Saturday, March 24, 2012

Meat Smuggling Still Rampant

Earlier this month, Liu Yonghao, founder of China's largest animal feed company, complained that large volumes of meat are smuggled into China. Liu, also a member of the China Peoples Political Consultative Committee, made his comments while in Beijing for this month's annual political meetings.

Liu said that most people don't know that chicken meat is the most-smuggled product--not computers, gold or jewelry. He described smuggling of pork and chicken as extremely "serious" with volumes amounting to several hundred thousand metric tons annually. Liu claims that the smuggling of meat is a threat to food safety and disease control and called for a strict crackdown on it.

[The smuggling is not new and there has been publicity about crackdowns over the past couple of years. Last year the dimsums blog posted an article with photos about a seizure of smuggled chicken feet and industry claims that smuggling was responsible for their low profits.] The article on Liu cites a 700-mt chicken seizure in Guangxi last year, four smuggling cases uncovered in Nanjing during December and 78 raids over ten months in Kunming that involved 1000 metric tons of meat.

Liu Yonghao attributes the smuggling to China's high meat prices. He said that China's average pork price last year was 79% higher than in the U.S. and 48% higher than in Europe. At the same time, Liu points out, Americans don't eat chicken wings [he probably hasn't heard of "Buffalo wings"], chicken feet, or internal organs so these can be bought very cheap from Americans and sold in China's market at a very low price.

Liu worries that the smuggling not only limits Chinese agricultural development but also damages the tax collection system and import-export regulations. He said no one knows whether smuggled meat carries viruses that could enter China and spread all over the country.

Liu claims that importing large volumes of meat is very bad (非常不好). He says an order for meat placed when Chinese prices are at 20 yuan would take half a year to arrive in China after being slaughtered, by which time the price might be down to 15 yuan and Chinese farmers losing money. Then Chinese farmers cut back and the price goes up, creating a vicious cycle.

During the week of Liu's outburst, a reporter for Southern Daily newspaper conducted an investigation that reveals some of the smuggling trade's workings. The reporter heard from a friend who serves American beef in his home that smuggled meat can be procured from a certain frozen food market in Panyu, a satellite city of Guangzhou. The reporter visited the market and saw many stalls offering boxes of frozen meat that lacked the required inspection and quarantine certificates. The vendors all claimed to do import business, claimed that their products were cheap and good quality and claimed to have loyal repeat customers.
Illustration that accompanied the Southern Daily article. The red line illustrates the smuggling chain: Hong Kong-Vietnam-Dongxing (Guangxi Province)-a frozen food market near Guangzhou. Source:

Visiting one stall, the reporter was approached by a smiling lady. The lady asked whether he was a buyer for a restaurant and offered to sell him frozen or cooked chicken wings, "very good for stir-frying." She had her assistant bring out a 15-kg (33 lb) box labeled "Brazilian chicken wings" which cost 308 yuan (about $1.45/lb). The reporter asked whether the quality of the wings was reliable and why there was no inspection certificate. She replied that some of her merchandise has certificates and some doesn't. When pressed on the matter, the lady slipped away to greet another customer.

The reporter spoke by telephone with a Mr. Zhang who is purportedly a big dealer in smuggled meat. He confirmed that there is a lot of smuggled meat in this particular market. He explained that meat from some countries is not allowed to enter China but demand for some products like beef tripe and chicken feet and wings is so great it can only be met by smuggling.

Traders told the reporter that loads of smuggled meat arrive in Hong Kong, then go by boat to Vietnam.  The reporter was told that two border crossings on the Vietnam border in Guangxi Province are particularly popular "for various reasons." During peak times hundreds of trucks a day pass through with loads of smuggled meat. They are transported by 10-ton truckloads that arrive at the market near Guangzhou in the middle of the night.

One individual in the trade explained that meat is smuggled because meat from "disease areas" is not allowed in China, plus duties on meats can be about 23%. So, on a load of beef that is worth 1 million yuan, there could be 230,000 yuan in duties assessed on a legal shipment. The smugglers only get paid 20,000 yuan and the logistics cost is about the same. This is a lot less than paying the duties, making the trade very profitable.

There is no mention in the article of how much the customs officials get.

According to the article there are about 500 companies operating in the Panyu frozen food industry and many legal companies are involved in the long "grey chain" for meat.

