Tuesday, March 3, 2015

China Hog Statistics Stink

These numbers don't smell right. Analysts trying to track feed demand and meat consumption in China should not hope to do so with any degree of precision. Statistics on hogs are inconsistent both in the level of output and the growth. For other types of livestock the statistics are mostly nonexistent and even less accurate when available.

How much pork is produced in China? The National Bureau of Statistics (NBS) statistical communique says that 56.7 million metric tons of pork was produced from 735 million slaughtered hogs in 2014. That's 77 kg of pork per hog (this presumably excludes feet, skin, organs and head although these in fact enter the food supply...the average finished hog is around 100kg).

The official pork output equals 41.7 kilograms (91.7 lbs) per capita, or 1 hog slaughtered for every 1.8 persons in China. That would put China among the top countries in the world in per capita consumption. However, this number is probably inflated far beyond its real value.
Table 6-2 of The China Statistical Yearbook reports per capita consumption of pork compiled by NBS household surveys for 2013 totaled 19.8 kg (43.6 lbs) per person. That's less than half the amount of pork produced per capita. While this number can be expected to be lower than production per capita, since some pork is consumed away from home and some is wasted, it seems unlikely that these account for half of China's pork. (NBS stopped reporting separate urban and rural consumption numbers in 2013. The rural and urban household surveys have been unified and they now report a single national average for food consumption.)

A report on the official government web site says that 236 million hogs were slaughtered at "above scale" and "designated" slaughterhouses during 2014. This number was reported by the Ministry of Commerce until responsibility was shifted to the Ministry of Agriculture in 2014. It presumably excludes hogs slaughtered on farms and in small or illegal slaughter points, but it is only 32 percent of the number of hogs that NBS reports were slaughtered during 2014. The ratio of the two numbers has stayed at 32 percent for five years. It seems improbable that 68 percent of the hogs are slaughtered on farms and in small-scale or illegal slaughterhouses.

Let's assume that the designated and above-scale slaughtered hogs also average 77 kg of pork--that's 18 million metric tons of pork. Let's suppose that the "above scale" and "designated" slaughterhouses only serve the urban population of 749 million. That gives us 24 kg of pork per person, a number that is consistent with the per capita consumption number of 19.8 kg.

The Ministry of Agriculture's Livestock Yearbook used to publish a table showing the number of hogs slaughtered by different sizes of farms. Adding up the numbers in the table gave a completely implausible total of over 900 million hogs slaughtered in 2010. They stopped publishing these numbers in the most recent yearbook.

Numbers on the robust growth in output are also suspect. Each increase in NBS slaughter since 2012 was larger than the increase in "above scale" slaughter. It seems improbable that most of the growth in pork slaughter has been outside the "above scale" slaughterhouses, given that the rural population is falling, the share of the rural population that raises hogs has been falling, and the government claims to be closing thousands of illegal or substandard slaughter points.

The monthly data reported by the Ministry of Agriculture have shown a major decline in swine inventories  over the past year. In December 2014, the MOA reported that swine inventories were down 7.8 percent from a year earlier, and sow numbers were down an alarming 13.2 percent year-on-year.

The National Bureau of Statistics reported a more gradual decline in swine inventories of 1.7 percent during 2014. They did not report sow numbers. So, did the number of swine fall by 8 million last year (NBS), or by 37 million (MOA)? It's up to you to guess.

How can either of these organizations possibly count the number of pigs with any degree of accuracy? NBS says in its Rural Statistical Yearbook that it uses monthly sample surveys to measure the change in pigs, and it uses the agricultural census from 1996--19 years ago!--to estimate the national total. New farms are constantly popping up, and millions of "backyard" farms have quit. The population of fattening hogs turns over every 4 months or so and fluctuates constantly. The MOA monitors 4000 points

In 2009, Chinese authorities announced a program to stabilize the hog market. One part of the program was to publish detailed monthly and quarterly statistics on inventories, production, prices, and diseases. The idea was to give farmers better market information so they will form better expectations about the direction of the market and make better decisions about when to expand or cut back capacity. However, these stinky numbers do not provide much guidance. If we are to believe the MOA numbers, Chinese hog producers are killing off their sows in alarming numbers--exactly the phenomenon that causes gyrations in prices and that the 2009 program was intended to prevent.

China's aspiration to stabilize its markets and to become a world price-setter will never be realized as long as it issues a blizzard of dodgy, inconsistent "statistics" with only cryptic documentation, keeps its statisticians under the communist party's control, and bans any competitors or meaningful outside collaboration for its overworked, undertrained statisticians.

Monday, March 2, 2015

China Will Check for Illegal GMOs

China's Ministry of Agriculture has announced a new agricultural GMO biosafety regulatory program that will monitor Chinese rice and corn crops for illegal genetically-modified content. The monitoring will focus on laboratories and research stations developing and testing genetically-modified crops, seed-production farms and manufacturers, and counties where genetically modified rice and corn crops have been planted.

Several months ago, this blog noted the abundant evidence that unapproved genetically-modified grains are planted in China, and it was suggested that authorities should inspect domestic crops with the same rigor they use in rejecting imports with any trace of unapproved GMOs.

Previous crackdowns and rumors seemed to involve illegal sale of genetically-modified grain still in the testing stages, GMOs grown in seed production areas, and widespread planting of genetically modified corn in parts of Liaoning Province. The new program is aimed at those same culprits. Agricultural officials will monitor universities, institutes, and companies, check fields, and take samples from markets for testing. They plan to distribute inexpensive quick-testing kits for testing samples in counties where illegal planting of  genetically modified rice and corn has occurred.

The new program is described as an important task in the Chinese government's "active research, careful dissemination" approach to genetically modified crops.

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.