Sunday, March 22, 2015

China Pushes Sustainable Ag Plan

China's State Council endorsed a "National Agricultural Sustainable Development Plan" that calls for controls on agricultural nonpoint pollution, preventing loss of farmland, and raising labor productivity in farming.

The Minister of Agriculture immediately got to work by telling his staff to formulate a strategy for implementing the core directive summarized as "one control, two reductions, three bases."

One control = strict control of the volume of water used for agriculture.
Two reductions = reduce chemical fertilizer and pesticide use.
Three bases = better utilize three basic resources: plastic mulch, crop straw/stalks, animal manure.

The Ministry of Agriculture launched a "zero growth" campaign for chemical fertilizer and pesticides. Currently, use of these two chemicals is growing about 1.3 percent annually. They plan to slow the growth to 1 percent in the next few years and achieve zero growth by 2020. It is estimated that about a third of chemical fertilizer applied is utilized by plants; they want to raise the utilization rate to 40% by 2020. They also hope to raise the utilization rate of pesticides from 35% to 40%.

A rural researcher at China's Academy of Social Sciences said that agriculture contributes more to water and air pollution than other sources, but its contribution is often unrecognized. The plan targets the chief pollution sources: fertilizer runoff, pesticide contamination of soil and water, smoke from burning crop straw, animal manure, and discarded plastic sheeting used as mulch and for greenhouses.

The 2015 "Number one document" ordered provincial officials to strictly control loss of cropland and to maintain its fertility. In January, Premier Li Keqiang and two vice-premiers ordered implementation of a permanent cropland designation plan and enforcement of strict penalties for illegally converting cropland to unapproved uses. Last November, the Ministry of Land Resources issued a plan to designate tracts of permanent cropland on the outskirts of 14 cities, including Beijing. It is to be completed by 2016.

Deep-ploughing will be encouraged to improve soil fertility. Water-conserving irrigation will be expanded, and 800 million mu of high-standard agricultural fields will be constructed by 2020.

The plan also calls for promoting new types of "appropriate scale" farming businesses while strengthening the base of family-operated farms to realize the potential of "systemic reform." By operating larger farms, it is hoped that farm workers will have higher productivity.

There's nothing really new in this plan except the zero-growth target for fertilizer and pesticides. All the other measures have been around for years. However, in China policies are just for show until they are endorsed by top officials. The State Council's endorsement is a signal to local officials that they mean business on this now.

Tuesday, March 17, 2015

China Ag Official Defends GMOs

An agricultural official observed that no food is risk-free in the latest barrage launched by Chinese officials in their campaign to reassure the public about the safety of genetically modified foods.

On March 6, 2015, following a meeting of top communist party officials in Beijing, former Vice Minister of Agriculture Niu Dun (he has been selected as China's new representative to the FAO in Rome) explained the Ministry of Agriculture's approach to GMOs in an interview with a Beijing newspaper.

Niu gave three objectives for GMOs: to maintain food security by increasing the volume of crops produced; to improve resistance to drought, low temperature, insects, and disease; and to give foods nutritional value desired by consumers.

On the value to consumers, Niu deftly gave an example calculated to win approval of China's female population (the key food decision-makers in families and perhaps also the leading GMO skeptics). Niu casually speculated that grains and vegetable oils might be engineered to contain increased unsaturated fatty acids that could improve the complexion of skin for China's beauty-conscious women and help them look younger.

Niu then walked his comments back by admitting that the only tangible progress so far is in engineering resistance to insects, disease and weather extremes. He said genetic modification to increase output and quality of crops is just a "pleasant thought" for the future.

When asked about the safety of GMOs, Niu replied, "We have not found any foods or other items that are 100 percent risk-free, so we need a lot of experimentation and data [to evaluate their safety]."

China's support for GMOs reflects speculative concern that China could be left behind if it doesn't keep up with this path-breaking direction in research. Niu described GMOs as a major opportunity and possibility. He urged listeners to take the long view: "Future generations will judge [this] generation's efforts and achievements." Niu said, "All we want is an advanced thing, to maximize advantages, and avoid becoming disadvantaged."

Niu then moved on to the labeling issue. He argued that genetically modified products must be labeled to protect the consumer's "right to know" and "right to choose." Niu asserted that consumers have the right to decide for themselves whether to consume GMOs. No one can force you.

Niu then launched into a confusing response to concerns that GMO-labeling will increase costs, emphasizing that labels are demanded by the law. But he also claims that labeling is a cost voluntarily borne by those who want to produce GMOs. He worries about ensuring that people who want to consume non-GMO foods have the right to do so.

[Using this logic, shouldn't there also be a label to indicate that foods are "non-organic" to protect consumers who only want to consume organic food? That would be absurd since we assume food is not organic unless it is labeled as such.]