Neither of these articles mention that countervailing duties were slapped on imports of U.S. chicken in 2010 after an antidumping investigation found that American chicken feet with virtually zero value in the United States are "dumped" in the Chinese market. No one checked to see that Hong Kong's imports of chicken meat doubled after the duties were put in place. The Southern Daily article worries that smuggled meat from "disease areas" will transmit diseases to China. The only example of a "disease area" given in the article is the United States where mad cow disease "was once found," implying that eating American beef exposes Chinese people to risk of mad cow disease, an absurdly small risk, especially when compared to the multiple hazards present in China-produced meat.

Wednesday, March 21, 2012

Mold Limits China's Corn Supply

This year's corn has a high incidence of mold in many parts of Shandong, Henan and Hebei Provinces, restricting the amount of decent-quality corn coming on the market.

The moldy corn can't be used in most animal feed. According to the article, it is being used in poultry feed; since poultry have short lives the "death rate is low" from feeding them moldy corn. Alcohol and other industrial processors are able to use the low-quality corn but their profits and production are low right now. There is now a steep price discount for low-quality corn.
A moldy corn sample from a warehouse in Hebei Province (source: China corn net)

As temperatures rise the mold problem will become a bigger constraint on the corn supply. The hog industry is in a down period now with many producers losing money but the hog price is expected to rebound in the spring, also pushing up feed demand. This will likely push prices upward.

According to a China Grain Net article, in Guangxi feed mills are substituting wheat for corn in finishing hog feed due to the high price of corn. Wheat comprises 30%-40% of the formulation. It says that corn from north China (Shandong, Henan, Hebei) is being used only in poultry feed due to the high degree of mold.

A February 29 article says companies in Henan are buying corn cautiously due to the high rate of mold in the region. Alcohol companies are the main buyers.

Corn Under the Snow

A China Times (华夏时报) article from March 17 reported that farmers in the northeastern provinces are have held back a large proportion of their corn harvest on-farm, confident that prices will keep rising. A big snowfall in Heilongjiang last week left a big part of this year's corn harvest lying under the snow.

According to the article, farmers have plenty of cash and are not in a hurry to sell. Ai Jingcai, a farmer who planted 100 mu of corn last year in Heilongjiang said, "I'm not worried about selling grain...The price has been changing the last couple of days; I can sell as much as I want."

According to statistics, less than half of Jilin Province's corn harvest has been sold. In some regions farmers are holding 20% more corn this year than last year at the same time. The article reports that sales are slow all over the country. With prices high, people from all over the country are focusing on the northeast to procure their corn.

With corn trickling on to the market at a slow pace, processors are having a hard time buying corn and are buying as they need it.

The price at Dalian ports (for transport to the south) is 2450 to 2460 yuan per metric ton. A trader in Dalian said the corn price had risen 40 yuan per metric ton since January.

The reporter heard that a deficit between supply and demand is the main reason for rising prices. One grain company representative in Dalian told the reporter that this year's actual production was probably 160 million metric tons--about 30 mmt less than the government's official estimate. According to the article, corn production is near "saturation" (maxed-out) and is vulnerable to adverse weather while demand keeps growing. "Inventories of corn are very low."

According to the article, "State reserves in the northeast region, high-price purchases by processing companies, and farmers' reluctance to sell" are the main factors driving corn prices. A trader in Jinzhou (Liaoning Province) said the increased cost of getting corn to ports is driving prices up.

On the other hand, a factor cooling demand is the scarcity of working capital among traders and companies in the northeast since early in the year. Large trading companies have reduced their inventories of corn accordingly. Companies are buying corn as they need it.

This is the low-season for livestock production, so feed mill production is down, another factor cooling demand. The high corn price discourages feed mills from accumulating inventories. However, feed demand is expected to pick up in the second quarter. A Jilin Grain Group analyst thinks there is more room for increases in the corn price.

Subsidies Adapt to Commercial Farming

Beginning in 2004 China began giving small subsidy payments to grain farmers and also began to phase out taxes on farmers. The subsidies were designed to be "decoupled" payments that are not linked to the amount of grain produced. The "decoupled" status allowed them to be excluded from payments that count toward the limit  on farm support imposed on China as a WTO member. However, officials under pressure to boost grain output are frustrated that the subsidies do not induce farmers to plant grain.

The tension over subsidies is highlighted by a recommendation for improving grain subsidies made by the Hunan delegation to the National Peoples' Congress earlier this month. The delegation asserted that the grain subsidy needs "improvement" since the 15-yuan-per-mu subsidy is not nearly enough to offset the increased costs of raising two crops of rice. Farmers lose money growing two rice crops, "no doubt dampening their enthusiasm." (Yesterday's post noted that Hunan is the focus of concern about farmers switching from two crops of rice a year to one crop.)

