Saturday, September 13, 2014

Target Price Details Dribble Out

During September 4-12, Chinese authorities released a series of six online documents (one, two, three, four, five, six) explaining the concept behind pilot "target price" subsidy programs for cotton and soybeans and providing a few additional details. According to the explanations, the programs are not just a change for these two commodities--they represent a blueprint for a new approach to agricultural support that will reduce government meddling with prices and let the market mechanism have a "decisive role."

The target price will be set by the government once a year. The price is to be announced before crops are planted to give a "clear signal" to guide farmers and the market. The target price is set with reference to production costs to ensure farmers can earn a reasonable return. With costs rising each year, the target price can be expected to rise as well.

This year, the target price of 19,800 yuan/metric ton for cotton was announced April 5. The target of 4800 yuan/metric ton was announced May 17. If the "market price" is below the target, the government will pay a subsidy to producers based on the difference between the target and market prices.

The "market price" will be the provincial average paid by processors or grain depots during the peak purchasing season (September-November for cotton; October-March for soybeans). The average will be calculated from price monitoring by the National Development and Reform Commission, Ministry of Agriculture, Grain Bureau, and Supply and Marketing Cooperatives. The explanatory materials emphasize that the subsidy will be based on the provincial average price, not the price actually received by the farmer.

The market price will be the price paid by cotton gins, grain depots, and enter-factory price of soybean crushing plants. The price at the farm gate will not be used because there is so much variation due to moisture, foreign matter, etc. Farmers that sell higher-grade crops at a higher price will get the same subsidy as those that sell poor-quality crops at a low price. The explanatory materials emphasize that this feature gives farmers incentive to maximize quality and price of crops they sell.

The cotton price calculation requires assumptions about several other parameters since the target price is for lint after it has been separated from seeds. The explanatory materials supply a formula showing how the market price is calculated using the lint price, seed cotton price, the cottonseed price, the proportion of lint in the seed cotton and an average processing cost.

"Temporary reserve" purchasing--described as a kind of price support policy--used until this year will cease after the introduction of the target price subsidy for cotton and soybeans. Farmers will sell their commodities at market prices. Their support will come in the form of direct payments instead of guaranteed minimum prices.

The explanatory materials say funds will be allocated to each province based on the difference between the target and market price and production statistics from the National Bureau of Statistics. Then provincial authorities will issue payments directly to producers. The distribution method is not specified and presumably will be up to local authorities. The materials say the subsidy payment will be based on area planted, production, or sales.

The materials do not say when farmers will get the subsidy payment. Based on the explanation, the subsidy cannot be calculated until the end of the marketing season when the average price can be calculated. Normally the statistics bureau does not report soybean statistics until a year after the harvest, but let's assume they will become more timely. It sounds like farmers can expect to receive their subsidies perhaps by April, about a year after the crop was planted. And that's assuming central government officials do things a lot faster than usual and light a fire under local officials to expedite the distribution process.

Another potential pitfall is disputes over statistics. Heilongjiang Provincial officials often report quite different soybean area and production statistics than the National Bureau of Statistics. In fact, NBS statistical procedures say they  estimate grain and soybean production mainly from sample surveys of household farms, but for state farms and companies they use numbers directly reported by those farms. The state farm system accounts for a large proportion of soybean output and the statistics bureau will base their estimate of Heilongjiang soybean production in large part on numbers supplied by the state farms themselves. It's very likely that Heilongjiang and the state farm system will suddenly "discover" lots of new soybean acreage. Similar conditions prevail in Xinjiang where much of the cotton is produced by the semi-autonomous "production corps" which also reports data directly to NBS. It is rumored that new cotton acreage has already been discovered in Xinjiang.

In contrast to the government's cut-and-dried explanatory materials, another article posted on a cotton website in August reveals that there is considerable trepidation and concern about the new target price subsidies.

Officials in Xinjiang, in particular, are concerned about how farmers will be affected. The "market price" could go down further than anticipated. Officials say the key is who will come to farmers to buy cotton. They fret that the long distance, high transportation cost, and high labor cost of unmechanized farms makes Xinjiang cotton uncompetitive. The explanatory materials mention that the target price system will force cotton warehouses to find a market for cotton they purchase instead of just buying on government orders and collecting subsidies for storage costs.

