Monday, December 22, 2014

Chinese Rice Mills and Underground Finance

A Jiangxi Province newspaper recently told the cautionary tale of a rice mill owner who disappeared after his side business as an underground lender got him deep into debt to family and friends. The story appears to be a warning about the dangers of underground lending, but it illustrates how China's Ponzi-style economy is unraveling.

"Mr. Li" got into the rice-milling business in 2009 when he invested several hundred thousand yuan to buy some milling equipment. He was "instantly transformed from farmer to factory boss."

In 2011, he built a mill using a 2-million-yuan loan that was secured by his inventory of unprocessed rice. The debt kept spiraling. During 2012-13, he borrowed 10 million yuan from several banks, but rice-milling business started running into trouble as the Chinese economy slowed.

The rice mill wasn't generating enough cash to cover his daily expenses, so Mr. Li became an underground lender in 2013. He lent 8 million yuan to a businessman from Zhejiang Province at an interest rate of 5-percent per month. He raised the money largely by borrowing from family and friends.

For four months, the Zhejiang businessman paid the interest promptly, but he disappeared when he got into financial trouble and still owed Mr. Li the 8-million-yuan principal. Mr. Li still owed his family and friends, and he himself was effectively bankrupt. If he sold his factory and equipment, he thought he could only raise about 2 million yuan. His grain inventory was already pledged as collateral for bank loans. He was 10-million-yuan in debt. This year, the court seized his factory and warehouse to pay his creditors.

Mr. Li himself went into hiding. He couldn't go home because he owed so much money to family and friends. The Jiangxi newspaper says there are dozens of such rice mill bosses who have disappeared because their cash chain broke down. Because rice-milling generates low returns, many bosses got into underground lending. The Jiangxi newspaper chastises these rice bosses for using their rice-milling business to borrow money for underground finance--"using money to make money."

A bank worker confirmed that many rice mills borrow money secured by inventories of rice and guaranteed by a third party company. The Jiangxi newspaper explains that the third party guarantor is responsible for the loan if the rice mill can't repay. If the guarantor doesn't come up with the money, the bank is stuck with the loan.

Another journalist visited a Jiangxi county in August and found that 42 of the county's 105 rice mills  had shut down since 2012. With little cash and low profit margins, small and medium mills had no money to pay workers or buy unprocessed rice. Many were using family labor to mill small quantities held in inventory to keep supplying their loyal customers. The journalist gave an example of a mill that invested 20 million yuan to expand, but was only generating a few hundred thousand yuan in profit.

It's beginning to look like China's booming economy was largely a giant Ponzi scheme propelled by reckless bank-lending ordered by the government to recover from the 2009 recession. Chains of debt were sustained by one-way bets on real estate, commodities, and the exchange rate. The system is breaking down now that the one-way bets have disappeared.

Saturday, December 20, 2014

Chinese Farmers in Russia Hit by Ruble Crash

Chinese farmers growing crops over the border in Russia have been hit by the fall of the Russian currency. This year Chinese farmers are bringing most of their Russia-grown crops back to China instead of selling them in Russia.

There are said to be 70 Sino-Russian cropping, livestock, and agricultural processing projects covering 400,000 hectares in Russia. Over the past decade, there has been a growing stream of Chinese farmers crossing the border to grow crops in Russia. Heilongjiang, Jilin and other provinces have reportedly invested US$ 200 million in Russian farms.

Most of the farmers are from the state farm system in Heilongjiang Province where land is scarce and the increase in mechanization has reduced the need for workers. Across the border in Russia's far east they can rent land much cheaper, the soil is good, and they can farm huge farms with large machinery.

The Hulin Eastern Star Farm has a 20,000-hectare farm in Russia where they grow 20,000 metric tons of soybeans and 80,000 tons of corn. The farm manager says the price in Russia will be 400-500 yuan less than the Chinese price this year, so they will send 95 percent of their produce back to China to avoid losing money.

Bringing the crops back to China is costly. It involves a long journey by truck, tariff, taxes, and inspection. Chinese border authorities require the grain to be packed in bags, adding more cost.The Chinese soybean price is nearly double the price in Russia, so farmers say it's profitable to send the crops back to China even with the high costs.

