Wednesday, May 29, 2013

Shineway-Smithfield: $7 billion food safety lesson?

Shuanghui Group--known as "Shineway" in English--has announced its plan to acquire Smithfield Foods, a huge link-up between the two leading pork suppliers in the world's two leading pork markets. Shuanghui is paying $4.7 billion for Smithfield's stock and taking on $2.3 billion in Smithfield's debt--a $7 billion deal.

According to company lore, Shuanghui's Chairman, Wan Long, took over a failing state-owned slaughterhouse in Luohe City--a small unremarkable city in Henan  Province--and turned it into the largest meat-processing operation in China. Shuanghui is a private company, not state-owned. Shuanghui reportedly used its own cash and capital raised by Morgan Stanley for the acquisition. Unlike other high-profile deals in Chinese agribusiness industry, this one apparently did not involve the  China Development Bank, the government's giant ATM for favored companies.

According to Mr. Wan Long, "the government encourages and supports big companies to 'go out' [invest overseas]." Wan further explained that food companies especially need to "go out" in order to learn advanced food safety technology and experience. Mr. Wan said Shuanghui's objective in acquiring Smithfield is to pool the two companies' advantages and accelerate the company's global expansion. Wan says the U.S. has resource advantages and Smithfield has valuable technology and brand names.

Smithfield reportedly slaughters 27 million hogs annually and raises 15 million (presumably the rest are procured from farmers who usually raise them under contract for the company). Shuanghui (and other Chinese companies) are trying to figure out how to raise their own hogs or otherwise gain more control over their supply chain--they may think they can learn this from Smithfield. Most Chinese slaughterhouses also operate far below their capacity. Smithfield runs its plants 16 hours a day.

Usually, one would think the acquiring company is the stronger one and will be able to create additional value through the acquisition. However, Shuanghui apparently plans no changes. It says Smithfield's management, brands and facilities will be unchanged and no plants will be closed. Shuanghui's recent history raises doubts about whether the company is capable of effectively operating or adding value to a company like Smithfield. In 2011, Shuanghui was implicated in a major scandal when Chinese Central TV revealed that one of the company's subsidiaries was complicit in the use of illegal feed additives. This was embarrassing since Shuanghui had been a high-profile leader in a "moral food company" campaign designed by the communist party to bolster food safety. The 2011 incident suggested that the company had little control over its subsidiary operations. Its advertising featured "18 tests, 18 assurances" which were criticized by one commentator as "empty words." After the 2011 incident, Shuanghui pledged to open a big company-operated hog farm operation to supply each new slaughter facility it builds.

Smithfield has already been engaged in exporting pork to China, even setting up farms that produce hogs without ractopamine, a feed additive banned by Chinese authorities. The link-up with Shuanghui may firm up the stream of U.S.-to-China pork sales which has been big but highly volatile. Shuanghui's chief business is manufacturing sausages and other processed meat products, so it probably intends to procure pork from Smithfield's operations. With a Chinese company operating at both ends of the supply chain, Shuanghui may have influence to smooth the way for U.S. pork to get past overzealous Chinese border inspectors. Producing pigs in the U.S. for the Chinese market will use grain more efficiently since U.S. hogs have superior feed conversion and more productive sows than their Chinese counterparts.

Monday, May 27, 2013

Price Support Creates Rapeseed Oil Stockpile

China's support price program for rapeseed is duplicating the bizarre phenomenon that its cotton market has been experiencing over the past two years: the government pays companies to buy up the crop at a minimum price that exceeds the price of imported commodities. No one wants to buy the domestic commodity, so most of the domestic harvest gets put into a "temporary" reserve and stored while imports soar.

Rapeseed is traditionally the main type of raw material used for cooking oil in provinces of central China, mostly along the Yangzi River (in North America we know it mainly by the name of its Canadian variety, "canola"). It is estimated that domestic rapeseed oil now constitutes about 19-20% of China's edible oil consumption, while soybean oil accounts for 40% and palm oil 20%.

The support price program for rapeseed was put in place in 2008 to encourage farmers to keep planting rapeseed by ensuring that the price won't fall below a specified minimum. But each year the minimum has been raised. The support price was 3900 yuan per metric ton in 2010 and was raised to 5000 yuan in 2012.  In May 2013 the support price was announced at 5100 yuan/mt. The government intends to stockpile 5 million metric tons of rapeseed--about half of the crop.

