Monday, February 16, 2015

Zhejiang-Heilongjiang Grain Tie-up

A joint venture between provincial state-owned companies reflects the resurgence of the State in grain marketing as Chinese officials cajole rich provinces into taking more "responsibility" for their grain supplies.

The Zhejiang Province Rural Development Group announced that it signed an agreement to form a grain-marketing venture with the Heilongjiang Province State-owned assets commission. The venture will produce, store, and transport grain from Heilongjiang to Zhejiang.

One of China's problems is that it is producing massive volumes of surplus, high-cost commodities in its peripheral provinces--corn and rice in Heilongjiang and Jilin, cotton in Xinjiang, pork in Sichuan. The central government bears the financial burden of subsidizing the storage and transportation of these commodities since agricultural hinterlands don't have much money and wouldn't spend it on agriculture if they did. The central government pipes money to farmers since it can't afford to let discontent boil over at the fringes of its empire. Meanwhile, rich coastal provinces like Zhejiang find it cheaper to import commodities. Last month, the central government announced that coastal provinces are now expected to take on more of the burden. This Zhejiang-Heilongjiang hook-up appears to be a manifestation of this strategy.

The Zhejiang company will invest 225 million yuan to set up the Heilongjiang Xinliang Grain and Oil Group. The Zhejiang company will have a 60% share, and the Heilongjiang commission will have 40%. In other words, rich Zhejiang is putting up most of the money to build assets located mostly in Heilongjiang. The "strategic cooperation framework agreement" between the two provinces calls for setting up an integrated production-storage-transport-trade grain industry conglomerate. In the first three years, the project will concentrate on constructing a "grain resource base," processing, storage, and depots for grain in transit (presumably from Heilongjiang to Zhejiang). Within five years, there are plans to build a 1.5-mmt grain-production base, 1.5-mmt of reserve storage capacity, and a port facility in Yingkou (Liaoning Province) capable of handling 150,000-mt to be shipped south to Zhejiang.

The project is expected to develop close relations between producing and consuming areas, will have a major role in ensuring Zhejiang's food security, and will "strive for profitability."

China's Agricultural Investment Vacuum

China's leaders have ordered their minions to overhaul the country's agricultural sector. The orders began with the top communist party leadership at their "economic work conference." The directive was repeated in the party's "No. 1 document" for 2015, and now the Ministry of Agriculture has issued a document putting top priority on a structural upgrade of the agricultural sector. The restructuring is wide-ranging, ambitious...and doomed to fail.

The document suggests that officials are afraid to make hard choices in their planned overhaul of agriculture.
  • Officials want to increase returns to farming, but they warn against abandoning grain production even though it brings low net returns.
  • They want modern farming and mechanization, but they also call for promoting traditional culture and beautiful rural scenery.
  • They want to promote environmentally-friendly farming and recycling of wastes, but they also call for cultivating idle "waste" land, grazing animals on mountainsides and idle cropland during the winter, and growing crops on land placed in a land retirement program.
  • They endorse the "decisive role of the market in resource allocation," but they call for a raft of subsidies and they have a 3-year zoning plan to designate "permanent cropland" around cities and transportation networks.
The main reason the restructuring will fail is that Chinese officials--who do not do any farming themselves--see themselves as the prime movers of this agricultural transformation. Chinese officials have already spent years subsidizing and cajoling farmers, lecturing rich men about their "social responsibility," and ordering banks to make loans. But in order for an agricultural transformation to occur, the people who control the land must be enticed to make long-term investments in it.

China aspires to make the leap to "modern agriculture." But modern farming is one of the more capital-intensive industries around, and that means a lot of investment per worker. Yet, in China's investment-crazy economy--where the gross capital formation ratio has risen from about 35% of GDP in 2000 to 48% of GDP during 2011-2013--agriculture attracts a puny amount of capital.


 Source: calculated from China Statistical Yearbook.