The head of the Heilongjiang soybean industry association estimates the province's soybean output to be about 5.8 million metric tons this year. The Chinese production of soybeans in Russia is estimated in the range of 20-to-30-thousand metric tons, so he's not worried that the influx of beans will put pressure on Chinese prices.

At the Suifenhe border crossing, a transit area for grain from Russia is busy. The most popular crop is soybeans. People in Heilongjiang estimate that 90 percent of the soybeans grown on Chinese farms in Russia will be brought back to China this year.

Thursday, December 18, 2014

China's "Farm Diplomacy"

Chinese President Xi Jinping always makes time for rural visits during his trips abroad. Premier Li Keqiang has been featuring agricultural investment and opening trade with new partners in his trips abroad. This is part of China's "farm diplomacy" which elevates agriculture to an important role in foreign policy.

A propaganda piece from the official Xinhua news agency reviewing Xi Jinping's Latin American visit during July 2014 introduced the "farm diplomacy" strategy. Chairman Xi has visited an Argentine ranch, brought seeds along on a visit to Fidel Castro's family hacienda, had coffee at a rural home in Costa Rice, visited a cattle farm in Australia, inspected a farm in Ireland, attended a tulip exhibition in the Netherlands, and drove a tractor in the United States. When he visited the United States as vice president he insisted on holding a meeting on agriculture in Iowa where he got reacquainted with a farm family he had previously visited in the 1980s.

Xinhua dubs this "farm diplomacy" (农庄外交) and asks, "With such a busy schedule, why does Xi Jinping always make room in his schedule for visits to the countryside?" 

First, Xinhua explains that Chairman Xi has a deep appreciation for the common people and the countryside as a result of his years in northern Shaanxi Province as a  young man. Second, Xi is "preoccupied" with how to improve the lives of rural people and develop the countryside. Says Xinhua, Xi has made agriculture a priority in each leadership position during his postings as municipal and provincial leader and now as China's new leader.

Xi has made agriculture an important part of China's foreign relations. Xinhua says all the countries Xi visits ask him to taste their food, hoping that China will import it. Agreements on agriculture are an important part of China's relations with other countries, says Xinhua. Since agriculture is a topic that all people can relate to, Xi's countryside visits build rapport with foreign hosts.

Xinhua lays it on thick with language that sounds like Mao-era propaganda:

"Land is the mother of all things, the source of hope, the root of friendship. Global thinking and love for the land is the commonality of many peoples, love of the land reflects our great national identity."

"The magical land brings forth the golden friendship between China and the world. The profound meaning of Xi Jinping’s 'farm diplomacy' is becoming a brilliant chapter in China’s diplomacy."

An August propaganda article endorsed outbound investment in agriculture by Chinese companies and reiterated Xi's agricultural priority in diplomacy. According to Farmers Daily Xi Jinping said, "Pushing forward ‘agricultural going out’ is beneficial for preserving national food security and it can serve the nation's diplomatic strategy.”

Establishing a more open economy was one of the general principles espoused in the 2013 "third plenum." The communist party's 2014 "number one document" on rural policies called for raising "the level and the quality of external openness in agriculture." Xi Jinping also endorsed a "new" food security strategy as top priority during 2014. The strategy acknowledges the inevitability of imports playing a significant role in China's food supply, and it advocates taking the initiative and gaining as much control over the flow of imports as possible. Auxiliary objectives are to increase the number of countries supplying imports (giving China more bargaining power) and for Chinese companies to control the entire supply chain for food imports (ensuring more profits flow to China and that Chinese companies dictate prices).

The Chinese strategy is to intertwine agricultural trade, Chinese investment, and diplomacy. China has a long history of using agricultural projects--mostly rice demonstration farms--as a diplomatic tool in Africa and Southeast Asia. Now China is dangling promises of agricultural trade and investment to achieve its food security goals and win new friends.

The strategy has been evident in outreach to Eastern Europe where Premier Li  has included agriculture alongside infrastructure and energy as targets for Chinese investment. In December 2013, Li struck an agreement to import cattle and pigs from Romania and signed an agreement for bilateral agricultural cooperation. A similar deal was reached with Serbia. China is holding an annual agricultural trade forum with central and eastern European countries.