The Hunan delegation worried that production incentives are weak when the  subsidy is given to the person who holds the contract rights to the land, not to the one who actually grows crops on it. They said the current "general benefit system has some limitations." They suggested that subsidies be based on the principle of "whoever plants gets the benefit." In other words, when land is rented out subsidies should go to the grower, not the land "owner."

The Hunan delegation suggested that land-holders who fail to plant crops on their land "for a long time" [more than just a single season of the year] can be assessed penalties and have their land turned over to large farmers who will plant crops on it. Last year this blog posted articles about the idle land phenomenon and measures officials take to prevent land from being left idle which indicate that these practices are common among local officials (although the practices seem to violate land contracting law). Apparently the Hunan officials are asking for legal or official sanction of these practices. They also asked that conditions be set for subcontracting (renting out) land, clarification of regulations for renting land of different grades, length of rental contracts and conditions for terminating rental subcontracts (i.e. for land-holders to get their land back from renters). These conditions are often ambiguous and rental agreements are often verbal.

They suggested subsidy payments for large grain farms (种粮大户) to help them consolidate idle plots rented from small farmers. The Hunan delegation said large farms are constrained by lack of financing and need help from the government to finance construction of infrastructure and grain-drying equipment. They called for relaxed credit limits and interest subsidies for large grain farmers. The article did not mention the size of "large" grain farms, but some provinces have large grain farm subsidies that have a threshold of 50 or 100 mu (about 9 to 18 acres).

The Hunan delegation complained that grain-producing regions are not adequately rewarded for their contribution to national food security. Farmers and local governments still bear a cost burden that they think should be shared by the rich coastal provinces. They asked that subsidies be doubled for farmers who double-crop rice and they called for higher input subsidies and extending subsidies to rice seedling farms as soon as possible (see yesterday's post). They called for setting up a compensation mechanism that would transfer funds from rich provinces or districts to grain-producing districts in order to cover electricity costs and fund agricultural infrastructure.

The article highlights an emerging social and economic change in rural China. The subsidy system was set up based on the presumption that agriculture is a subsistence activity in which millions of small land holders live off their small plots of land and pass the land down from generation to generation. However, this is becoming outdated as agriculture becomes a commercial profit-making operation and land becomes a capital input that can be consolidated, rented and sold. The subsidy system is becoming outdated and complex as it is forced to adapt to the new reality.

Tuesday, March 20, 2012

Early Rice Transplanting Campaign

In February the Ministry of Agriculture launched a campaign to maintain the area planted in early rice. For decades Chinese authorities have struggled to get farmers to double-crop rice in eight provinces of southern China. This entails transplanting rice in early spring that is harvested in mid-summer, then followed by a late rice crop on the same land. Many farmers have been abandoning the early rice crop in favor of single-season rice that can be planted later.

On February 29, the Ministry of Agriculture announced an early-rice-transplanting aid program for Jiangxi, Hunan, Guangdong, Guangxi provinces. The special fund allocation of 100 million yuan from the central government finances subsidies for large farms, specialized transplanting businesses, and farmer cooperatives for buying seed trays, plastic structures and other equipment with a subsidy of 800 yuan per mu for plastic greenhouses where seedlings are grown and 40 yuan for fields. A Jiangxi news program shows a farm with a series of plastic tunnels where rice seedlings are grown in plastic trays. The sign describes it as a rice "factory-ized" transplanting model farm. The seedling trays are loaded on trucks and transported to fields for transplanting.
Propaganda showing construction of structures for raising 
rice seedlings in Hunan (source: Changsha news site)

On March 5, the Ministry held a meeting in Hunan Province to promote the early rice-transplanting campaign. The Ministry's chief economist chaired the meeting and praised Hunan for allocating 120 million yuan of its own funds "even though it is not an economically strong province." He said everyone should learn from Hunan.

At the meeting, southern province officials were told to put a priority on early rice planting and promoting the transplanting campaign. The meeting stressed the importance of rice to national food security. Although the "overall supply and demand for grain are in balance," "there are imbalances in regional and commodity structure." At the meeting it was said that rice consumption is increasing and the importance of maintaining food security from start to finish was stressed.
Transplanting rice (source: Yunnan Daily)

The meeting called for keeping early rice area steady at 86 million mu and promoting a slogan of "single to double." They are trying to mobilize local officials and farmers to promote early-rice-planting. Officials want farmers to switch from directly seeding rice in fields to transplanting high-quality seedlings produced by specialized farms. Their plan is to start the program with large farms and cooperatives as models and promote the new technique to small farms. 