According to the National Bureau of Statistics, agriculture, forestry and fisheries accounted for 2-to-3 percent of fixed asset investment consistently from 2003 (when they began reporting these figures) until 2013. This was far below agriculture's share of Chinese GDP--which has fallen from about 15% in 2000 to 10% now. Agricultural and food processing--a smaller sector--gets more fixed asset investment than agriculture.

Nearly all the farmland in China is controlled by rural households who own it collectively, but they have little inclination to make long-term investments in it. Investment by rural households began to grow over the past decade, but investments were primarily in housing (the blue line in the chart above). It's well-known that rural families plough much of their savings into rebuilding their houses--the one physical asset they have full control over and an advertisement of their wealth. Other investment by rural households is in educating their kids, weddings and funerals, hospital expenses, and nonagricultural businesses.
Source: China Rural Statistical Yearbooks.
 
With little investment by the rural households who "own" the land, Chinese agriculture relies on investment by companies that have a tenuous hold on land and government investment programs. The new plan to overhaul agriculture calls for improving financial services for agriculture, and reserve requirements have been lowered for agricultural lenders. The program also falls back on creating hundreds of demonstration areas, subsidized loans for building high-yielding fields and irrigation infrastructure. Notably, the plan also includes a directive to tighten supervision to prevent shoddy construction of "high-yield" fields, perhaps an indicator that some of these fields are not-so-high-yielding.

An article about the purported bankruptcy of a large-scale farmer in Chongqing suggests that the refurbishing of Chinese farms is not as easy as it appears. The article describes a farmer who rented over 10,000 mu of land (1,650 acres) from over 2600 families in 46 village groups to grow high-end rice. He had to raise wages to attract laborers, but could only hire old people. He bought machines but had to rely on hired laborers to cultivate 60 percent of the 8500 scattered plots on hilly land. Costs per mu of manually-planted and harvested land were three-fold higher than mechanized land. Much of the irrigation infrastructure was dilapidated, dating from the 1960s and '70s. He says he invested in upgrades, but only addressed 30% of needed improvements. His field advisors were mostly old men who had little technical knowledge. The Chongqing farmer claims he lost 2 million yuan, accumulated debts to pay laborers and buy pesticide, before finally abandoning the venture. The reporter claimed to have seen fields planted with trees, covered by fish ponds, or left fallow. The farmer claimed he was owed 300,000 yuan in government subsidies when he went bankrupt.

The article claims that many large-scale farming ventures are running into similar problems. It concludes that risk is often underestimated and farmers need more subsidies, better information and other services, and more bank loans. The Chongqing agriculture commission claims that its survey found that agricultural cooperatives only got loans equal to 2% of what they needed. In addition to interest, agricultural borrowers have to pay service changes for loan guarantees and fees to evaluate collateral, raising the effective cost of loans. A farmer in Shaanxi Province told the reporter that he went to a banker who laughed and said, "Why would I lend you money for farming?"

China's Odd Corn Import Diversification

In 2012, Chinese officials were alarmed to discover that 99% of the country's corn imports came from the United States. They immediately rushed out to sign up Ukraine and Argentina as corn suppliers. Later, they signed up Bulgaria.

An article reviewing China's 2014 corn imports concludes that China did indeed diversify its corn imports. Corn imports were down 20% during 2014, and all of the decrease reflected reduced imports from the United States due to rejections over the MIR162 issue. Imports from Ukraine, Thailand, Laos, and Myanmar increased. The Guoji Shangbao (Global Business News) article announced that the U.S. share of China's corn imports fell to 40%, "comparable to the proportion from Ukraine."
Source: dim sums analysis of Chinese customs statistics.
 
This is a curious strategy for a country obsessed with "food security." The largest and most reliable corn supplier in the world is knocking on your door, offering to sell you as much corn as you want. So you rush out to sign agreements with regimes with a history of political instability and debt crisis. You make a multi-year commitment to a country that has an actual war in its territory threatening its crops and make it your featured new corn-supplier.
 