This mixture of commercial and diplomatic objectives makes it hard to figure out just what China is up to. Many of these deals don't seem to have much potential impact on agricultural trade. For example, Romania is a net importer of pork, yet it is expected to supply China with 3 million pigs. One of China's objectives is to expand the number of suppliers for corn and other commodities. Peru was added to the short list of countries eligible to export corn to China, but its exports are inconsequential. According to customs statistics, China hasn't gotten that much corn from Ukraine and Bulgaria this year. Ukraine may default on 20 percent of its promised corn shipments to China this year. So, it seems likely that diplomatic objectives are behind many of these deals.

The "farm diplomacy" game may divide potential allies that might challenge Chinese agricultural support or protection policies. Agricultural trade baubles may influence free trade agreements or undermine coalitions that might challenge China at the WTO. The prominent role of investment may tie trade opportunities to a country's willingness to welcome Chinese agricultural investors. Entering the EU through the Bulgarian back door may open up other opportunities.

Xi does seem to have a genuine personal interest in agriculture. His dissertation for his doctorate in Marxist education at Tsinghua University was on agricultural marketing. (Whether he actually wrote it or not, he probably chose the topic.) His dissertation also featured an ambivalent approach to markets: use markets to distribute farm products but make sure the government has a firm grip on those markets. As President, Xi seems to be exercising a similar approach. While last year's "third plenum" called for the market to have a "decisive role," agricultural trade will increasingly be decided around government conference tables.

Saturday, December 13, 2014

China Needs to Test Domestic Corn for GMOs

For more than a year, Chinese border officials have been rejecting shipments of corn containing any trace of unapproved genetically-modified strains. No GMO corn has been approved for planting inside China, but there are indications that production of unapproved GMO corn has quietly spread despite crackdowns over the past four years. If Chinese officials were really serious about keeping unapproved GMOs out of their food system, they would test domestic corn as well.

Chinese corn prices are more than double the price in the United States, but the GMO issue is a barrier to imports from all the leading exporters--the United States, Brazil and Argentina. Consequently, Chinese traders are scouring the globe for other cheap feed ingredients.

On November 18, 2014 AQSIQ, China's agency for inspection and quarantine, posted an online Q&A where Chinese trading companies peppered an AQSIQ official with dozens of questions about importing corn, sorghum, and barley. One trader was told that he can't import corn from France, and no, he can't process it into cattle feed and import it either. Another was told that he can only import corn from Russia if a Chinese company controls the Russian farm and processes it near the border. Traders asked where they could find approved corn-exporters from Ukraine and Thailand. A number were interested in importing sorghum from India and Australia, and barley from Ukraine and Australia--both for feed and for making liquor and beer. AQSIQ said that sorghum cannot yet be imported from Argentina because the risk assessment has not been completed [the final agreement for Argentine sorghum access was signed about a week after this Q&A].

One odd question posed to the AQSIQ official alleged that GMO corn is now widely planted in parts of Liaoning Province and is rapidly displacing non-GMO varieties. According to the "questioner," investigations in a number of Liaoning counties found that seed dealers surreptitiously sell genetically modified corn seeds, even though GMO corn is banned by the government. He claims that GMO corn sells for a better price because it can meet buyers' standards. In fact, he claims that government reserve depots will only buy GMO corn. He claims that these factors are pushing non-GMO corn completely out of the market in some places.

AQSIQ's response was to contact the State Food and Drug Administration or Ministry of Agriculture.

A blog post from July 2014--probably by the same person--goes into more depth on the Liaoning complaints. The post, "The investigation that got the premier's attention," alleges that seed dealers have been selling GMO corn seeds, while industry regulators ignored the practice due to their financial interests in seed companies. He visited Tai'an County in Liaoning where he was told seed dealers repackage GMO seeds as approved varieties. Some GMO seeds are sold surreptitiously directly to farmers. He names a number of varieties. Most are insect-resistant bt strains. The blogger worried that planting of GMO corn was on the verge of explosive growth.

The writer claimed that the vice governor of Liaoning received a report claiming that 70 percent of Liaoning's corn was GMO, yet the vice governor asserted this year that "Liaoning does not have a single grain of GMO corn."

"Why did the governor lie?" asked the blogger. He said dealers were secretly warned ahead of time of a crackdown. Nevertheless, three dealers were caught, but they were let off with small fines. The blogger dared officials to punish him for "telling the truth."