Heilongjiang is also a far-flung place distant from final markets. A wide range of enter-factory soybean prices are currently quoted there, from 4000 to 4600 yuan per metric ton. The target price of 4800 yuan implies a subsidy from 200 to 800 yuan, depending on which market price is chosen. However, the price of imported soybeans is currently quoted much lower, at 3700 yuan in Tianjin and Shandong and 3680 in Shanghai and Guangdong. Will the market price in Heilongjiang remain at such a high premium? With global soybean prices falling on news of a massive U.S. harvest, Chinese officials are probably worried about falling domestic market prices that will inflate the cost of their "target price" subsidy far beyond what they planned.

At an April conference, a State Council researcher described the target price as a major systemic transition, but he warned that no one knows how it will affect farmers. "Now everyone is unsure, and it's hard to anticipate the risks behind it," the researcher said.

The director of the Ministry of Agriculture's Research Center for Rural Economy raised concerns about the long-term plan for implementing target prices. He warned that China lacks the data needed to implement such a program: "If fundamental work is not carried out well, it could disrupt the market." Moreover, the director raised the question of which commodities will be covered by target prices in the future and which ones excluded.

While the target price policy is described as a market-oriented support method, officials also imply that their hand has been forced by the failure of the current support price methods. They note that minimum prices were raised year after year until they were at a level that exceeded international prices. This distorted the market, created artificially-high demand for imports, and forced officials to stockpile commodities, including 90% of cotton production. The budgetary pressures and untenable distortions have pushed them to accelerate the target price experiments and hope they are successful.

Saturday, September 6, 2014

China is Awash in Grain

Suddenly, China is awash in grain. There was so much grain in government reserves this spring, authorities worried that there wouldn't be room to store this fall's harvest. China's grain reserve corporation--Sinograin--set a goal of clearing out 32 million tons of grain by the end of October and began auctioning off grain at a furious pace in mid-May. They sold 30 mmt by the end of August.

This 1970s poster says, "Reap an abundant harvest; store grain everywhere."

China's grain production continued to soar over the past two years but demand slowed. With supply greater than demand, the market prices fell below the government's price floor. Authorities had to purchase large volumes of surplus grain to prevent prices from falling.

From November 2013 to April 2014, authorities purchased 70 million metric tons (mmt) of corn in northeastern provinces for its "temporary reserve." This was added to 35 mmt purchased in 2012/13 plus normal reserves held by the government.

Authorities purchased 25 mmt of winter wheat from the May-June 2014 harvest--three times the amount purchased in 2013. The total purchased by all types of buyers soared 41 percent from 2012 to near 70 mmt. China's wheat market now is said to have "three highs": "high prices, high government purchases, and high inventories."

There is also a surplus of rice. Officials worried that there wouldn't be room to store the early rice crop harvested in July. They purchased 2.6 mmt to support prices.

In a Peoples Daily article Jiangxi Province officials explained the strategy for coping with the flood of grain: "auction, sell, move, repair, build, and rent." Officials have been holding weekly auctions of grain reserves since May and had auctioned 30 mmt by mid-August and they have stepped up sales of old grain in their "rotation" plans. Officials are requisitioning rail cars and coordinating the movement of grain to provinces that have a deficit. Old, dilapidated granaries are being repaired and they are renting storage from privately-owned depots and processors. Allocation of central government funds has been expedited to meet targets for new grain storage this year and next year.