Officials are forming large contiguous areas specialized in rice that cover entire townships or counties. They
want to hook up transplanters and seedling producers with large 10,000-mu rice production bases. They also have plans to increase mechanization in rice areas and develop pest control teams.

One of the orders issued at the meeting was to generate lots of publicity and a number of provinces and counties have put out many news articles promoting early rice transplanting.

Xiangtan City in Hunan has dutifully announced a plan to maintain early rice area at 1.52 million mu. The district is promoting three techniques: concentrated production of seedlings, reasonable spacing of plants, and "safe heading." Xiangtan and Xiangxiang City were chosen as models for the province with 130,000 mu devoted to concentrated seedling production operations. Xiangxiang has 10 high-yield districts with centralized demonstration plots for seedling production. Other townships also have a designated demonstration farm, all using standardized varieties, plastic-covered housing, standards for renting fields to seedling producers and specialized management of seedling farms.

On March 14 Liu Saijun, a farmer in Lianmeng village, was busy transplanting seedlings. This year he manages 3.5 mu of early rice seedlings which can be transplanted into 70 mu of fields. He expects the seedlings to germinate by the 18th and be ready for sowing in fields by the 25th.

Friday, March 16, 2012

The Market for Dead Chickens

A news report from Shandong TV warns consumers that cooked chicken could come from chickens that died of disease. According to the report a "Mr. Liu and several friends" ended up in the hospital after eating diseased chicken.

According to the report, when there is a disease outbreak farmers lose a lot of chickens despite trying to treat the disease with medications. Instead of destroying the dead chickens, farmers sell them to rogue traders in order to cut their losses. The reporter was told, "Wherever there are chicken farms, you will find traders who come looking for dead chickens."

The reporter went to a farming area. The farmers told him there were no sick chickens in their coops because they had sold them to traders who came asking for dead chickens.

The reporter met with several traders. He visited the biggest trader who operated out of the courtyard of a small village house. The reporter saw a freezer filled with dead chickens that had been bought that morning, plucked and gutted. The chickens had turned purple but the trader said they could be bleached white.

He then went to a processing plant where he also saw dead chickens. The company is a reputable one that advertises quality as its priority. The chicken is supplied to a company in Jinan (the capital of Shandong) which uses them to produce cooked chicken products.

The reporter hopes that government departments will crack down on this activity to prevent sick chickens from showing up on consumers' tables.

Hide the Clenbuterol

Livestock bureau officials in Jiaozhou, a prefecture of Shandong Province, announced that they will conduct a big crackdown on "lean meat powders" for the March 15, "Protection of Consumer Interests Day." The campaign was publicized in the news, presumably as an assurance to consumers. No doubt it also sent a signal to farmers and dealers to keep their clenbuterol out of sight until the campaign is over.

Jiaozhou inspectors carry out a special inspection (source: Zhu-e net forum).

"Lean meat powder" is a general term for a class of beta agonists that channel energy into making muscle instead of fat. They are banned for use as feed additives in China. Clenbuterol is the most common "lean meat powder" but there are about a dozen others as well. "Lean meat powders" created a scandal in March 2011 when a Chinese Central TV broadcast revealed that use was rampant in northern Henan Province.

A Jiaozhou official explained to a reporter that each person in the department has responsibility for certain companies and markets, leaving no "blind spots." The prefecture has 30 feed mills and 6 veterinary drug manufacturers, and someone is responsible for each one. Each member of the inspection department is responsible for 4-to-6 of the prefecture's 170 large-scale farms, 80 veterinary and feed sellers and 9 fresh milk collection stations. Jiaozhou also has 521 medium and small markets and 764 livestock villages with 6632 small farms. These are overseen by 505 village-level disease prevention personnel.

During the March 15 inspection (which apparently lasts multiple days), each inspector is too carry out daily strict inspections of each large-scale farm, feed and veterinary drug company in his district. Village disease prevention personnel are to conduct twice-a-week inspections of commercial farms and livestock villages. There are to be weekly inspections and record checks of veterinary stations and prefecture personnel will carry out random inspections of the stations and village prevention officers. They will also check inspection records and unify the record-keeping system.

Tuesday, March 13, 2012

Pig Diseases More Complex

Two recent postings on online bulletin boards warn farmers that pig disease are becoming more complex and difficult to deal with. China is in a transitional phase from "backyard" production using local breeds to an industrialized system where large numbers of pigs are concentrated in factory-like conditions. Many producers are still using traditional practices in the industrialized modes and this creates dangerous disease vulnerabilities.
A farmer posted this photo on an Internet forum looking for help with a skin disease.