So maybe China was worried that the United States would use its monopoly position as a corn-supplier to gouge Chinese buyers. But now the Chinese government is using its monopoly position to force its corn buyers to pay twice as much for corn as their competitors in other countries, so maybe Chinese officials are not all that concerned about price-gouging.
 
In reality, a monopoly over a particular commodity is hard to establish because there are substitutes. Chinese officials may not have realized that there are substitutes for corn. Imports of distillers dried grains, sorghum, and barley have poured in...and the United States was the main supplier. China managed to break the U.S. monopoly of its corn imports by brute force, but instead the U.S. supplied China with 11.2 mmt of sorghum and DDGS.
 
Note: combined imports of distillers dried grains (DDGS), sorghum, and barley.
Source: dim sums analysis of Chinese customs statistics.
 
 
So, what did China accomplish by banning U.S. corn for a year? The Ministry of Agriculture has approved the MIR162 corn variety, so this type of corn will enter the Chinese market after all. They equalized the shares of U.S. and Ukrainian corn imports last year, but created a big market for feed-quality sorghum, barley, and DDGS. 

Friday, February 6, 2015

China's Imports Displace Stockpiled Grain

China is in a dither about its swelling imports of agricultural commodities. The imports reflect a massive misallocation of resources. As China imported more commodities it also stored away massive amounts of its own harvest to keep prices high.
Note: Imports for calendar year of soybeans, other oilseeds, grains, distillers grains, fish meal, and cassava; policy purchases by the government at minimum prices or for "temporary reserves."
Source: dim sums blog using data from Chinese customs statistics.
During 2014, Chinese authorities purchased 123.9 million metric tons of grain to support prices under its minimum purchase price and temporary reserve stock-holding programs. That was 35 percent of all grain purchased in the country and 20 percent of China's entire grain crop last year. The volume of policy-style purchases was up 40.7 mmt from 2013. The director of China's grain bureau said that the government's price support programs encouraged the country's farmers to sell a higher proportion of their crop than usual despite the large  harvest last year. It was reported at the grain work conference that the programs increased farmers' income from crops by 55 billion yuan, or roughly US$ 8.9 billion during 2014.

The grain bureau will not tell you that their policies are extremely wasteful. During 2014, China imported 112 mmt of commodities while authorities were removing 124 mmt of domestic grain from the market to put in their stockpiles. This bizarre situation has intensified over the last three years. Imports have grown from 87 mmt to 112 mmt from 2012 to 2014 while the government's price-support purchases grew from 37 mmt to 124 mmt.

Note: Chart shows 2014 calendar year imports in million metric tons as reported by Chinese customs data. 

Of the 112-mmt import total, 71 mmt were soybeans. The other 37 percent of the total was composed of various oilseeds, grains, fish meal, and hay. The total also includes 8.7 mmt of cassava which is used as a substitute for corn and other starchy commodities for making starch, biofuel, alcohol, and feed. Barley, sorghum and distillers grain imports swelled to a combined 16.8 mmt, most of it to substitute for pricey domestic corn that went into government reserves.

While Chinese farmers were getting higher prices, U.S. farmers have seen a steep drop in their income. China's demand for imports boomed because global prices dropped over the last two years. In December, USDA's Economic Research Service estimated that U.S. farmers' gross receipts from crops dropped 25 percent during 2014. This is about three times the gain in Chinese farmers' crop receipts Chinese officials attributed to their price support programs during 2014.




Note: China's grain work meeting estimated that policy-type purchase programs, favorable prices, and post-harvest grain-drying increased grain producers' income by 55 billion yuan, approximately US$ 8.9 billion.

Saturday, January 31, 2015

China's Feed Output Declined in 2014

After a decade of spectacular growth, China's feed industry is stuck in the doldrums. China is now the world's largest feed-milling country, but the industry has been shrinking as it deals with an overall slowdown in animal production, high Chinese prices for raw materials, and sheds excess capacity.

