Thursday, February 11, 2016

Double-Cropping Unwanted Rice in China

China is the world's leading importer of rice yet it has huge amounts of rice in warehouses that no one will buy.

According to Grain and Oils News, authorities held auctions to release 101 million metric tons of rice from reserves during 2015, but only 5.3 mmt of it was sold. There was little interest in any types of rice:

  • 18 mmt of early-season indica rice was offered but only 3.8% sold; 
  • 38.9 mmt of medium grain rice was offered, but only 4.8% sold; 
  • 43.7 mmt of long-grain rice was offered but only 6% sold. 

Grain and Oils News focuses on the early-season rice as the nexus of the problem. Authorities have offered about 500,000 tons of this rice every week since October, but there have been virtually no buyers.

The early rice crop is planted in early spring, harvested in mid-summer and followed by a second crop harvested in the late fall. The early rice doesn't taste very good, so much of it is used as government food reserves, as animal feed, or for liquor or food processing. The early rice competes directly with imported Vietnamese rice which is cheaper. In Guangzhou, early rice from Hunan cost about 14% more than Vietnamese rice during January.

The demand for early rice as animal feed is also declining because the price of corn has been declining and imports of other feed ingredients like sorghum and barley are much cheaper.

Since the 1960s, Chinese communist officials have alternated between prodding farmers to grow the crop when they were worried about food supplies and discouraging them from growing it when there is a glut. In 2007, a Peoples Daily article warned that farmers in southern China were switching from two rice crops to a single crop, leaving fields idle for part of the year. The following year an article in Xuexi Shibao, a journal for communist officials, warned that the idle rice fields were a threat to national food security. By 2011, officials rolled out a program to revive double-cropping of rice by subsidizing rice seedling farms, greenhouses, and transplanting equipment, giving villages financial awards for keeping fields fully cultivated, and cajoling villagers into subcontracting their land to farmers who promised to plant two rice crops.

The extra rice produced as a result of these programs was bought by the government to prevent prices from falling and has been held in warehouses ever since. The early rice offered for sale in recent months was produced two-to-three years ago in 2012 and 2013. The decline in early rice output began in the late 1990s--during a previous glut--and has stabilized in the last ten years (if we can believe the statistics). There has been a robust increase in output of single-crop rice which is also in surplus.

Ironically, Grain and Oils News proposed cutting back on planting of early rice as a strategy for easing the glut of unsold rice. He recommended reversing the recent policy by encouraging farmers to switch back to growing a single rice crop annually . The Grain and Oils News author referred to the current party line of preserving production capacity to argue for cutting back from two crops to one. In short, he calls for reversing the big campaign to promote early rice planting which officials said was necessary to avert a food security catastrophe. As recently as 2014 Peoples Daily warned that farmers giving up rice double-cropping was a hidden threat to food security.

Last month, the government announced that the minimum prices for most types of rice will be held steady from last year for the 2016 crop. However, the early rice price was cut slightly to 133 RMB/50kg from last year's 135 RMB/50kg. This slight reduction is described as an improvement in the minimum price mechanism. Presumably, the early rice price was cut because it competes directly against cheaper imported rice.

Tuesday, February 9, 2016

China's Wheat Inventory Pressure Grows

Chinese authorities announced the minimum price for the 2016 wheat crop last October, nine months ahead of the marketing season. Their decision to hold the wheat price steady at RMB 2360 /metric ton -- the same level as the last two years -- may result in a serious glut of low-quality wheat this year.

Authorities thought they could insulate the wheat market from declining prices in the rest of the world by clamping down on imports -- 90 percent of the wheat import quota is awarded only to state-designated trading companies who presumably can only import when the government gives them permission. However, the wheat price is facing strong downward pressure as the price of corn and related feed materials has fallen significantly below the wheat price.

