain reserve company brags that its purchases of grain raised incomes for farmers by 10 billion yuan ($1.45 billion). Wow! However, the company reports that the subsidies distributed to granaries last year to cover the cost of storing the grain was 11.5 billion yuan ($1.67 billion). cost 11.5 billion yuan to raise farmers' income by 10 billion yuan.

This doesn't count the shrinking book value of the grain, nor losses due to spoilage. Market prices for corn in Heilongjiang are now 1300-1400 yuan/mt, much lower than the support price for corn of 2220 yuan/metric ton they would have paid for corn in 2013 and 2014, and about 600-700 yuan less than the 2000 yuan they would have paid in 2015/16. Rice prices have been more or less flat. If they ever sell this grain they will not cover the cost of purchasing it.

Nor do they count the cost of corruption. Last August, 15 officials from Heilongjiang's Sinograin branch were convicted of receiving bribes. According to court documents, the communist party secretary got 1.96 million yuan, US$88,000, and two gold bars. This individual was also in charge of the granary at Lindian in Heilongjiang when it burned down in 2013, one of the biggest scandals ever in China's grain bureaucracy.

Sunday, February 5, 2017

China's Grain Supply Side Reform

Chinese President Xi Jinping decreed at last December's "rural work meeting" that "supply side reform" will be the slogan guiding rural policy in 2017. "Supply side reform" is a catch-all for fixing everything: overhauling the countryside by moving rural people into cities and consolidating farms, attacking pockets of rural poverty by moving people out and creating new industries, improving the agricultural product structure and making farming more profitable and competitive using "the two hands of government and the market."

One of the many targets of supply side reform is China's grain industry, which is suffering from one of the biggest mismatches of supply and demand ever created. In an interview with the official Xinhua News Service last month, the deputy director of China's State Administration of Grain pronounced that 2017 will be a key year for reform of the grain industry.

While celebrating the massive 43-percent increase in grain production achieved during 2003-2016, the official fretted over "structural contradictions" that are evident in the grain sector. He said corn and rice are clearly in excess supply, there is a shortage of high- and low-gluten types of wheat, and China has a huge deficit of soybeans. Now China is contending with growing pressure from "high inventories, high imports, and high costs" -- "urgent problems" that have created "huge financial burdens and waste of resources," the official said.

The geographic locus of grain production has shifted from its traditional concentration in the south to areas of northern China where the growing season is shorter and water supplies are limited. The geographic separation of grain production from final demand means that more grain needs to be stored and transported, but the official complained that China's grain distribution costs are twice as high as those in developed countries.

Disposing of corn reserves will be the top line priority for China's grain industry in 2017 (as it was last year). Specific measures include expanding fuel ethanol production, exploring other measures to use up corn, and more support for corn processors. The official promises to "coordinate departments to encourage more exports of processed grain products," "get a grip on imports," and crack down on smuggling of grain. Grain departments in coastal provinces will "guide" local companies to purchase more grain from grain-producing provinces. China hopes to speed up sales of grain from reserves through auctions, encourage a wider variety of companies to purchase grain, and encourage farmers and companies to store more grain. The surplus of grain notwithstanding, grain-producing areas will increase their grain production capacity.

The grain official pointed out that China has added much infrastructure for grain distribution and storage but the mechanisms for allocating resources are not effective. While China insulated itself from fluctuations in the global market, its price-formation mechanism needs improvement, resource allocation is distorted, and the grain industry is plagued by "high inventories, high imports, and high costs," the official said.

The grain industry plans to become more competitive by "deepening" reform of state-owned industry and consolidating grain companies. The official does not explain how competitiveness will be improved by combining small inefficient provincial grain companies to make bigger ones. A "mixed" ownership plan aims to attract private investors to put money into state-owned companies whose main advantages are their size and their pipeline to loans from state-owned banks.

The official promises China will build on the elimination of the floor price program for corn by investigating unspecified "improvements" in the minimum price programs for wheat and rice. The comments seem to endorse moving from a price system that rewards pure volume of production to one that gives farmers incentive to produce the high quality grain that is now demanded in China. The official calls for a marketing system that satisfies demands for safe food: stronger safety and quality assurance that prevents problems of excessive pesticide residues, heavy metal contamination, and spoilage.

A December article in China's Business Reference News probed more deeply into the grain policy angle of supply side reform. The minimum price policies for wheat and rice are expected to continue, but the "tough battle" will be for corn and soybeans. Disposing of corn inventories--reserves equal a year's supply according to Business Reference News--will be one of the toughest parts of supply side reform, the article speculates.

According to the National Development and Reform Commission, the new policy is to allow market forces to set the price for corn while giving subsidy payments to producers in the key corn-producing regions. Business Reference News reveals that the path forward for soybean policy, however, is not settled. The third year of the trial "target price" subsidy for soybeans is being completed in 2016/17, and there is disagreement about the policy's effectiveness. Some observers deem the target price pilot to have failed because soybeans are still not as profitable as corn. Others say it's still too early to tell. An official with a soybean industry association in the northeastern provinces endorses the target price as a "non-distorting" policy that he asserts is in the WTO's "green box". He urges government officials to consider keeping the program, especially since there is nothing else to replace it.

The Minister of Agriculture urged local agricultural officials to push structural adjustment of crop-planting in a February 4 meeting kicking off preparations for spring planting. He told local officials to "fight" for a 10-million-mu (667,000 ha) reduction in corn area planted this year--about 1.8 percent of the area planted last year. The Minister encouraged more planting  of soybeans and fodder crops, including corn for silage to support cattle and sheep production. Combining livestock and feed production is a major thrust of this year's work.