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.

Tuesday, August 5, 2014

Rice Smuggling "Threat to Food Security"

During 2014, Chinese customs authorities have been engaged in a "green wind" crackdown on smuggling of agricultural products. Authorities claim successes but new publicity includes warnings that the smuggling is a threat to food security, suggesting that they remain concerned.
Chinese customs officials nab a truckload of smuggled rice

In April this year, this blog reported on the "green wind" campaign against smuggling of agricultural products. In July, customs authorities launched a new publicity campaign that mostly warns about the seriousness of rice-smuggling along the border with Southeast Asian countries, linking it to food security and "pressure" on domestic industry.

According to Legal Daily, the aggressive crackdown on smuggling in Guangxi Autonomous Region has pushed the smuggling trade to Yunnan Province. The Kunming customs authorities say they recently broke up two smuggling rings that have illegally brought in 60,000 metric tons of rice and corn this year.
Officials in a Yunnan Province prefecture bordering 
Vietnam discuss the rice smuggling crackdown

Customs enforcers describe the smugglers as "ants" that bring in small loads of 12 to 16 metric tons of rice late at night. The smugglers keep tabs on the whereabouts of customs officials and checkpoints to avoid being apprehended.

In a 2 am raid on July 16, enforcement personnel nabbed seven alleged smugglers, eleven trucks and discovered four storage facilities holding 210 metric tons of rice and 90 tons of corn. Officials claim this gang smuggled 40,000 metric tons of rice.

Officials say rice is first brought from Vietnam to Qujing City, northeast of Kunming (incidentally, this is also the site of the deadly earthquake this week). From there it is shipped by rail to Sichuan and Hubei Provinces for sale.
Rice smuggling route from Vietnam into central China

The smuggled Vietnamese rice is said to have a similar color and flavor to Chinese fragrant rice, but it is about 30 percent cheaper. However, the authorities also warn readers that moisture from improper storage turns the rice a yellow-green color or can become black with mold. Smuggled rice is either sold to noodle processors or mills, processed and sold, or mixed with domestic rice.

Smuggling appears to be a food security threat regardless of whether it's coming in or going out. At the northern end of the country, the "green wind" campaign is catching smugglers taking grain OUT of the country. Grain prices in Mongolia are said to be three times higher than in China, causing "serious" smuggling along Inner Mongolia's vast border. In Heilongjiang, traders without an export license illegally shipped corn to a pig farm in Russia.

Saturday, August 2, 2014

Chinese Corn Processors Corn Storage Subsidy

Chinese authorities--having run out of space to store their corn glut--will pay 61 starch and alcohol processing plants to hold government reserves purchased from the 2014 crop. The new subsidy is a small piece of the Chinese Government's complex juggling act in a highly distorted domestic corn market.

On July 24, 2014 the Ministry of Finance, National Development and Reform Commission, Grain Bureau, Agricultural Development Bank jointly issued a notice announcing subsidies for 61 northeastern corn-processing enterprises to hold corn purchased for the state's temporary reserve. The notice listed processing companies eligible for the subsidy in the three provinces where the largest volume of surplus corn has been purchased: Inner Mongolia, Heilongjiang and Jilin. The notice did not provide any details about the amount of the subsidy or how it will be paid.

Chinese authorities reportedly purchased 70 million metric tons of corn from the 2013-harvested crop for the "temporary reserve" (this doesn't include normal reserves held by the government). This corn was purchased by the government to prevent prices from falling and to ensure farmers would not be stuck with unsold corn. The 70-mmt temporary reserve purchases equaled nearly one-third of the 2013 corn crop. The temporary reserve program operated only in four northeastern provinces: the three provinces covered by the new storage subsidy plus Liaoning. Chinese news media report that some corn from other provinces was shipped to the northeastern region to take advantage of the high "temporary reserve" price plus another subsidy to ship corn from the northeast to southern provinces.

The new corn-storage subsidy pays industrial processors to store the government's corn because government granaries in the northeastern provinces have run out of space. Other reports say Sinograin--the government's reserve management company--has already been renting private grain depots to store reserves. The new subsidy expands storage capacity with another big crop expected about two months from now.