The Chinese approach appears to presume that genetically modified crops will be a niche market. Usually GMOs become predominant.

A week after Niu's comments, a delegation from Brazil's seed association came to Beijing to request that China speed up its lengthy approvals for genetically modified crops. According to the article, 93% of Brazil's soybeans and 82% of its corn is genetically modified this year.

Over 90% of U.S. soybeans and corn are genetically modified as well. After China approved genetically modified pest-resistant cotton, it was adopted by nearly all farmers outside of Xinjiang where there are no bug problems. There are rumors that Chinese farmers are already planting genetically modified crops even though they are not approved. The Ministry of Agriculture just announced that they will start testing domestic crops for GMOs.

In February, one of China's top rural policy advisors--and a long-time GMO proponent--pointed out that China imported 71 million metric tons of soybeans in 2014 and probably all of them were genetically modified.

Chinese officials may be interested to know that humans themselves are genetically modified. This week's Economist magazine points out that human beings have at least 145 genes acquired from other species.

Friday, March 13, 2015

Premier Calls for "Open" Data

And then the Premier said, "Let there be open data." And the data was open, and it was good.

Chinese officials have always been obsessed with numbers and statistics. So it's natural that the "big data" trend that will allow them to collect numbers on everything and everybody has got them really excited. Chinese officials are also obsessed with secrecy, so a pronouncement from China's premier that government-held data should be open is...um...revolutionary.

A news article, "Li Keqiang's Declaration on Government Data: Open!" appearing on numerous news sites this week is the communist version of scripture that has now proclaimed open data "good."

The parable-like story describes Premier Li Keqiang's participation in a Shandong Provincial delegation's review of the government work report at the Naitonal Peoples Congress on March 6, 2015. One of the delegates was Sun Pishu, the chairman and communist party secretary of a cloud-computing company. When Sun made a suggestion that government data should shared and open to the public, Premier Li "made his attitude clear" by blurting out, "Your suggestion is good!"

According to the article, Premier Li has endorsed big data and cloud computing on numerous occasions since last year, describing it as a major trend. During a visit to Sun Pishu's company last year, Premier Li saw big data and pronounced it good.

Sun noted that various levels of government are collecting a lot of data on everyone and the government holds 80 percent of the data being collected in over 3000 databases. He went on to observe that some developed countries open their data as a strategic move. He claimed that western medical services and manufacturers achieve great cost savings through making data open.

As soon as Sun finished his remarks, Premier Li offered a rejoinder: "Government’s data should be open. Apart from data that is required by law to be kept secret, data should be as open as possible in order for cloud computing companies to offer social services and improve government decision making and regulatory services."

The article said that Premier Li's utterances attracted attention inside and outside the venue. The good news was spread far and wide on web sites. People in the room began whispering about the pronouncement.

"Compared with commercial organizations, it's not easy for the government to open its data," lamented one person attending the meeting.

But the unnamed delegate continued, "I believe the Premier's advocacy of openness today opens a new chapter in the country's governance of big data."

We might translate this into plain English as follows: "We are going to collect lots of information about you, and you will like it because we will be able to keep you under tighter control."

Chinese leaders probably think that collecting data on everyone and everything will justify the rule of wise leaders. A blizzard of numbers alone will not help anyone make better decisions. Moreover, "big data" is no better than "small data" if people don't know how to interpret the numbers and think about them logically.

Thursday, March 12, 2015

Provinces Issuing Cotton Subsidies

Several Chinese provinces have announced "target price" subsidies equal to over $200 per acre for the cotton crop that was harvested six months ago.

Until 2014, the only subsidy for cotton was a small seed subsidy of 15 yuan per mu (about $15 per acre). Authorities supported farmers mainly by stockpiling cotton via a "temporary reserve" policy until it was abandoned last year. A "target price" subsidy pilot program was announced, but only for Xinjiang Autonomous Region. Nine other "inland" provinces had no price support and only the seed subsidy until a vague announcement of a subsidy of up to 2000 yuan per metric ton was announced last fall.

This month, "inland" provinces are announcing their subsidies for the crop harvested in the fall of 2014. The subsidies are being called "target price" subsidies, although the "target price" pilot was to be limited to Xinjiang. The subsidies are fixed amounts per unit of land to be distributed based on records of cotton which are 2-to-3 times the amount of grain subsidies. The "target price" subsidy is supposed to be based on the difference between the target and the market prices, but the government has not announced an average market price.

One county in Xinjiang announced that its target price subsidy was 267 yuan per mu (about $267 per acre). The funds were paid out in two installments: one 224-yuan/mu payment was based on acreage planted and another of 0.688 yuan for each kilogram of cotton sold.