Sinograin incurred losses of 560 million yuan ($90 million) during January-June as it cleared out its stockpiled grain. The Peoples Daily article reports that prices are seriously out of whack: milled rice prices are less than paddy rice prices, new grain is cheaper than old grain, prices in production areas are higher than in consuming areas. The large volume of grain purchased by the government is keeping prices artificially high. Prices of imported grains are lower, putting downward pressure on prices in coastal regions. For example, the CNF price imported U.S. wheat fell steadily after the harvest and is now below the Chinese support price. The current price of corn in northeastern Chinese ports for shipment to the south is $416, but the estimated cost of imported U.S. corn for arrival in October-November is $243.
Source: China Grain and Oils Information Net.
Chinese farmers were said to be happy this summer after receiving payment for their wheat and early rice. Cost of production surveys conducted in Henan and Anhui Provinces this summer found that net returns to wheat growers were up about 20% this year despite increases in production costs. However, grain producers are being helped at the expense of rice and flour mills and livestock producers.
Another way to dispose of excess grain inventories: a fire at a Heilongjiang granary in May 2013 destroyed an estimated 34,000 tons of corn and 18,000 tons of rice. At the time, the fire was said to be an alarm bell on the risk of holding large grain reserves. The estimated loss of 100 million yuan was much less than the 560 million yuan lost this year by selling off old grain.

Sunday, August 31, 2014

High Land Rent Discourages Grain-Planting

Chinese villagers have been renting out more of their farmland in recent years as officials encouarged liberalization of land markets. However, rents have been soaring and officials are concerned that land rental is discouraging production of grain which doesn't generate enough income to cover the high rents. 

The latest alarm is sounded by Economic Observer's report on a land rental survey conducted by Shandong Province agricultural officials. The report found that 19.6 percent of the province's farmland has been rented or transferred. The more alarming finding was that only 32 percent of land was planted in grain after it was rented out. That's less than half the 70 percent of the land  planted in grain before it was rented out.

The rental rates for farmland in China have soared. Until the early 2000s, farmland was viewed as a liability since villagers had to pay tax on it. Many charged no rent, letting their neighbors cultivate their land rent-free. Land-based taxes were eliminated by 2006 and replaced with subsidies, and land is now a valuable asset. Farmland rents have soared along with the general real estate market in China. Many companies have sought to rent farmland, sometimes as a speculative land grab, sometimes sincerely hoping to make money farming. Land rents have soared from zero to a few hundred yuan per mu to over 1,000 yuan per mu in many places in 2014. That's roughly equal to about $ 1,000 per acre.

According to USDA data, United States cropland rents also doubled from 2003 to 2013, but they still averaged only $ 136 per acre in 2013, far less than in China.

A Shandong news article reports that a fruit cooperative's rent rose from 800 yuan to 1,200 yuan over five years. Land rent comprises half of the cooperative's production costs now. They think the rent could go up to 1,800 yuan in a few years. The article also finds that net returns to a cooperative growing four crops of spinach and melons in greenhouses each year are seven times the returns earned by a well-known grain farmer.

In one village, a company offered to rent land at 1,200 yuan per mu, but villagers turned them down. They expected to get 1,400 yuan.

The Shandong article cites another example of a company that rented 5,260 mu (870 acres) of land to grow medicinal crops and set up a tourism project. The company expects to net 5,000 yuan per mu. Thus, they can afford to pay much more rent than a grain farmer earning 1,000 yuan or less per mu.

Another Shandong article gives the example of Mr. Liang who returned to his hometown to take up farming when his construction business slowed. He rented 195 mu of land (32 acres) at 1,300 yuan per mu. His plans to raise livestock fell through, and he grew corn and wheat instead. He didn't even make enough money to cover the rent. His rental contract linked his rent to that of a local industrial park. His rent was raised to 1,600 yuan this year.

The situation is not unique to Shandong. A 2013 survey in Xinxiang, a prefecture of Henan Province with over 5 million rural families holding land rights, found that one-third of its farmland was rented. Rents in Xinxiang were generally over 1,000 yuan per mu and as high as 1,400 yuan. The report also raised concerns about the conversion of land from grain to high-value crops. It noted that some local governments in Henan had set up funds to subsidize land renters, but it said funds for such subsidies were insufficient.

One of the Shandong articles worried that subsidies for grain farmers are only 200 yuan per mu (about $200 per acre). Moreover, the subsidies are not based on actual production. The reporter complained that many land-holders still got "grain subsidies" after planting vegetables, fruit trees, or nursery crops on their land.