One posting, "Hog farm epidemic situation is grim;stronger prevention is urgent," appeared on many web sites last week but it appears to have been written in 2008. The article points out ways that diseases have become more widespread and difficult to treat. The writer warns that a pattern has emerged where diseases cause high death rates, then subside before making a resurgence. The writer says that highly pathogenic blue ear disease (PRRS) has followed this path. Blue ear and other diseases that have become widespread are immunosuppressant diseases which he says has led to a resurgence of classical swine fever.

The second article, a veterinarian's advice for preventing disease outbreaks on concentrated hog production farms, notes that diseases are changing and becoming more complex. The writer warns that old forms of disease are changing and new disease symptoms are continually emerging. In particular, he notes the spread of mild forms of classical swine fever, pseudorabies, enzootic pneumonia, PRRS, atrophic rhinitis (inflammation of tissues inside the nose) and other infectious diseases that "are becoming quite serious." 

Both articles warn that the changing structure of the industry contributes to disease problems. The first author observes that raising pigs in high density, keeping them in adverse conditions for long periods, emphasizing rapid growth and neglecting disease resistance, unbalanced feed formulas, and abuse of antibiotics pose serious threats to the health of pigs. He points to the low resistance of imported pig breeds that are not accustomed to the climate and feed resources in China as a major contributor to disease. Insufficient attention to inspection and quarantine allowed some foreign pigs to transmit new diseases, says the author. He points out that importing these breeds with a myopic focus on feed conversion and leanness of meat is short-sighted. He calls for developing resistant breeds through government and company cooperation.

The second author says, "With domestic and foreign breeds being propagated some new diseases have spread rapidly, like parvovirus (always present in sow herds), pseudorabies, endometritis and agalactia syndrome. The prevention and monitoring of these diseases is often ineffective, causing serious trouble for the hog industry." He says that new symptoms are appearing and there are many secondary and mixed infections that make prevention and treatment more difficult.

The first author observes that high prices and government subsidies attracted many people to the industry who don't have experience with pig diseases. In the scramble to get piglets, farmers will buy whatever pigs they can get and interregional movements of feeder pigs has increased, promoting the spread of disease. The second author warns that diseases can spread quickly and become hard to control on large-scale concentrated hog farms. He gives a number of tips for creating a bio-secure farm, choosing a site far from roads, elevated, with good ventilation, improving nutrition, using all-in/all-out, raising your own piglets, careful cleaning and disinfection and other measures to prevent disease.

Both articles call for a change in thinking and approaches to treatment. Traditional treatment methods don't always work any more. The first author calls for increased use of Chinese herbal medicine for treating pig diseases. Reacting to epidemics after they occur is not as effective as using preventive measures. The second author calls for veterinarians to change their thinking and practice, to observe diseases and symptoms, analyze all available data and to be proactive. 

Friday, March 9, 2012

Food Safety and Monopoly

A string of news articles on the pork industry in the city of Shenzhen exemplify the struggle between big "safe" companies and small, cheap "unsafe" processors. Illegal slaughter and marketing of pork is surprisingly resilient. It remains rampant even in one of China's richest cities a year after massive public and government attention was focused on pork sector problems a year ago when CCTV revealed the widespread use of "lean meat powders."

Last month, a Shenzhen news site reported that the daily volume of hogs processed by the city's legal slaughterhouses was down 30%-40% this year because so many pigs are being slaughtered by illegal underground butchers. At one facility that has capacity to process 3000 hogs a day production is just 1300 or so. At another, production is about 60% of the usual volume. Managers complain that they have spent a lot of money renting the land, installing exhaust systems, high-pressure water systems and mechanized equipment, but some people want their pork "a little cheaper," so illegal pig-slaughter is "rampant."

A legal slaughterhouse in Shenzhen

The reporter paid a visit to an illegal slaughter operation hidden behind newly-planted trees. When he got there, the workers had all fled, leaving clothes hanging up and knives lying around. The slaughter took place on a cement platform in an open compound. Trucks would drive up and unload pigs on to the platform where they were slaughtered. Three pumps sucked water from a nearby river which was pumped into the carcasses to increase their weight. A drain pipe washed waste water into the river upstream from the intake pipe, so the waste water was pumped into the pigs.

The reporter visited an illegal slaughterhouse processing 1000 head a day. Another, much larger, facility processed only 200 a day.