Grain and Oils News warns that China's wheat market will face heavy pressure to sell off stockpiles in the months after the spring festival holiday. During January, the government held auctions to offer 4.6 million tons of wheat from reserves, but less than 25,000 tons sold. (When a similar amount of wheat was offered for auction in January a year ago, 57 percent of it sold.) The article reports that stockpiles of wheat are up significantly in many regions this year. Grain and Oils News estimates that there is 39-to-40 million tons of excess wheat that was purchased at minimum prices and needs to be released to the market. With another harvest coming up in May-June, the March-April period will be critical for offloading the wheat.

China's wheat and corn markets are linked through the use of wheat as animal feed. During 2012-13, when corn prices were high, over 20 million tons of wheat were used for feed in place of expensive corn. In addition, milling the wheat crop produces bran used as feed which is equal to about 20 percent of the wheat crop. Now that corn prices have fallen below wheat prices, the amount of wheat used for feed has shrunk by about half, according to estimates by USDA and China's National Grain and Oils Information Center. Grain and Oils News points out that the surging supply of imported substitutes for corn has also cut into feed demand for wheat.

The link between wheat and corn prices is evident from the simultaneous drop in both prices in Shandong Province after the September 2015 announcement of a 10-percent cut in the support price for corn. The decline in wheat prices was stemmed by the October 23 announcement that the wheat price would be held steady in 2016. Putting a floor under the price of wheat makes traders less inclined to accept lower prices for wheat. They need not worry that holding the wheat longer will result in a loss since they're assured the price won't fall.

Wheat ends up stuck in government warehouses where interest and storage costs are subsidized. The government offers wheat for auction at starting prices that would recover the acquisition cost of the wheat. At those prices, however, there are few buyers. Grain and Oils News observes that there is little chance of changing the auction policy, so success rates will remain low for the auctions.

With the "flame out" of feed demand, flour-milling is the only source of demand for the wheat. Grain and Oils News says the demand for common wheat is soft while there are insufficient supplies of wheat with special characteristics. National Grain and Oils Information Center estimates that use of wheat by flour mills declined from 97.1 million tons in 2012/13 to 90 million tons in 2015/16.

With excess supplies of common wheat and weak demand, the government will not be able to offload its inventory. Grain and Oils News advises dealers to make rational plans to sell wheat bit by bit to avoid dumping large volumes on the market that would depress prices.

Friday, February 5, 2016

China's Statisticians Admonished by Communist Inspectors

A Chinese Communist Party discipline inspection team berated the National Bureau of Statistics for poor communist party discipline and ongoing violations of President Xi Jinping's anti-corruption campaign, a reminder of the highly politicized nature of Chinese statistics and the incentives for corruption in the statistical system.
Discipline inspection team announces findings at National Bureau of Statistics.

An article from the Central Commission on Discipline Inspection web site re-posted on the National Bureau of Statistics site reported on a January 31, 2016 meeting where an inspection team berated the bureau's communist party organization for weak leadership, poor party discipline, failure to fulfill responsibilities, and failure to establish party organizations at the grass roots level. The inspectors found a number of problems at the bureau, including improper employment and promotion practices, officials who used "data" for personal gain, abuse of power, and violations of President Xi's "eight regulations" such as excessive office space. The inspectors accused statistics officials of failing to do their jobs and complained of continued problems with "bureaucracy" and "lazy government."

The inspectors' inquisition came several days after the chief of the Bureau, Wang Bao'an, was fired for serious disciplinary infractions. Wang had only been at the statistics bureau for half a year, and his sins were apparently committed when he was in much more lucrative positions overseeing massive public works investment.

A year ago, the statistics bureau held a meeting where the previous director reminded the bureau that falsification of statistics is a type of corruption that should be severely punished.

A commentator writing on the Caixin web site recalled the "fake statistics = corruption" admonishment and pointed out that some believe misleading data has prevented the government from capably managing the economy in recent years. There is strong pressure from officials to produce statistics that show success which can be reported to higher level officials, resulting in promotions and awards.

An example of the absurdity of a politicized statistical bureau is a questionnaire administered by the National Bureau of Statistics last year which found that 91.5% of the public is satisfied or relatively satisfied with progress on the communist party's clean government and anti-corruption campaigns. How could the bureau have possibly reported any other result?