Shandong Province announced a "target price subsidy" of 235 yuan per mu (about $235 per acre) with expenditure of 1.3 billion yuan. It will be distributed to over 1 million farmers cultivating 5.6 million mu of cotton in Shandong. Each farmer's subsidy is based on the area of cotton planted in 2014. Apparently there is some record system for distributing the cotton seed subsidy that will be used to determine each farmer's subsidy. Funds are to be paid into farmers' electronic accounts by April 10.

Jiangsu Province announced a "target price subsidy" of 206 yuan per mu with expenditure of 320 million yuan to benefit 850,000 farmers.

In January, Anhui Province announced it was beginning its first cotton subsidy program, but has not yet announced the amount of the subsidy. Hebei Province made a similar announcement. Perhaps announcements from other provinces will be made soon.

In Dongying, a prefecture of Shandong, news media reported that the cotton price had fallen from 4.4 yuan/500g last year to 3.1 yuan/500g this year. Cotton area planted in the district decreased. In Jiangsu there has also been a decline, and it was reported that business was extremely slow for cotton traders to the extent that many went out to find other jobs after the Spring Festival.

In December a report from the Dongying Price Bureau calculated a hypothetical target price subsidy for Dongying farmers of 329.6 yuan per mu--higher than the subsidy just announced--and the report noted that there is no target price subsidy outside of Xinjiang.

The Price Bureau estimated the gross value of cotton output at 1584 RMB/mu. The 235 yuan subsidy just announced is equal to 15% of the output value (well above China's 8.5% WTO-imposed limit on subsidies). The cotton subsidy is also more than double the subsidies given for grain in Shandong.

The main deterrent to cotton production is its high labor requirement. After deducting the opportunity cost of family labor, cotton was estimated to yield a net loss of -779 RMB/mu.

The cotton subsidies appear to exceed the 8.5% limit imposed by its WTO accession agreement. They are clearly in the "amber box" since they are based on area planted, and announcements emphasize that subsidies are to be paid to those who grow the crops (not to landowners, unless a rental agreement specifies who gets subsidies). However, it will be impossible to verify China's subsidy amount since cotton subsidies are being calculated separately by each province and reported piecemeal.

Monday, March 9, 2015

China Government Corn Purchases Record-High

A Futures Daily corn market analysis says the Chinese government's purchases of corn in the northeast region reached 70 million metric tons as of February 25, surpassing last year's total and a record high. The government purchases account for 65 percent of all corn purchases since the 2014 harvest.

China has a "temporary reserve" program that makes the government buyer of last resort when market prices fall below a minimum price set each year. The program only operates in the northeastern provinces, and most of the corn supply in that region is in the hands of the government.

The Chinese government approved the MIR162 variety in December. According to China's inspection and quarantine authority, 1.43 mmt of U.S. corn and related products were rejected during 2014 due to detection of MIR162. According to Futures Daily, corn imports are profitable now. It's unclear whether tariff rate quotas have been released to potential importers.

Futures Daily says several years of big harvests and weak demand have led to the accumulation of huge inventories of corn that probably are around 100 million metric tons. Some corn from 2012 and 2013 is being transferred from reserves in the northeast to other provinces. One reason is to clear out space for corn from the 2014 crop. Another reason is to improve the regional balance of inventories.

In 2014, there were spot shortages of corn that caused the price to jump 300-to-400 yuan in the space of a couple weeks. Last  year, with much of the northeastern corn flowing into government reserves, a higher proportion of corn from provinces like Shandong, Henan, and Hebei was sold to southern provinces, leaving short supplies there in the spring and summer of 2014. Futures Daily says this is unlikely to happen this year.

One reason for the weak demand for corn is the substitution of cheaper imports of sorghum, barley, distillers dried grains, and dried cassava which don't require a quota issued by the government to import. The Futures Daily reporter estimates combined imports of these substitutes at 25 mmt in 2014.

Domestic wheat has also been substituted for corn. In 2013, many areas had heavy rain at the time of the wheat harvest which caused sprouting of wheat, making it unusable for milling into flour. A significant volume was used for feed. Futures Daily also says that wheat output has increased over the last several years in southern provinces of Anhui, Hubei, and Hunan (presumably replacing rapeseed), causing the price to fall and making it attractive as a substitute for corn.

This year there was also rain at the time of the corn harvest, causing widespread contamination of Chinese corn with vomitoxin and aflatoxin. In Henan Province, farmers have a lot of corn on hand since traders are hesitant to buy and store large volumes.

As was the case in 2014, China's corn market will be driven by government sales of reserves during the spring and summer after the corn-purchasing season ends.

Saturday, March 7, 2015

E-commerce for Chinese Farmers?