In 2013, the average grain yield in China was 358 kg per mu (2,173 kg per acre). At a price of 2.2 yuan per kg, the gross income would be 787 yuan. Even with a subsidy of 200 yuan there is not enough money to pay a 1000-yuan rent...and this is at a price equal to over $9 per bushel of corn--double U.S. prices now. Will China choose a path of high prices and subsidies to ensure that its farmers keep planting grain?

Wednesday, August 27, 2014

Crackdown on Animal Drug Abuse in China

A crackdown by agricultural authorities and police in Qingdao indicates that abuse of veterinary drugs in the production of poultry and other livestock is rampant in China.

In May 2014, the Qingdao Bureau of Animal Husbandry and Veterinary Medicine launched a six-month campaign to shut down illegal veterinary drug manufacturers and clamp down on illegal use of pharmaceuticals in the raising of poultry and livestock. One of the focal points of the crackdown is the city of Pingdu, major poultry-producing area. It is probably no coincidence that Pingdu was also the focus of a 2012 scandal when it was discovered that a major supplier to Kentucky Fried Chicken restaurants was raising chickens on as many as 20 drugs and failing to obey required withdrawal requirements before slaughter. At the time, Chinese news media focused blame for this "quick chicken" scandal on KFC while the core problem of on-farm veterinary-drug abuse received little attention. Authorities are now cracking down on problems, but the campaign is being conducted out of the public's eye with only modest publicity.

Officials celebrate their crackdown on veterinary drugs in Qingdao.

The crackdown includes shutting down black dens of illegal veterinary drug manufacturers as well as policing on-farm abuse of pharmaceuticals. It includes wide-ranging problems, such as production by unlicensed manufacturers, fake drugs, false or exaggerated claims, lack of testing documentation, absent or fake labels and registration numbers, and repackaging or reprocessing of banned substances. Livestock farmers are being watched for use of fake or forbidden medications, use of medications intended for human use, excessive doses, products that failed testing, excessive use of antibiotics, failure to stop drugs within required withdrawal periods before slaughter, illegal use of hormones, and adding illegal substances to feed and water. Many of these abuses were reported in the 2012 poultry-farming scandal uncovered in Pingdu.

During June 2014, Qingdao authorities staged an event where they destroyed a collection of illegal drugs seized from illegal manufacturers and farms. A worker gave examples of seized drugs: boxes that had no registration number or numbers borrowed from other companies; drugs from companies whose licenses had expired; products that claimed to treat numerous pig diseases when they actually were effective only for one.

The official warned that the drugs could harm humans who consume meat from the animals. He said that tests had detected ribavirin, an antiviral drug banned for use in animals. He claimed that the drug is retained in animals' bodies and can lead to antibiotic resistance if the meat is eaten by humans. He also warned against high levels of mold in animal feed which generates toxins that can harm humans, and may possibly be carcinogenic, according to the official.

Officials and police said they had dealt with 83 cases of illegal behavior related to veterinary drugs and feed additives since 2013. Four cases were referred to police and 13 people were arrested.

In August, Qingdao's Animal Husbandry Bureau reported taking actions to improve supervision of veterinary drugs and feed additives.  They formed a task force under the Bureau's vice director, set up systems to monitor manufacturers and farms, and planned to increase publicity and training.

The drug abuse problems are not unique to Qingdao. There was a brief national campaign in March 2014 and several other localities have launched crackdowns on veterinary drug manufacturers or included drugs in campaigns against fake farm inputs.

Building the world's largest livestock industry in a country that is also the leading producer of chemicals and pharmaceuticals is a dangerous recipe.

Wednesday, August 20, 2014

Taxes on Chinese Peasants Rebound

One of the Chinese communist party's great achievements during the last decade was to eliminate the "agricultural tax" and eliminate other taxes and fees on peasants. In an inspection of villages last fall, Chinese Ministry of Agriculture officials were alarmed to find a bevy of new fees and assessments being collected from rural residents. Officials warned local leaders to stop piling fees on farmers to prevent a revival of the "peasant burden" problem that caused widespread discontent during the 1990s. While it's easy to blame the resurgent taxes on greedy officials, it is unclear how all the new services and infrastructure mandated for the rural population are to be financed.