Besides corruption and deliberate falsification, there may be more fundamental problems. Political reliability trumps professional competence in selection of personnel. Why would clever and capable statisticians take up employment in such a highly politicized organization? Even if the statisticians are good, the quality of their surveys depend on respondents telling the truth when they fill out the forms.

In a press conference to discuss the new GDP statistics in January, a reporter asked former bureau chief Wang how the bureau is adjusting its methods to monitor such a rapidly-changing economy where new companies are springing up, old ones are going out of business and new ways of doing business are appearing. Wang talked about plans to make improvements in the future but could not say how statistics are keeping up with changes already happening.

Thursday, February 4, 2016

GMO Corn an "Open Secret" in NE China

Chinese authorities have waffled between funding research on genetically modified crops while stoking fears of imported GMOs. As they dragged their heels on approving transgenic crops for commercial use, there is mounting evidence that Chinese farmers are growing them illegally. 

The Chinese communist party's "document no. 1" released last month called for "strengthening research on transgenic agricultural technology and its supervision, carefully spreading results on the basis of safety assurances."

Is it a coincidence that a week later it is announced that the Chinese state-owned company ChemChina plans to pay $43 billion for the Swiss company Syngenta whose products include transgenic crops? This deal appears to be in line with the "strengthening research" part.

The admonitions about "supervision" and "careful" dissemination of transgenic crops may be about a decade too late. A detailed Greenpeace survey of the corn industry in Liaoning Province caused a stir when it reported that genetically modified material was found in nearly all the samples collected from fields, seed dealers, and products in supermarkets. 

No genetically modified corn varieties have been approved for commercial sale or use in China, so planting GMO corn for sale is illegal. Genetically modified cotton has been available to farmers for about 15 years, but no other GMO crop is legally planted for commercial use on a large scale. Dimsums reported on planting of GMO corn more than a year ago. This follows allegations of widespread GMO soybean production in Heilongjiang last year and detection of GMO rice in supermarkets. 

China Dialogue's bilingual article on the Greenpeace report quoted a well-known seed industry expert from China Academy of Agricultural Sciences who said, “The reason there is such a large area of illegal GM corn is that this has been going on in Liaoning for a decade, regulation has been lacking.”

According to a China Times article, the spread of illegal GMO seeds  in northeastern China is an "open secret". An unnamed seed industry person told China Times that farmers prefer pest-resistant seeds, which are all transgenic. (However, some of the purportedly pest-resistant seed varieties are fake and do not resist pests, according to this person.) The seed industry person went on to blame small companies illegally selling seeds developed by multinationals as the source of the problem. 

China Times notes that the government has not produced an authoritative report on the amount of GMO crops illegally grown in China.

Several localities have launched crackdowns on genetically modified corn seed sales. A letter sent out by Liaoning's seed bureau threatened to report serious violators to the police. It was reported at a meeting in Jilin Province that three seed companies in the province had their licenses revoked for illegally selling GMO corn seeds. 

A Renmin University professor told China National Radio that sellers of genetically-modified seeds are like drug dealers and should not be tolerated. 

Greenpeace is unable to say how the GMO seeds got into the country. But inspection and quarantine authorities have periodically reported catching people mailing in genetically modified seeds or carrying them in suitcases. On January 27 (incidentally, the same day the "No. 1 Document" was released) an executive with a Chinese seed company pleaded guilty in Iowa to stealing seeds from test plots, propagating them on rented plots of land in the U.S., and sneaking them into China hidden in luggage or in popcorn canisters. 

Tuesday, January 26, 2016

China Will Liberalize its Corn Market...One of These Days

A Peoples Daily article this week signaled that China will allow its corn price to be determined by market forces. Although there is "consensus" that the corn market needs to be liberalized, nothing concrete was revealed about how or when the reform would take place because the details are "complicated."