The subsidy also throws a bone to corn processors who have been losing money over the last two years. The recipients of the new subsidy are manufacturers of starch, alcohol, ethanol, corn oil, sweeteners and other chemicals using corn as raw material. (It does not include feed mills or grain storage and trading enterprises.)

The problems in China's corn processing sector reflect an earlier short-sighted effort by Chinese authorities to stoke corn demand when corn prices were depressed a decade ago. Authorities subsidized dozens of corn processing projects during the depressed corn market of 2000-04, but the National Development and Reform Commission released a document a few years later calling for limits on the industry. Now corn prices in China are three times their level in 2000 and most processors are losing money.

The July 24 notice listed 61 processors eligible for corn-storage subsidies. Their total corn-processing capacity was reported at 28.5 million metric tons (mmt): nearly 40 percent of the corn output in these three provinces--and doesn't include feed mills. These plants are probably operating at less than half their capacity due to negative margins. Prices of starch, sweetener, and alcohol products have been falling due to weak Chinese demand and falling global prices. Chinese authorities kept corn prices at an elevated level, a recipe for big financial losses in the processing industry.

COFCO--a giant state-owned agribusiness--is/was the leader in boosting corn processing. It's also the largest processor on the list of subsidy-eligible plants with 5.4 mmt of capacity in six plants on the list. This includes two fuel ethanol plants in Jilin City (1.8 mmt corn-processing capacity) and Zhaodong, Heilongjiang (600,000 mt capacity), both built in 2001. COFCO's Yushu plant built in 2006 can reportedly manufacture 410,000 mt of corn starch, 97,000 mt of corn fiber feed, 16,000 mt of corn oil, and 18,000 mt of corn germ meal from 600,000 mt of corn annually. Northeastern corn prices were about RMB 800 per mt in 2001 and are now about RMB 2400-2500 per mt.

China's new corn-storage subsidy echoes 1970s-era U.S. grain policy mistakes. The 1977 U.S. Farm Bill authorized a "Farmer Owned Reserve" program that paid farmers to store grain on their farms to serve as a buffer stock to stabilize the grain market. This culminated in budget-busting surpluses and the 1983 PIK program that paid farmers with surplus grain if they agreed not to plant crops. Government efforts to stabilize markets always end up creating a proliferation of  arcane programs and unanticipated chaos.

Thursday, July 31, 2014

China's Water Choice: Grain or Coal?

An official of China's Ministry of Environmental Protection dared to think clearly about environmental and energy issues. Recognizing that both coal and grain production require large amounts of water, the official recommended that China could scale back grain production in Shanxi, Shaanxi, Inner Mongolia and Xinjiang to free up water for coal production. Instead, China could import more grain from overseas, the official suggested.

The daring proposal was made by an environmental assessment inspector  at the "2014 China international energy summit" held in Beijing July 28-30.

The official was inspired to think the "forbidden thought" of importing grain when he visited Italy and found farmers protesting outside the parliament over the cancellation of a plan to export grain that had collapsed because they couldn't find a market.

The environmental official notes that many people in China say the country should never import grain. But he doesn't see why "food security" should be elevated above "energy security", noting that China imports 60% or more of its energy. He argues that the "cold war mentality" [of grain self-sufficiency] must be broken to relieve pressure on the "precious water resources" of coal-producing areas and revive their "fragile ecology." Importing grain from Canada, France, or Italy, he says, would also reduce pesticide and fertilizer use "a little bit."

The official addressed the concern that "everything China buys gets expensive." He says if China starts importing modest amounts of grain, prices may go up at first. But the "law of the market" may make prices go down in the long-run (as other countries expand output).

This official's proposal does not appear to reflect official policy, but it is significant that someone has begun a public discussion of environmental choices. Of course, this is China and appearances can be deceiving. As the story acknowledges, importing grain has always been a taboo subject and this story's appearance on grain market web sites is unusual. It's possible the story was planted by top officials laying the groundwork to open the market to "reasonable imports" of grain--one of the key points of the new food security strategy.