A company selling organic rice from northeastern China exemplifies an e-commerce strategy for connecting farmers in the vast hinterland with urban consumers...with help from the "invisible hand of the government."

An article posted by Farmers Daily and many other sites--indicating official endorsement--tells the story of a company in a rice-growing area of Jilin Province that had a hard time getting the attention of consumers when it first started trying to sell organic rice, beans and other products online. The company decided they needed advertising help when it came up at number 600 in searches of Taobao--a leading e-commerce site in China. However, the 700,000 yuan cost of advertising was more than the company could afford by itself.

The company got help from a provincial program to promote e-commerce. In 2014, Jilin Province officially began a "strategic partnership" with Alibaba to promote provincial products on Taobao. The company used "the invisible hand of the government" by tapping into a 10 million yuan fund set up by the provincial government to help companies promote Jilin products online. The article also mentions unspecified support from the municipal government.

The company geared up to sell products like "Shuangliao rice," "pregnant women's rice," and organic black beans in the "Jilin Pavilion" of Taobao for "double-11" day (November 11 "singles day," a huge shopping day in China). The promotions feature the fertile black soil of the northeast, organic production, and food safety. Sales reached 400,000 yuan and included orders from Japan and Taiwan. In two days, a farmer reportedly sold 4,500 kg of sweet potatoes at six times the usual price. Northeastern products like Shuangliao red beans, mung beans, glutinous rice balls, and Shuangshan dried tofu were sold to southern China. A package of 8 rice balls sold for 32 yuan.

The strategy generated a lot more sales than traditional ventures like opening specialty shops and sales counters in urban markets. According to the article, the featured company has offered free training to other rural ventures who are selling their liquor, peanut, and bean products online. E-commerce is described as a new strategy for rural development.

E-commerce presents potential to connect farm products in China's vast hinterland with consumers in far-off skyscrapers. By bypassing long chains of traders and retailers, it potentially puts more of the consumer's dollar in the farmer's pocket.

Like everything else in China, it will not turn out as planned. E-commerce sites will be clogged with thousands of indistinguishable sellers as every company and local government gets on the e-commerce bandwagon.

The article suggests that all of these companies will need to hire advertising advisors, creating an advertising war in which the main beneficiaries are the "advisors," funded by government subsidies.

All of the e-commerce sellers are offering premium goods--most in fancy packaging intended as gifts--aimed at a relatively small market segment. It will quickly become glutted. The more important e-commerce strategy will be b2b sales of common rice and flour, feeds, veterinary medicines, and farm inputs online.

Most of the sellers will not be romantic grassroots collaborations of poor farmers--they will be companies set up by local real estate tycoons who have a connection in the mayor's office.

The high prices will be sure to attract fly-by-night operators in some Beijing alley masquerading as organic farmers in some verdant corner of the countryside. Consumers could again become confused and cynical about "green" and "organic" products offered on e-commerce sites.

Thursday, March 5, 2015

Chinese Pork Demand Pops

In a recent newsletter, China's leading pork industry analyst explained why hog prices are still depressed in that country after two years of shrinking animal inventories.

In his Soozhu.com newsletter, analyst Feng Yonghui observes that Chinese hog producers are confused as to why prices have not bounced back after two years of declining hog numbers. Feng describes the downsizing as a structural response to the anticorruption campaign and economic downturn that have roiled markets in China over the past two years.

Feng estimates that the anticorruption campaign (launched December 2012) popped a bubble equal to 10% of pork consumption. He estimates that before the anticorruption campaign, 7 out of 10 pigs were consumed on family dinner tables, and the other 3 pigs were supplied to restaurants and cafeterias. He estimates that the anticorruption campaign eliminated 1 of the latter 3 pigs. In other words, it popped a bubble equal to 10 percent of demand for pork.

The Chinese hog industry has been in the process of reducing production capacity to meet the new, lower level of demand. The slaughter of pigs that was part of the downsizing process put more pork on the market in the short run, putting downward pressure on prices.

Feng thinks there are two signs that supply and demand may be near balance: the large decline in inventory (reported by the Ministry of Agriculture?) and the leveling-off of feeder-pig prices over the last two months (after a 20-percent decline year-on-year).

One's view depends on which statistics you choose. The National Bureau of Statistics says hog inventories only declined 1.7% in 2014. The Ministry of Agriculture says they declined 7.8%.

Feng doesn't acknowledge price pressure from the world market. EU and US exports have been displaced by Russia's ban on imports from western countries and the euro has devalued. U.S. pork supplies are recovering from the PEDv disruption, aided by low U.S. corn prices. Global prices seem to impact China's pork market more than would be expected given that imports are only 2 percent or less of its consumption. The international dimension makes the search for a new equilibrium even more complex and could prevent the price rebound that Feng and many others expect.