The article repeated and amplified remarks made in a January 10 speech by Chen Xiwen, the vice director of China's leading group on rural work. The Peoples Daily article was part of a series explaining the broader strategy of supply-side restructuring that China is pursuing in 2016.

Like the steel and housing sectors, China's grain production has overshot consumption, and a huge unsold inventory has piled up. Chen Xiwen said one of the priorities this year is to prevent this stockpile from growing even bigger.

Different from steel and housing, China has tried to prop up domestic grain prices by limiting  imports of grain and buying up surpluses to protect farmers' incomes. Chen Xiwen explained that China's grain prices are now far higher than prices in the international market. This is due to a policy of raising support prices to cover rising production costs, appreciation of the Chinese currency, and a decline in freight costs since 2009, said Chen.

The loophole in this price-support strategy is the lack of quotas to control imports of commodities that can substitute for corn. The substitutes include barley, sorghum, distillers grains, cassava, and cassava starch. Chen estimates that these substitutes displace about 50 million metric tons of domestic corn--about 20% of China's corn output, he said (this blogger calculates 22% of 2015 production of 224.5 mmt).
Calendar years. *2015 through November.
Substitutes=barley, sorghum, DDGS, cassava, cassava starch.

According to customs statistics through November, imports of corn and its substitutes for the calendar year were over 40 million metric tons, up from about 10 mmt in 2009 (the first year China began importing DDGS). The substitutes are omitted from most balance sheets. If they are added in, China's consumption of grain and related products for feed, starch, and alcohol production looks surprisingly robust over the past two years.

Chen says that holding domestic corn prices above the international price results in a confusing paradox in which grain production grew 12 years in a row, yet imports grew in parallel and grain inventories rose to a record level. He also notes that the production of corn doubled in 15 years while soybean imports grew to 81.7 mmt during 2015. Chen suggests that the increase in corn production overshot demand, and he suggests that corn production would be equal to demand if it were cut.

According to Chen, corn will be liberalized to let market supply and demand determine the price. The government will no longer be the main actor in the corn market--there will be diverse buyers and multiple distribution channels. Farmers need subsidies to ensure they receive reasonable income, Chen said, but the subsidies for farmers will be separated from the price. The government will give them a cash payment instead of holding the price at a high level.

A substantial decline in corn price has already occurred for many farmers, especially those in regions not covered by the temporary reserve price support program. Peoples Daily cites the example of a large-scale farmer in Shandong who received 1680 yuan/metric ton for her corn this year, down from 2100 yuan last year. Chen explains that the government has already reformed the price mechanism for soybeans, cotton, and rapeseed and is experimenting with target price subsidy payments to replace price supports.

While Chen said "everyone" agrees that the corn market must be liberalized, the timing and details of how it would occur are "complicated." Thus, there is no concrete announcement about when this would take place--will it be next month, in May, September, next year, or several years from now? No clues, leaving futures traders and other market participants exposed to a quantum change in corn price at the government's whim (and officials wonder why China's futures market is not used to set global prices...)

Chen and Peoples Daily revealed that they do not really trust markets. Market outcomes are great as long as they don't threaten China's "food security", reduce income of farmers, or result in domination of the market by foreigners. Officials have calculated that there is not enough grain traded in the world to meet China's needs if they were to import more. Therefore, Chen said rice and wheat will continue to have minimum prices since there can be no question of their production falling short of demand. Chen did not address smuggling of rice, the imbalances and distortions that would result when the price of corn falls to half the price of wheat, nor the plight of the rice- and wheat-milling industry which is unable to raise product prices to cover high raw material costs.

Rather than let farmers decide on their own to plant less corn as the price falls, the Ministry of Agriculture has concocted a giant plan to switch corn area to other crops in a "sickle"-shaped region extending from the frozen northeast through the parched northwest and into the mountainous southwest. The plan will begin this year. Officials are exploring land retirement and fallowing programs. Production costs will be reduced by cutting back on chemical fertilizer and pesticide use. Farms are expected to become more competitive by enlarging the scale of their operations, developing services for farmers, and improving seeds and other technologies.