According to the blogger, when he visited Tai'an County no one would talk to him until his identity was confirmed and he agreed not to take photos. The frequent crackdowns announced by authorities suggest that GMO corn may in fact be widespread in China.

This month, a district of Liaoning Province was identified as a "model" for agricultural quality and safety which stipulates that officials crack down on fake, counterfeit, and genetically modified seeds. Crackdowns on GMO seed have been announced in a number of other localities in northeastern China.

During 2010, the Ministry of Agriculture banned four corn seed varieties from prominent seed companies and institutes that were illegally commercialized GMO strains. The strains had been declared as non-GMO when submitted for evaluation, and at that time MOA didn't require checking for GMO content if they were declared non-GMO.

The 2010 crackdown did not wipe out GMO corn seeds. In March 2014, a crackdown in Hainan found seven companies and institutes illegally growing GMOs, and six other suspected violators were still undergoing testing. Twelve of 15 GMO-positive samples were strains of corn (3 were cotton). Another article said 11 seed companies were growing GMO corn illegally in Hainan, including three from Henan Province, one from Liaoning, and one "well-known state-owned company." This was significant because Hainan is a center for seed breeding and propagation due to its sub-tropical climate.

Meanwhile, rumors and pseudo-science about GMOs spread among the Chinese public. There have been outlandish stories about GMO corn causing pigs to miscarry and killing rats in Shanxi Province, and causing men to become sterile in Guangxi Province. The Liaoning blogger said common people joke that they will stop eating meat next year since all the feed is GMO now. Many Chinese people think Americans don't consume GMOs; they export them to weaken the people of other countries. The cynical use of GMOs as a trade barrier on purported food safety concerns and the ambiguous approach to domestic use reinforces these fears.

If Chinese officials are so concerned about the hazards of consuming GMOs, they should test domestic corn for illegal strains with the same stringency used for imported corn. They will never do this, since they are also giving domestic corn a pass on known hazards like mycotoxins from moldy corn.

Saturday, November 29, 2014

China's Corn Price Support Problem

On November 25 Chinese authorities announced the beginning of "temporary reserve" purchases from the 2014 corn crop. As expected, the temporary reserve prices were held at the same level as last year. With China experiencing a corn glut for the third year in a row, the government is expected to purchase a large volume of corn again this year. With grain bins already full, the temporary reserve announcement included an exhortation to prevent "hidden threats" of mold and fire from destroying millions of tons of corn stored in thousands of rudimentary bins scattered across northeastern China.

China began the "temporary reserve" policy in 2008 to place a floor under market prices. Since then, authorities announced minimum prices for each of four northeastern provinces each year and promised to buy grain for government stockpiles when the market price falls below the minimum. The grain is stored until the price rebounds. Then it is sold back into the market. That's the theory, anyway. But the wheels came off this policy when supply increased more than officials thought possible and "rigid" growth in demand flat-lined after Xi Jinping's anti-corruption drive shut down official banqueting that pumped up Chinese meat and liquor consumption.

This year's reserve prices are:

metric ton
Inner Mongolia

Authorities began the 2014/15 temporary reserve purchase program November 25, and it will continue through April 30, 2015. The program operates only in the four northeastern provinces listed above. Grain can be purchased by depots operated by Sinograin, the government's grain reserve management corporation, or by depots commissioned by Sinograin. Purchases by two other state-owned enterprises were limited to 5 mmt for COFCO, and 1 mmt by Chinatex (less than previously rumored).

Desperate to maintain production incentives and rural income growth in a period of rapidly rising wages and costs, officials raised the corn support price each year from 2011 to 2013. The price in Jilin Province was raised from 1500 yuan/mt to 2240 yuan/mt from 2009 to 2013 and remains at that level this year. During 2011 and 2012 the market price exceeded the support price, and little corn was purchased by authorities. However, when market prices stopped rising government corn purchases ballooned to nearly 30 mmt during 2012/13 and 69 mmt during 2013/14. Some analysts predict that another 40-to-50-mmt will be purchased this year.

The practice of raising support prices every year was introduced in 2008 and repeated as received dogma in official meetings and speeches until 2013. At first it was applied to rice and wheat "minimum prices," but the practice was adopted for lower-priority commodities like corn too.