In many places, rapeseed competes with wheat for land. Wheat also has a support price and a much larger subsidy than rapeseed. The bigger attraction is that wheat only requires 2-3 days of labor per mu compared with 6-7 days for rapeseed. People in the industry say the support price has indeed prevented rapeseed planted area from falling, but the result has been a simultaneous stockpiling of domestic crop while imports of rapeseed and oil made from rapeseed soar.

Imported rapeseed oil is cheaper than oil made with Chinese rapeseed. According to one oilseed analyst, the price of Chinese rapeseed oil is 10,100-10,500 yuan/mt, but imported oil is 9800-10,000/mt. Imported rapeseed is better quality and has a higher oil-extraction rate. The government pays companies to process the domestic rapeseed into oil, bottle it and store it in warehouses. A CCTV 13 news segment displays oil processing enterprises and shows bottles of oil in storage.

Imports of rapeseed and rapeseed oil have been increasing since 2009. That year over 3 million metric tons of rapeseed was imported despite new inspection requirements and discovery of a "black leg fungus" on Canadian rapeseed intended to slow down imports. Imports of rapeseed totaled 2.93 mmt in 2012, up from 1.26 mmt in 2011. Imports of rapeseed oil also doubled in 2012, reaching 1.18 mmt. Imports for January-April of 2013 are up from the same period in 2012.

While imports soar, much of the domestic rapeseed crop is stored in warehouses after being processed into oil. According to a National Grain and Oils Information Center estimate, the stockpile includes about 300,000 mt from the 2009-2010 crop years and nearly 3 million metric tons from 2011 and 2012. Anticipating purchase of even more rapeseed starting this month, the government has been holding auctions of the stockpiled oil to clear out space for the new crop. But there has been little or no interest in buying the stockpiled oil since its price is high.

China's rapeseed-crushing industry has extreme excess capacity. There are over 500 "above-scale" enterprises with a total capacity of as much as 50 mmt. China produces about 10 mmt of rapeseed and imports about 3 mmt, so capacity utilization is roughly 25 percent. Large companies only operate 3-5 months of the year and small ones only for a brief period.

This situation is identical to that of the cotton market. The government has stockpiled large volumes of domestic cotton at support prices over the past two years while imports have soared. The government can't sell the stockpiled cotton and high prices are undermining the competitiveness of China's cotton industry.

There is also incentive to use the price support program to rip off the government. Some companies purportedly mix in cheaper imported rapeseed oil with domestic oil to sell to the state reserve. Regulations for this year's program expressly forbid selling the state reserve oil already in inventory, mixing in imported oil or cottonseed or palm oil.

Chinese officials are on a slippery slope with their price support programs. They may be counting on world commodity prices to bounce back and make Chinese commodities price-competitive again. If that happens--and they can sell off their stockpiles--they will look like geniuses. However, if global prices follow their historical pattern of falling as often as they rise, Chinese officials will face a choice of stockpiling commodities  forever, erecting import barriers, or abandoning the price supports.

Tuesday, May 21, 2013

Wheat Sprayers From Outer Space

Unmanned aircraft that spray pesticides are the latest thing in Chinese agriculture. In Hebei Province's Zhao County, an extension worker scouts the wheat fields for pests and sends a gizmo that looks like a space ship over the fields to spray them with insecticides.

The head of Hebei Province's plant protection station says that all localities have invested in unmanned aircraft sprayers and other mechanized pesticide application equipment this year. In a 6-to-8 hour day the aircraft can spray 300-400 mu (50-65 acres), what would normally take 20-80 people. He claims it also improves the effective utilization of pesticide by 30 percent. It reduces exposure of people to toxic pesticides and doesn't damage the crop by driving machines through the field.
In recent years, China's Ministry of Agriculture has featured an annual "one spray, three preventions" campaign as a measure to prevent pest damage to the wheat crop. The bug spray program is financially supported as part of its disaster prevention program. The government has given farmers subsidies for supplies for the pesticide-spraying program of 5 yuan per mu (about $5 per acre), a total of 181 million yuan ($29 million) for the province. In Hebei, the plant protection chief says they're spraying the wheat crop from south to north to kill bugs and ensure a good harvest.

A machinery cooperative in a county of Shandong Province has bought two unmanned aircraft sprayers whch the cooperative head says has improved efficiency of insecticide application. The head of the local agricultural machinery bureau said the aircraft can spray 16 mu (2 acres) in 8 minutes, a job that would usually take 50 people. The machines cost 200,000 yuan ($32,000) each.

Wages in China are now about 100 yuan per day, so it could cost 5000 yuan to hire 50 people for a day. At that rate, the bug spray aircraft would pay for itself after seven days. Agriculture was once a labor-intensive activity in China but soaring wages are inducing the adoption of the same capital-intensive methods used in developed countries...that is, by organizations in model counties that are handed government subsidies or bank loans.