Saturday, January 23, 2016

Non-GMO Soybean Supply Shortfall in China

China is learning that not all soybeans are equal and you have to pay a premium if you want to consume and produce "non-GMO" products. China's shortage of non-GMO soybeans was one of the main topics of discussion at a meeting on the soybean market held by the Ministry of Agriculture during December 2015 in Heilongjiang Province. The area planted in non-GMO soybeans in China has been shrinking year by year while the demand for non-GMO cooking oil, food products, and protein supplements has grown. Meanwhile, the price of imported soybeans--which are predominantly genetically-modified--has been falling.
According to data from the National Grain and Oils Information Center, the price gap between Chinese soybeans for food processing and imported soybeans grew to 1000 yuan per metric ton in mid-2015. The gap narrowed after domestic beans came on the market in the fall, but there is still a roughly 25-percent gap in price. This is a big change from past years when prices were comparable between the two types of beans.

Until recent years, China thought of soybeans and other farm products as generic commodities, but now there are distinct segments in the soybean industry. The dominant portion consists of processing soybeans to make cooking oil which now utilizes imported soybeans almost exclusively. Several smaller segments require use of non-GMO soybeans as raw material: non-GMO cooking oil, food products like tofu, and soybean protein used as ingredients for other foods or nutritional supplements.

China's soybean imports soared to 81.7 million metric tons during the calendar year 2015, a number that China's Economic Daily called a challenge to the country's "protein security." The import volume was up 10.3 million metric tons, despite a slowing economy.

China's own soybean production is shrinking. At the December soybean conference it was estimated that domestic soybean output was about 10 million metric tons in 2015, down 2 mmt from the previous year. Reportedly, some farmers in Hunan Province have switched from cotton to soybeans as cotton prices plunged, but production in northern regions has been declining as farmers switched to corn and rice. A new plan aims to focus on building up a "green" soybean production base in Inner Mongolia in coming years. At the meeting other northeastern provinces cried out for government aid to supply farmers with seeds, to build irrigation facilities, and give support to Heilongjiang's "weak" soybean processing industry.

Falling international prices make it hard for Chinese non-GMO soybeans to command a premium. Despite tight supplies of domestic Chinese beans, their price has been falling, just not as fast as the price of imported soybeans. At the soybean industry conference it was estimated that the food processing industry needs about 10 mmt of soybeans annually, of which an estimated 3 mmt of imported GMO soybeans are used surreptitiously by food processors and the volume was said to be growing steadily. This substitution of cheaper imported beans--called an "open secret" over two years ago--was said to be a chief reason why domestic non-GMO soybeans cannot command a sufficient premium to bring forth a greater supply.

At the industry conference it was said that the soybean-based protein supplement industry has very strict standards that prohibit use of GMO soybeans--because a large portion of their products are exported. GMO soybeans are reportedly easy to obtain at soybean wholesale markets in southern coastal regions. Some operators imported far more soybeans than they could use in order to get letters of credit which they lent out short-term at high interest rates on the gray market. They dumped their excess beans in wholesale markets, contributing to the leakage of imported soybeans into the food processing industry.

advertisement for soybean protein isolate--a "non-GMO soybean product"

Four years ago, the Ministry of Agriculture held a meeting to hail China's soybean industry as a global supplier of non-GMO soybeans and protein products. Exports of soybeans and protein products were booming by 2013, but now they are being undermined by the shortfall. Customs statistics through November 2015 show that China's export volume of soybeans--used for food products in the U.S., Japan, and elsewhere--fell to 121,700 metric tons, down 38 percent from the same period in 2014. China's exports of protein concentrate products totaled 94,000 mt, down 22 percent.

Meanwhile,customs statistics show that imports of soybeans from Russia--non-GMO beans grown by Chinese farmers over the border--were up to 320,000 metric tons during January-November 2015, a ten-fold increase from the same period in 2014. The average unit value of the Russian beans was reported at $364 per metric ton--or about 2330 yuan--while imported South American soybeans averaged $425 and U.S. beans averaged $453. The low Russian prices are due to the collapse of the Ruble.