Chinese authorities were shaken up by the global grain price spike during 2007-08 and became convinced that commodity prices would rise forever. A book on food security published by the State Council's Development Research Center (DRC) think tank in November 2013 pronounced "we are in an era of high food prices," and chanted the mantra of raising prices annually. Officials became especially concerned about tight supplies of corn, an assessment reflected prominently in the "new" food security strategy put forward last year.

Chinese officials don't seem to have anticipated the possibility that corn prices might drop. In July 2013, the National Development and Reform Commission announced a 5-percent increase in the corn reserve price--four months earlier than usual. There was also some discussion of raising the priority of the corn price support from "temporary reserve" to "minimum price" so it would be equal in priority to rice and wheat.

The increase in the 2013 Chinese support price was announced when it was already obvious that corn prices would be under strong downward pressure. It was already clear that the U.S. and China would both have record harvests, and U.S. futures prices were already dropping. Indeed, the surge of output last fall put downward pressure on prices in both countries. Chinese authorities stockpiled corn in their "temporary reserve" to prevent Chinese prices from falling.

Chinese and U.S. prices diverged in 2013 and the gap widened after another big  harvest in 2014, creating one of the biggest price distortions ever. While this year's temporary reserve prices are unchanged from 2013/14, they are more than double the current U.S. gulf fob price of about $4.56 per bushel. Chinese authorities began rejecting the first of 1.25-mmt of U.S. corn shipments the same week the 2013/14 temporary reserve purchase program was begun.

By June of 2014, authorities in Beijing were worried that grain reserves were at a record-high level--they said 100 million tons--and there was no space to store the 2014 harvest--another big one. That month, the director of the Jilin Province Grain Bureau said 70 percent of the province's reserves were stored in temporary bins or sheds, and he expected that more makeshift bins would be needed to hold the 2014 harvest. The situation was probably worse in Heilongjiang. In May, authorities began frantically holding weekly auctions of corn to clear out space for this fall's harvest. Much of the corn offered failed to sell, however.

Much of China's "temporary reserve" of corn is stored in temporary bins made of thatched straw on a circular base of stones. Thatched mats are wound around to make the sides of a cylinder. The grain is poured in, and a thatched roof is added. The Jilin grain bureau director estimated that his province would need 70,000 temporary storage structures.

A fire at a granary in Heilongjiang in June 2013 destroyed nearly 20,000 tons of corn and got a lot of public attention. This comic skewers the explanation for the fire given by the managers of the grain depot. The man in a traditional mandarin's costume tells the "inspection team's" camera that the granary fire was caused by "high temperatures and wind."
This corn in a Heilongjiang farmer's courtyard in January 2014 was covered by snow and was too moldy to sell to the government reserve. Nevertheless, large volumes of corn in the reserve granaries was also moldy. Large volumes of corn from Heilongjiang offered for auction this summer failed to sell. This year's government document on the temporary reserve emphasizes that grain must be dried and meet standards before it can be sold to the reserve.

In addition to all these problems, China's practice of raising price supports every year was bound to  violate its WTO commitment to limit domestic support to 8.5 percent of the value of production. WTO practice is to measure the value of price-support by calculating the difference between the support price and a fixed historical reference price--in China's case the reference is the average from 1996-98. So, if you raise the price support every year, the difference between the support and reference prices will automatically grow. The price support is now more than double the WTO reference price, or about 1200 yuan per metric ton (see first chart above). This works out to about 17 percent of the value of production using a conservative assumption that the 69-mmt purchased for the temporary reserve during 2013/14 is considered "eligible" for the program. That's double the 8.5-percent ceiling on domestic support.

Like many of China's policies, this one works well when all prices are going in the same direction. But the wheels come off when prices start falling. The decline in corn prices seems to have caught the Beijing policy makers off guard. The Development Research Center was alarmed to find that China had fallen below 90 percent self-sufficiency in 2012 and that corn imports had surged. They began to fret about an inevitable increase in corn imports. A new 400-page book by DRC policy wonks (China: Food Security and Agricultural Going Out Strategy Research) spends most of its 400 pages talking about China's need to import corn. It was released in September--two months ago, when it was clear that China had what is probably the biggest corn glut in history.