During October and November 2013, China's State Council sent inspection teams to 77 villages in Heilongjiang, Shandong, and Anhui Provinces to check up on the taxation of villagers. They interviewed peasants and inspected accounts. On August 13, 2014 MOA issued a document reporting on the problems and reminded local officials that eliminating financial burdens on peasants is the communist party's rural governance strategy.

While the teams found that rural officials had done a lot to reduce financial burdens on their subjects and most peasants were satisfied, they also uncovered a lot of fees and assessments on villagers.

Some problems uncovered:

In some rural schools in Shandong, students are charged fees for school supplies and services of 100 yuan without issuing a receipt.

Some peasants are assessed with surcharges for electricity generation projects that are double usual electricity rates for home use.

In some areas, women of child-bearing age are charged 500 yuan for insertion of IUDs and village clinics are assessed fines of 1000-1500 yuan by county health authorities.

Some families find that an 8.94 yuan service charge is deducted by the postal savings bank from their 50-yuan award for having a single child.

In Shandong, some village authorities demand a 5000-yuan deposit from villagers building a new house.

In Shandong, village organizations and farmer cooperatives are charged fees for "statistical information advisory services" (2000 yuan) and fees for "training in safe production" (200 yuan). Some Shandong villages spent 3000 yuan to send officials to track down migrants and ensure they are following family planning regulations.

In Heilongjiang, village organizations are charged 500 yuan for a librarian training fee and a 190-yuan fee for making an official village rubber stamp. Some Heilongjiang villages spent over 40,000 yuan on enumerators for the population census, and some spent 5800 yuan on plaques and signboards for family planning.

In Anhui, some villages are charged a 720 yuan fee to send university graduates serving as village officials to the provincial communist party school for training. A security project in Anhui charges villages 10 yuan per family for an insurance premium, 26 yuan for personnel costs, and a 2000 yuan contribution from the village. Some Anhui villages spent 2000 yuan on a cook for the primary school.

Unaccountable officials are inclined to increase taxes to enrich themselves and make themselves look good. Villagers have little influence over their leaders, so central officials have to keep checking up on millions of low-level officials.

Yet, village officials are also in a tight spot. Central officials mandate improvements in services and endless programs for farmers and villages like cooperatives, schools, clinics, electric grids, and road for a poor, widely dispersed population. The costs per head are often high, and the mandates often come without funding. Who will pay for more services and infrastructure?

Thursday, August 14, 2014

Chinese Rice Mills Cry For Subsidies

Articles in two Chinese government-run newspapers warn that shrinking margins threaten to push rice mills out of business. The inferred implications of the articles are that mills need subsidies to stay in business and imported rice should be blocked to restore "order" to the market.

Two remarkably similar articles on the dire situation facing China's rice mills appeared a month apart in newspapers that serve as Chinese communist party mouthpieces. An investigation of rice mills in Jiangxi Province appeared July 23 in Chongqing Daily. A second article appeared in Farmers Daily on August 13, describing a very similar crisis facing rice mills in Liaoning Province. The two articles with different authors stated very similar findings from their "investigations" in opposite ends of the country: a major area for producing long-grain rice in the south, and a major medium-grain rice-producing area in the northeast. Their similarity suggests either the authors were working from the same propaganda playbook or one author copied from the other.

Both articles emphasize the "paddy strong, rice weak" pattern that has been a theme of the rice market over the last 2+ years. The price of unprocessed paddy rice has been rising faster than the price of milled rice products, narrowing profit margins for mills.

The article on Liaoning attributes the weak rice price to the weak macroeconomic environment in China. Farmers Daily says many construction projects have ground to a halt in Liaoning, so bosses have stopped making bulk purchases of rice to feed workers. The article says purchases by workplace and school cafeterias have dried up. Both articles also blame low-priced imported rice for the weak rice price. Imported rice from Vietnam directly competes with long-grain rice in the south. The Liaoning article claims that it also puts downward pressure on the medium-grain rice price in northeastern China.