The illegal slaughterhouses charge a 15-yuan fee to slaughter each pig, much less than legal slaughterhouses charge. With a minimum of 800 head a day, the reporter calculates that they take in 12,000 yuan per day.

The main advantage of illegal slaughterhouses seems to be that they are not encumbered by following the regulations. Legal slaughterhouses have to test pigs' urine for illegal substances. This costs money and slows down the process. The slaughterhouse has to wait until test results come back before they begin slaughtering. The manager of an illegal slaughterhouse boasts that he can accept pigs and deliver the meat to you any time you waiting around for test results.

This article is one of many on illegal slaughterhouses in Shenzhen, other places in Guangdong, and other cities in China. Another recent article reports on finding traders carrying a half-dozen carcasses with fake inspection stamps. The guys caught with the illegal carcasses said they bought them from an acquaintance who said he got them from a legal slaughterhouse. They were delivering the pork to small restaurants.
Carcasses with fake inspection stamps in Shenzhen (Source: Shenzhen News Site)
Today in Guangzhou an article announces that 12 people are on trial for trade in illegal pork. According to the article, enforcement personnel have been conducting at least one raid a week over the past year to crack down on illegal pork in markets. The article refers to Guangzhou's "backward" pork marketing system as a factor preventing officials from stamping out illegal pork trade and food safety problems like pumping water into pork.
Illegal pork traders on trial in Guangzhou

Shenzhen is already taking action to reinvent its pork slaughter-marketing system. The vice mayor of Shenzhen attending the National Peoples Congress in Beijing this week defended the city's plan to build four large modernized pork slaughter facilities that will displace 16 older ones. The first new slaughterhouse recently went into operation and the others are expected to start up soon.

Some people are accusing this new plan of creating a monopoly that will raise meat prices. There is one large slaughterhouse planned to supply each district of the city, giving each on a local monopoly. The new slaughterhouses are expected to use an integrated management model in which they buy hogs under contract from production areas, slaughter them and supply them to final retailers. Under the current system there are 50 wholesalers who pay slaughterhouses to slaughter the hogs and compete with each other to supply final retailers.

Critics of the new Shenzhen system say the wholesalers will be pushed out of the market under the new system and each of the four slaughterhouses will have a monopoly on pork trade in its district. Thus, the law of the market will not be able to work, they argue, and slaughterhouses will be able to raise meat prices.

Oddly, the article about the vice mayor doesn't mention the rampant underground slaughter points that have lower costs, flout inspection requirements and have undercut the legal slaughterhouses. As long as there is a demand for cheap pork, will officials be able to eliminate illegal slaughter and marketing?

Shenzhen news displays legally stamped carcasses
 (left and above right) and illegal pork (lower right)

Safe food is costly. "Safe" food processing companies use large modern facilities, expensive automated equipment, they do inspections and tests, hire and train workers who know what they are doing, use lots of clean water and get expensive certifications. This all costs money. These "safe" companies operate alongside hole-in-the-wall workshops that do without all the expensive equipment and produce a product that is often not discernibly different from the "safe" product. Labels, stamps, and trademarks that consumers look for as assurances of safety can all be counterfeited easily.

Tuesday, March 6, 2012

Steel Pig Farmers

One of the world's leading steelmakers, Wuhan Steel Group, recently announced plans to build a 10,000-head pig farm as part of a strategy of company diversification.

A common saying in the company lately is, "Making steel is not as good as selling pork.” Energy and raw materials are rising and steel prices are down. Last year Chinese steel companies made a profit of 2.5%, far below the average of 6.5% for industrial enterprises. 

Steel is cheaper than pork. The price of steel is said to average 4.7 yuan per kg, far less than the 26 yuan price of pork.

The company's chairman, Deng Qilin, says the decision to build a pig farm is not done on a whim. It is part of a broader restructuring plan to diversify the company away from its focus on steel. Deng says the cost of steel production is going up while the demand for downstream products like cars is down. The company makes a profit of about 2 billion yuan annually producing 300-400-million tons of steel. Deng says the days of relying on massive scale and waste of resources is over.

The company plans to set up a modern household service company that will provide all sorts of services, from buying houses to renting cars to children's education to changing light bulbs. They also have plans for real estate and other manufacturing. Last month they signed a joint venture agreement with Hong Kong's China Resources Group to produce natural gas. 

Deng says Wuhan Steel's next step is to buy several thousand mu of land to begin "ecological" production of chickens, hogs, and vegetables. They plan to sell "Wuhan Steel" brand vegetables.

Monday, March 5, 2012

Repent and Study Lei Feng!