Officials in China recognize that the price support has hit a ceiling. In October 2013, a National Development and Reform official again chanted the mantra, "Agricultural commodity prices must keep rising to compensate farmers for rising costs and to increase their income," but he went on to note that "...the domestic grain price is now higher than the international market price, so there is little room for prices to rise further." Since then, the soybean, cotton, rapeseed, wheat, and corn prices have all been held at their previous year's level and this year they are experimenting with target price subsidies for soybeans and cotton.

Authorities would like to transition to a target price subsidy for corn, but it looks like the temporary reserve policy for corn will be in place for at least a year and probably two. How long can the corn price remain stuck between the floor and the ceiling?

Monday, November 24, 2014

China Cotton Still in Excess Supply

The good news is that China's elimination of price supports has reduced the incentive for its farmers to produce large volumes of poor quality cotton. The bad news is that the world still has too much cotton.

According to China Cotton Association data reported by a textile industry analysis, the country has 12 million metric tons (mmt) of cotton in storage. This year, Chinese production is expected to add another 6.6 mmt to the supply. Its import quota has been chopped to 890,000 metric tons (imports have been running over 4 mmt in recent  years). Adding up inventories, production and imports, China will have 19.7 mmt of cotton available. That's nearly three times estimated annual consumption of 6.8 mmt.

The Chinese textile business is not what it once was. Factory bosses complain that they pay 3,000 yuan more than the international price for every ton of cotton they use. They are also paying higher wages and sometimes encountering labor shortages.

The Chinese cotton price is 14,821 yuan/mt. The New York cotton price for December is 63 cents/lb, translating to 11,912 yuan/mt at Chinese ports, 2909 yuan/mt lower than the domestic market price.
Chinese textile factory bosses complain that orders have been down since the 2008 financial crisis. With high costs and insufficient innovation, they can't compete with southeast Asian producers on an equal footing. Some are going bankrupt or going on the lam to escape unpaid debts.

In a market where supply and demand determine prices, a decline in price sends a signal to producers that they should produce less cotton. China introduced a support price in 2011 to prevent cotton prices from falling. Chinese farmers kept turning out cotton and the government bought it up.

This year the support price--known as a "temporary reserve" policy--has been canceled. Farmers are to sell their cotton on the open market. The market will set a price. The government will calculate the difference between the market price and a "target price", then pay farmers the difference as a cash subsidy. That's the theory.

In practice, the market is not actually having the "decisive" role promised. The government's Agricultural Development Bank is flooding the countryside with cash to ensure farmers aren't turned away or paid with IOUs. The bank has allocated 60 billion yuan (nearly US$ 10 billion) to fund cotton purchases. A single cotton company in Xinjiang autonomous Region said it got a 1-billion-yuan line of credit. It is said that commercial banks have pulled out of the cotton-financing business due to the high risk (of prices falling?). Once again the Agricultural Development Bank is lending money to purchase commodities that are falling in value.

Peoples Daily introduces a Xinjiang farmer who says his seed cotton is selling for 6.3 yuan per kg this year, down from 9.8 yuan in 2013. He says farmers can't make any money at this price--they have to depend on the subsidy for their profit this year.

The target price is set at 19,800 yuan/mt for cotton that has been ginned. A 6-yuan/kg seed-cotton price translates to a lint cotton price of 14,000 yuan. thus, the subsidy is 5800 yuan/mt--over 40 percent of the purchase price.

According to Peoples Daily, the new policy will improve quality. The temporary reserve policy encouraged farmers to grow the maximum volume of cotton without regard for quality. This year, farmers have incentive to plant good quality cotton varieties (everyone gets the same subsidy per kilogram--that gives farmers incentive to sell at a higher price). The poorly calibrated mechanized equipment in Xinjiang also degrades quality by damaging fibers and introducing impurities. Foreign fibers are also mixed in [intentionally?] with hand-picked cotton. A Xinjiang cotton enterprise manager thinks the quality improvement will be the most important impact of the new subsidy.

Saturday, November 15, 2014

China's Bulgarian Corn Connection

On November 11, China received its first cargo of imported Bulgarian corn. This corn represents China's new approach to agricultural trade in which Chinese entities control the commodity from its source. This corn was grown by a Chinese company on soil that happens to be in Bulgaria.