A Chinese market analysis group, Nongbo net, estimated that China's output of manufactured feed fell 5 percent to 183.6 mmt during 2014. This would be the second straight year of declining output in the industry following a period of extremely rapid growth that outpaced growth in production of meat and eggs.
Source: Dimsums blog, using data from China feed industry association,
Nongbo net, China National Bureau of Statistics.

A global survey of feed mills by a company called Alltech estimated China's manufactured feed output at 182.7 mmt, the world's largest. The United States was number 2, with 172.5 mmt, and Brazil was a distant third, with 66 mmt. Like Nongbo Net, the Alltech survey also reported a decline in China's production during 2014. China's decline held back global feed output which grew only 2 percent during 2014, according to the Alltech survey.

These numbers are only estimates. The Nongbo estimate is based on feed industry association statistics that showed output was down 1 percent in the first three quarters of 2014. A strong fourth quarter was expected, but the fourth quarter turned out to be worse than expected. Therefore, Nongbo estimates that output for the year declined. 

One of the factors contributing to the decline is a massive re-licensing of feed mills conducted by the Ministry of Agriculture that reportedly shut down 30 percent of the licensed feed mills during 2014. The MOA campaign was related to stricter regulation of the industry to weed out mills that were not up to standard in their equipment and product quality assurance. The government-induced shake-out also follows years of complaints about excess capacity in the feed industry. While China's feed industry includes a number of large, sophisticated companies, thousands of small, low-tech mills stayed in business until the MOA stepped in to shut them down (or at least take away their licenses).

The Nongbo Net report also attributes the decline in production to a depressed livestock sector. They estimate that feed production for hogs, egg-layers, meat poultry, and aquaculture declined to varying degrees. Hog feed output was estimated to have fallen 5 percent after a big decline in hog prices early in 2014 and disappointing demand during the customary peak holiday season during the fourth quarter. Poultry output was severely affected by avian influenza. Many small scale egg producers quit. Feed for egg-laying hens was estimated down 11 percent and feed for meat poultry was estimated to fall 2.5 percent. This was the second year in a row of decline for the poultry sector. Aquaculture feed output was also hit by bad weather in southern provinces during the peak season. Aquaculture feed was estimated to fall 4.5 percent. Feed for ruminants was the only type of feed that increased, up 5.7 percent. Ruminants--mainly cattle and sheep--use less than 5 percent of China's manufactured feed.

Reports of the Chinese feed industry's depressed state appear inconsistent with China's booming imports of feed raw materials during 2014. However, the imports are substitutes for China's expensive domestic corn crop which is being stashed in government warehouses. Authorities bought up nearly 70 mmt of the 2013/14 corn crop and are on pace to purchase even more this year. As of January 25, 2015, authorities had purchased 39 mmt of the 2014/15 corn crop for the temporary reserve, ahead of the pace of 2013/14 purchases. The purchase program runs through April 30.
Source: Dimsums blog, using Chinese customs statistics for calendar years.

Most of the temporary reserve purchases are in the two leading corn-producing provinces--Heilongjiang and Jilin--which are also a long way from the top feed-milling provinces along China's coast and its southern provinces. The task of Chinese officials concerned with national self-sufficiency is to stop feed mills from buying American corn and instead force-feed them expensive, moldy corn stored in thatched bins in distant provinces.

Wednesday, January 28, 2015

China's Quality Wheat Shortage

A recent Chinese wheat market commentary is the latest to call attention to the shortage of high quality wheat in China.

China had a big wheat harvest during 2014, but the country is still short of certain types of wheat not widely produced in China. China's wheat predominantly has moderate levels of gluten, but western-style breads need wheat with high gluten, and crackers and cookies need low-gluten wheat. Both are in short supply in China.

Millers have reportedly been paying 2800 to 2900 yuan per metric ton for strains of Chinese wheat that are considered high quality. The cost of imported U.S. wheat for March arrival is estimated at about 1917 yuan/mt.

Flour mills are eager to get access to imported wheat, but only 10 percent of the import quota is made available to private-sector users. During January 6-8, the government auctioned off wheat from its reserves and linked the distribution of quota to purchases made at these auctions. Millers are so eager to gain access to import quotas, they bid aggressively at the auctions.