Both articles attribute the rising price of paddy rice to the government's increased price support and rising production costs. A grain bureau official quoted in the Jiangxi article has another explanation. He says mills "blindly" expanded capacity beginning in 2010 to qualify for participation in government rice auctions.  Mills competed to buy rice to fill their processing capacity, thus bidding up the price of unprocessed rice.

Both articles say mills are experiencing shrinking or negative profit margins. Many are closed or operating below capacity. Some mills operate at night when electricity rates are lower. Others automated packaging to save on labor. Nevertheless, many medium and small mills have unpaid debts and are having trouble getting credit. The Liaoning article says large mills continue operating at a loss to maintain their customer base. One industry expert says a shakeout of mills is on the horizon. The prospect of mills closing is said to be a pending disaster for farmers.

Both articles suggest that rice mills need subsidies to survive, but they are vague about the type of subsidy. Both also emphasize the importance of large mills as industry leaders and mention "disorder" in the market. Both mention that some large mills got subsidies to buy automated equipment or to build grain storage facilities.

The articles probably have been planted to justify subsidies for rice mills to build storage facilities, following up Premier Li Keqiang's announcement of such subsidies last month (see last month's post on "China's Subsidized Rice Glut."

A second reason for the articles may be to justify measures to block imported rice to restore "order" to the market as preparations are made to buy a new rice crop at inflated prices. Good Morning, Vietnam!

Tuesday, August 12, 2014

Mysterious Target Price Subsidy Experiments

In January 2014, China's central communist leadership's "Number 1 Document" officially announced a plan to launch experimental target price subsidy pilots for soybeans in northeastern provinces and for cotton in Xinjiang "Autonomous" Region. This subsidy will calculate the difference between a "target" price and the market price, then pay farmers a subsidy to make up the difference.

In April 2014 authorities announced the target prices: 19,800 yuan/metric ton for cotton and 4,800 yuan/metric ton for soybeans. However, no other details about have been announced. Which market price will be used to calculate the subsidy? How will the government verify the price and the amount planted/produced/sold by subsidy recipients? How and when will the payments be issued to producers? What happens if buyers prefer to purchase imported commodities?

Today's Economic Observer notes that none of these details have been announced with the harvest of the cotton and soybean crops is a little more than a month away. The article reports on what officials are saying about the mysterious new subsidy experiments.

Typical of Chinese government programs, central authorities sketched out the general terms of the program and told local authorities to figure out how to implement it. China's National Development and Reform Commission, Ministry of Finance, and Ministry of Agriculture set the terms of the pilot programs in April, but later made revisions. Local authorities had to figure out tricky issues like how to determine "the market price" when prices vary from region to region and over the course of the season. Officials were reportedly considering using prices reported on tax invoices to calculate the subsidy, but they worried that this would lead to misreporting of prices to defraud the subsidy program. Another major concern was how to issue the payments in a way that would ensure farmers actually get the money.

Reportedly, local officials are worried that farmers could experience lower incomes with the target price subsidy, and this is the main factor that has delayed finalization of the details. Economic Observer learned that local authorities have set the terms of the target subsidy pilots and they are now waiting for approval from the State Council.

According to Economic Observer, Chinese officials hope that the target price experiments will be successful so they can replace the failed price support programs used for other major crops: rice, wheat, corn, rapeseed, and sugar. Economic Observer says that minimum price and temporary reserve programs have led to large gaps between Chinese and international prices, diverted much of the grain supply into government reserves, and created huge financial burdens. Economic Observer reports that 70 percent of wheat inventories in Henan are now in government reserves, and it is estimated that costs of purchase, storage, interest and subsidies for wheat held in reserves total 400 yuan/metric ton, nearly 20 percent of the purchase price.

Officials hope they can gradually shift from price supports to target price subsidies to eliminate price distortions and aid farmers more efficiently. Interestingly, officials said almost exactly the same thing ten years ago when they set up the current system of decoupled subsidy payments and minimum prices.

What if target price experiments don't work? Professor Li Guoxiang of the Chinese Academy of Social Sciences has taken part in many meetings to discuss the target price subsidy program. Economic Observer quotes him as saying the new subsidy is a major systemic transition, but "there is a lot of risk behind it."