The 36,700-ton cargo--identified prominently in news media as "non-GMO"--was received at the Shenzhen port, where it was promptly inspected and testing with expedited "green channel" procedures for agricultural cargoes. This treatment stands in contrast to other cargoes which are turned away or languish in their berths for weeks waiting for port officials to approve the shipment.

A representatitve of the importer--Tianjin Nongken Longchen Jiayi International Company--notes that the corn was grown in Bulgaria to be sold back to China. The company plans to import 175,000 metric tons of corn in 2014 and hopes to import 300,000-500,000 tons next year.

The corn shipment is the first tangible result of an agricultural investment strategy targeting Bulgaria. Several years ago commercial officers at China's Bulgarian embassy recommended Bulgaria as a potential site for Chinese companies to launch agricultural investments on the European continent as part of the Chinese "go global" strategy to grow crops overseas for the Chinese markets. A number of companies have been exploring possibilities, but the Tianjin company's investment in grain and oilseed production is the flagship project.

The investor in Bulgarian farming is a company created by the State farm system in China's Tianjin municipality ("Nongken" is an abbreviation of "agricultural reclamation", part of a national network of state-owned farms that operate swathes of land converted to farms on the forest or desert frontier, reclaimed coastal lands--like Tianjin--or tropical plantations.)

Tianjin Nongken has political support. In May 2014, a member of China's Politburo and Party Secretary of Tianjin Municipality visited Bulgaria at the invitation of the head of Bulgaria's Socialist Party. The Chinese official conveyed greetings from the Chinese premier and was briefed on the agricultural investment project. The agreement allowing Bulgarian corn to be imported to China was signed 3 months later. Diplomats said an earlier agreement to establish import protocol for Bulgarian corn was signed to facilitate the Tianjin Nongken project.

Also in May--perhaps by coincidence, perhaps not--Minister of Agriculture Han Changfu urged State farms to form shareholding companies and conglomerates and endorsed them as main players in China's agricultural "go global" strategy.

In 2011, Tianjin Nongken set up a company in Bulgaria with investment of 30 million Euros, renting 30,000 mu (2000 hectares) of land in northwestern Bulgaria to grow corn and other crops using local labor.

According to the Politburo official's briefing during May, Tianjin Nongken planted crops on 127,000 mu in Bulgaria during 2014. They expect to produce 25,000 metric tons of corn, 10,000 tons of wheat, 4,500 tons of sunflower seeds and rapeseeds, and 3,500 tons of other oilseeds. An online posting by Tianjin Nongken's trading company offers corn, alfalfa, wood products, sunflower oil, Bulgarian wine, distillers dried grains, and other grain products. The company has warehouses near the Varna port and has acquired a Bulgarian flour mill and a sunflower seed processor.

Chinese overseas agricultural investors encounter a lot of problems. Tianjin Nongken planted their first Bulgarian crop in 2012 but production was disappointing (they were hoodwinked by Bulgarian partners?). The land was fragmented into numerous parcels and much of the land was not usable for farming. Transportation was poor and the level of economic development was low. The Tianjin Nongken company packed up and moved their operation to another part of Bulgaria. They signed another agreement to buy and rent 130,000 mu (8,700 ha) with investment of 270 million Chinese yuan (about US$ 44 million).

According to the diplomats' report, a Beijing company has rented 500 hectares of land in Bulgaria to grow vegetables in greenhouses. They are just getting started but expressed frustrations over lack of labor and poor English skills of workers. They plan to bring in more Chinese companies to help them.
Chinese investors complain that buying land in Bulgaria is risky due to frequent disputes over ownership "for historical reasons." The legal environment is poor, efficiency is low, it's hard to consolidate land parcels (sound familiar?) and organized crime and "interest groups" are a problem.
The diplomats say the China-Bulgaria agricultural relationship is constrained by differences in language, customs, culture, and ideas. Bulgarian workers have poor English, communication is difficult, and misunderstandings are common.

Returning to the 36,700-ton Bulgarian shipment--this single shipment exceeds the Tianjin Nongken's entire production in Bulgaria this year. The trading company's plan to bring in 175,000 tons means that the company is getting corn mainly through traditional purchasing channels. This illustrates the impossibility of completely controlling grain supplies from production to port.