Thursday, January 21, 2016

Hogs Rebounding in China? Pick Your Statistic!

Are China's hog producers rebuilding their herds after a two-year decline, or is the industry still in the doldrums? Two different statistics issued by Chinese government agencies provide conflicting answers. You can pick the statistic that fits your point of view.

Most market analysts follow monthly reports on changes in hog inventories issued by China's Ministry of Agriculture (MOA) which indicate a suspiciously constant number of hogs on farms throughout 2015 following a sharp drop late in 2014.
An "official" hog inventory number buried in the National Bureau of Statistics GDP report this week reveals an expansion of 30 million head during the second half of 2015. This follows a 50-million head decline in hog numbers during the first half of 2015. One would have to dig out the numbers from obscure quarterly reports (the hog number was omitted from the third quarter report) in order to discover this apparent bounce in hog numbers. The trajectory of hog numbers has important implications both for the supply of pork and its price during the upcoming peak-consumption season at the Chinese new year as well as the demand for feed.

Should authorities sell some of their frozen pork stockpile during the holidays, or are farmers gearing up to supply hogs during the peak consumption season? Will barns be too depleted of hogs after the holidays to absorb the supply of soybean meal and corn?

There are even bigger discrepancies in measures of pork output. NBS reported that 708 million hogs were slaughtered during 2015, but the Ministry of Agriculture's (this was issued by the Ministry of Commerce until two years ago) monthly report reveals that only 214 million hogs were slaughtered in "above scale" plants during the year. The NBS number of hogs slaughtered has consistently been over three times the "above-scale" slaughter number, and this year the discrepancy widened. If the two slaughter numbers are accurate, it means that the proportion of hogs slaughtered in large, sanitary slaughter plants is actually declining despite crackdowns and withdrawal of licenses of small slaughter facilities over the last few years.
The two slaughter statistics tend to move in the same direction each year, but the NBS number tends to be more optimistic. This year the change in hogs slaughtered was similar for the two statistical series for the first time since 2010, but the percentages differ. The NBS reported a 3.7-percent decline in slaughter, but the slaughterhouse statistics imply a 9-percent decline.

The bottom line is that we really can't discern much about the current trend in China's hog market from these statistics. Nor is there any way to evaluate the quality of these statistics since there is no detailed documentation explaining the methods and samples.

The fog created by conflicting statistics is ironic because a 2009 program to stabilize the hog market called for issuing a whole series of statistics--including the inventory and slaughter numbers--to inform hog producers so they could make better decisions about expanding or contracting their herds. The statistics are reported on an official government web site, but producers seem to still be in the dark about market conditions. The program did not stop an excessive build-up of inventories in 2012 that was followed by a two-year liquidation of sows that may be still underway.

The MOA numbers suggest that sow numbers continued to decline in November and December. One industry analysis calculates that there has been a cumulative decline in sow numbers of 23.7 percent over 27 straight months since August 2013. The 11.8-million decline in sows the analysis calculates suggests a decline in hog output of 140 to 175 million (using a ratio of finished hogs per sow of 12 to 15), yet the NBS numbers show a decline in hogs slaughter from 2013 to 2015 of only 8 million.

The inept statistical work further reveals the futility of Chinese leaders' attempts to improve on free markets by tinkering with stockpiles and other interventions designed to stabilize prices. The 2009 regulation for stabilizing the hog market called for buying up pork during periods of depressed prices and selling it during periods of short supply. Successful market-tinkering like this presumes that government planners have superior information and foresight based on timely and accurate statistics on supply and demand, but their statistics actually shed little light on the situation. How can planners in a Beijing office building have a better feel for the market than the people who are in the market buying and selling on a daily basis?

Don't plan on conducting your own survey, because the government will probably arrest you for creating "confusion" in the market by providing an alternative to its official statistics.