Then, on January 21 and 28 the government held more auctions. But this time they sold American wheat they had imported in 2013 and held in storage until now. Most of the wheat imported has been socked away in the government's "temporary reserve." They offered 196,000 metric tons during the January 21-28 auctions and about half of it sold at an average price of 2465 yuan/metric ton, or just under $400 per metric ton.

The purpose of the auctions was to add supply to the market ahead of the spring festival holiday season. By adding to the supply, there was speculation that this would bring down the price of high-quality wheat which had been driven by the lack of supply.

There were worries that this would leave the bidders from the January 6-8 auctions "embarrassed" that they had bid so aggressively to get access to wheat import quotas, only to have to government dump more quality wheat in the market two weeks later, driving down the price.

Chinese officials who run agricultural policy are still stuck in the past when wheat was a generic commodity that peasants grew and consumed themselves as noodles or steamed bread. Their silly food security slogan, "Chinese food bowls must be filled with Chinese grain," ignores the fact that Chinese malls all have European-style bakeries selling croissants and pastries that can't be made with Chinese grain. Their ham-handed approach to controlling markets is not appropriate for the increasingly sophisticated food market that is developing in China today.

Monday, January 26, 2015

Governors' Responsibility System Reveals China Grain Worries

China's State Council has issued a directive establishing a new provincial governors' food security responsibility system which demands that local leaders shoulder more of the responsibility for boosting local food supplies, storing the food and ensuring that the food is distributed to consumers who need it.

A number of articles in Peoples Daily and other outlets tied to the government have emphasized that this new system reflects the government's top priority on food security. The articles indicate that top leaders are frustrated with provincial leaders for slacking off and expecting the central government to be responsible for national food security. Chinese officials portray a sense of urgency about the food security situation despite the fact that China has a serious glut of most major commodities.

The provincial food security system charges both the communist party secretaries and the governors of each province with ensuring local food supplies. They will be held accountable by including food security in the evaluation system for officials, requiring officials to make reports to the State Council, and subjecting provincial leaders to "criticism," "rectification," or other penalties if they fall short.

The new system goes beyond the "governors' rice bag" and "mayors' vegetable basket" responsibility systems installed in the 1990s--those just ensured there is "enough to eat" but the new responsibility system demands that governors pay attention to the entire marketing system for grains. The new system reportedly goes beyond grains to include vegetable oils and potatoes.

Part of the responsibility is to boost local grain production. Governors are expected to finance provincial "grain risk funds" and pay for farmer subsidies that have stronger production incentives than the existing subsidies. They are expected to finance model farming projects and high-yielding grain production districts.

Grain storage and distribution is a big emphasis of the responsibility system. Governors are expected to hold provincial reserves to supplement the massive central government reserves which are mostly held in remote grain-producing provinces. They are supposed to crack down on the practice of "round-tripping"--shifting grain around to collect subsidies on phantom grain reserves. Provincial governors are supposed to establish a new grain marketing system comprised of public-private hybrid companies. Poorly-operated state-run grain companies are to be merged and consolidated. Private companies are expected to take ownership stakes in these new state-owned grain companies.

The new system appears to be based on frustration that rich coastal provinces neglect grain production and storage while excess supplies of grain rot in remote grain-producing areas. According to a Development Research Center official, government reserves of corn, wheat, and rice are at record levels and inventories of each grain exceed 50 percent of annual production. Another unnamed official said that huge amounts of grain go to waste in government reserve warehouses. Most of the grain has been stored at least 2 or 3 years and has degraded to the point where it can only be used as animal feed or other uses (like making fuel ethanol).

This sounds like a recipe for even more waste, confusion and statistical subterfuge as officials mainly concerned with skyscrapers, subways and industrial parks are ordered to construct model farms, warehouses, and establish bogus grain companies. All the while filing fictitious reports showing their superiors that everything is fine.