Chinese communist party members are getting spiritual and moral guidance by studying the life of a man who was the paragon of morality and died at an early age even as he served people with no thought of his own interests. That's right, Lei Feng, a mythical soldier-hero manufactured by Mao in the early 1960s as a model for "serving the people," is back again...resurrected from the dead, as it were.

The campaign comes at a time when confidence in the party is fragile, a path-breaking village election was just held in Wukan village, and the country is doing some soul-searching after the "Little Yue-yue" incident last October when a 2-year-old was run over by two vehicles and ignored by passers-by. Lei Feng is invoked as a kind of substitute deity/saint in a society run by atheists who have no moral compass.

Ministry of Agriculture Lei Feng campaign (Source: Ministry of Agriculture Press Office).

On March 5, the Ministry of Agriculture's Administrative Approval Office launched a special campaign to practice the spirit of Lei Feng. The campaign is an initiative of the office's communist party branch, and the head of the branch's party discipline inspection group gave a speech. As in most speeches given lately, the speaker emphasized that this is a significant year since it's the first year of the 12th five-year plan and party thought and organization must be strengthened and the party must stress clean and honest government.

The speaker stressed that we must recognize the significance of studying Lei Feng in a new situation, have a high degree of political responsibility, a good mental state, a solid work style, creatively pushing the Lei Feng study campaign.

  1. Ideological morality must be the first priority. Vigorously carry forward the Lei Feng spirit, guiding party cadres to strengthen the core value of socialism, firmly establishing a correct view of the world, maintaining advancement and purity, adhering to the spiritual community of the communist party.
  2. Study Lei Feng based on our work positions. Deepen the integration and focus of the pioneering struggle for excellence with our business work. Standardize and improve the effectiveness of work to provide a good environment for scientific development of agriculture and the rural economy. Make official work more open and strive for excellence.
  3. Raise the level of service through innovative methods. Draw upon the experience and methods of other regions. Study new methods of administrative assessment. Do more online assessments, speed up pilot programs to do pesticide approvals online. Quickly launch online approvals of seed, pesticide, feed,  and fisheries. Improve the application system. Focus on convenience, cordiality and satisfaction with services.
The Lei Feng campaign seems to be nationwide. Quite a few articles report on Lei Feng campaigns. The Liaoning Inspection and Quarantine Bureau gathered at a monument to Lei Feng to lay flowers honoring the 49th year since Comrade Mao Zedong first launched the "Learn from Lei Feng" campaign and the 50th anniversary of his "death in the line of duty." In the Nankai District of Tianjin City, officials gave community residents free advice and medical exams as part of the Lei Feng campaign.
Lei Feng campaign in the Nankai District of Tianjin

At Renmin University in Beijing, a scholar of political thought explains that studying Lei Feng can advance and spread a sense of moral society. "In a complex society," he says, people have varying degrees of morality, but most are pursuing universal, foundational moral standards. A few are advanced and a few are lagging in morality. In the "new situation" [since 1978, that is] of reform and opening and a socialist market economy, social morality is diverse, there are multiple moralities and morality is always changing. The advance and spread of morality coexists with backwardness. There are advanced moral people who imitate Lei Feng and there are backward people exemplified by the "Little Yue Yue" incident in Foshan. Therefore, the professor concludes, we must study and promote the spirit of Lei Feng, adhering to moral ideals, including diverse morals, castigating those with backward morality, condemning and punishing immoral behavior. When asked about people who think studying Lei Feng is an outdated idea, the professor insists that this is completely wrong. He argues that the outrage over the "Little Yue Yue" incident shows that most people desire advancement in morality. 
Little Yue-Yue, the girl run over by two vehicles in Foshan October 2011.

The irony is that this "scientific" organization must figure out how to promote morality without a god to prevent society from spinning out of control. It's hard for a party of atheists to keep people in line with no deity, no scripture, no promise of eternal reward and no threat of punishment in the afterlife, so the party has to invent a substitute in the form of Lei Feng who serves as a sort of secular saint. The party is trying to mimic a religious organization by commanding its members to to participate in its rituals, repent of corruption and laziness, and selflessly serve the people. 

Saturday, March 3, 2012

Feed Industry Consolidation and Integration

An article from a Shanghai feed industry analysis group provides a panorama on the history of China's feed manufacturing industry and describes its future direction. The article sees rapid consolidation in the industry, growing reliance on imported feed resources and a strategy of pushing upstream into livestock production to solidify the market for feed products and create new profit centers as margins on feed shrink.

The article describes the history of the Chinese feed industry in stages that are linked with the evolution of the livestock industry. In the 1980s, farmers began producing livestock and poultry as a commercial activity and there were thousands of small feed mills to supply them. Most livestock farmers were small, scattered "backyard" producers who had access to abundant feed resources in the form of grains, brans, crop stalks, vines, potatoes, etc. but they needed proteins and micronutrients. In the early years, feed mills produced largely concentrates and premixes to to supplement what farmers had on hand.

Beginning in the 1990s commercial scale livestock farms began to appear on the scene. "Backyard" producers began to gradually decline in number. The commercial-scale farms tend to use complete compound feeds instead of buying concentrates and mixing them with their own grain.

The article asserts that increasing volatility in the livestock sector in recent years has also shaken up the feed manufacturing industry. Market cycles have become shorter. In past years, the article says, it would take 4-to-5 years for the effects of a big event (like a shift in demand due to avian influenza or a "blue ear" disease outbreak) on the market to dissipate, but now it is 1-to-2 years. The article identifies two shake-out periods in 2006 and 2009-10 when the livestock market was depressed, feed demand fell, and many small feed companies were forced out of the market.

The first trend identified is consolidation in the market as big companies with access to finance and technology expand their market share through acquisitions. The beginning of this trend was signaled by New Hope Group's acquisition of Liuhe Group in 2005. The authors cite several other acquisitions that followed. Big companies with financial resources, marketing networks, good management and the ability to rapidly expand market share build new mills in major livestock-producing areas which leads to the disappearance of small and medium-size feed mills. The article cites statistics showing a decline in the number of feed enterprises from 15,000 in 2005 to 11,000 in 2009. The authors anticipate the number to drop further to 8000 in 2015 and 6000 in 2020.

Another trend is the prevalence of industry-chain management in which feed manufacturing is part of a series of links that include livestock and poultry production, slaughter and meat processing. This model was introduced into China by Zhengda (the China subsidiary of Thailand's CP Group) in the 1980s and has since become widespread. Unlike the tightly-controlled models often used in the U.S. where the company owns the animals and provides the feed, in China looser integration models called "company + farmer" or "company + base + farmer" are prevalent. In these models the company identifies groups of farmers in a geographic region  (a "base") as suppliers, signs rudimentary contracts with them, sells them chicks or feeder livestock and feed, then buys the animals back when they are ready for market. In some cases, feed companies operate hatcheries or breeding farms and slaughter/processing facilities. (The article doesn't mention it, but meat companies do the same thing.) This model solidifies the market for feed products, offers the possibility of increasing and stabilizing profits by diversifying their business.

The article sees large feed companies relying more and more on the industry-chain model in the future. The authors anticipate that small and medium companies with weaker financial and technical resources may unite to engage in this type of management.

This industry chain management reflects a maturation of the market. In the early stage (1980s) feed industry profit margins were high--about 16%--but fell to the 8%-12% range during the 1990s. During the last decade profits shrank and the industry became more turbulent. By 2005, the profit margin had fallen to 4%-5% before feed demand crashed in 2006 due to falling hog prices and shrinking inventories. In 2007, grain and soybean prices rose sharply. Profit margins are now 1%-3%, say the authors, and companies can't rely on feed alone to generate profits. They have to diversify and use industry-chain strategies to firm up their market share and profits.

The article describes a shift in the composition of feed products from feed concentrate to complete compound feed that goes hand-in-hand with the change in livestock industry structure. In the 1980s, backyard livestock farming was predominant but commercial farms increased their share in the 1990s. Egg and broiler industries were the fastest to commercialize; hogs and fish-farming were slower. The exit of backyard farms and the switch to complete feeds accelerated in 2007 when feed prices jumped, off-farm opportunities sucked people out of farming, and disease risks became a deterrent to hog production. The concentrate share of the feed market is down to 20% and the article anticipates that it will disappear from the market as complete feeds become prevalent.

The authors observe a growing reliance on imported feed resources. "With population increasing, cultivated land shrinking, shortage of irrigation water, and increasing natural disasters, China’s ability to supply the main raw materials for feed is more and more threatened. The shortage of raw materials has already become an important factor that can’t be ignored." As early as 2000, 80% of fish meal used in China was imported and the authors say that 80% of soymeal comes from imported soybeans. The article says there is a theoretical 5-mmt deficit of cottonseed and rapeseed meal that can't be replaced by soymeal. The supply of corn can't keep up with feed and industrial demand and large corn imports are possible in the next 2-to-3 years.