Monday, May 20, 2013

Restaurant Waste is Pig Feed

China has millions of restaurants and cafeterias that generate an estimated 60 million metric tons of food waste annually. A large, but unknown, portion of this waste is used to feed pigs. There are many online articles about swill-feeding of pigs and crackdown efforts. Local authorities concerned about spoilage and the potential to spread disease, have been trying to stamp out this swill-feeding activity. A renewed effort is underway, apparently motivated by the connection of "gutter oil" as a by-product of cooking down the restaurant waste.

A reporter visited a village outside Changsha in Hunan Province where large boiling vats filled with food waste gave off a pungent odor. After cooking, the swill will be fed to hogs. The oil forms a thin layer on the top of the vat and is siphoned off and placed in metal drums to be sold as "gutter oil." The director of the local food and drug bureau calls these swill farms a "headache" and claims they are hard to find (although the reporter managed to find five of them to visit).
A swill-feeding operation

Restaurants and cafeterias frequently sell their waste to dealers who transport it in small vans and carts to small and medium-scale hog farms. In most cities this is illegal, but the trade is profitable, and authorities have a hard time stamping out the activity. Restaurants get paid several hundred yuan every few months for the waste and hog farmers can use swill to feed their pigs at half the cost of commercial pig feed.

In 2011, a reporter in Changzhou, Jiangsu Province, was alerted by villagers who complained about a neighbor who fed restaurant waste to pigs. The neighbor had come from another province, rented a plot of land and burned trash to cook down swill and separate out "gutter oil." The reporter saw 7 or 8 pigs in a bamboo shed with uneaten swill on the ground. Other villagers said the farm had been started in 2007 and during the hot summer months they could smell it 500 meters away.
A cart delivers barrels of restaurant waste to a pig farmer near Changzhou in 2011.

This is not a new problem. A 2006 Bejing Evening News article estimated there were at least 20 swill-feeding pig farms on the outskirts of Beijing, most of them operated by migrants from Sichuan Province. One man the reporter interviewed said they can't feed swill to young pigs because they get sick easily, but hogs over 50 kg can eat it with no problem. A lady with a Sichuan accent said it costs 7 yuan per day to feed pigs with commercial feed, but just 2 yuan for swill. The lady said she gets the waste from a restaurant owner she has known a long time--he keeps it a secret and doesn't ask questions about what they do with the waste.

In 2000, Shanghai agriculture authorities carried out a remediation campaign to stop swill-feeding. According to a survey conducted at that time, Shanghai produced 1100 metric tons (mt) of food waste daily, including 780 mt from food and beverage establishments (69%); 130 mt from school cafeterias  (12%); and 220 mt from workplace cafeterias (19%). That's about 400,000 mt annually. A demonstration project set up small treatment facilities and there was a plan to set up a market for recycling food waste. According a 2010 estimate by academics in Qingdao, 500 metric tons of food waste were produced daily in that city and 90 percent was purchased by underground dealers. The oil was extracted, recycled and resold while the residue was fed to pigs.
Pig hungry for swill in Suzhou.

Shanghai is conducting another pig-swill remediation campaign that began in January 2013 and runs through November. The campaign is being conducted in every town and involves agricultural, food and drug, health authorities and police. Agricultural authorities will find farms feeding restaurant waste to pigs, trace their sources, stop illegal behavior and assess penalties. Food and drug authorities will canvas restaurants and cafeterias, check their food disposal records and make sure their waste is collected by enterprises approved by the city. The campaign's goal is for 80 percent of restaurant waste to be recycled in a sanitary way by the end of the year.


On Shanghai's Chongming Island, an enforcement team of 25 people rode around in 11 vehicles to investigate 62 farms feeding food waste to pigs. They handed out copies of a notice forbidding the feeding of restaurant waste to pigs and made the farmers sign an agreement to cease and desist. Local officials plan to form enforcement teams including police and representatives from other government departments to monitor slop-feeding.


Feeding waste to pigs was long the norm in China (and many other places) when nothing was wasted. There is still a strong inclination to utilize waste and there are still a lot of people willing to do this nasty work as long as there is some money to be made. Chinese authorities have plans to treat and recycle the waste or turn it into biogas and fertilizer, but it's easier and more profitable to feed it to pigs.

There is no way of measuring the amount of pork produced from swill-feeding, but let's do some very rough back-of-the-envelope calculations. Start with the 60 million metric tons of food waste estimate. If we assume 30 percent (9 mmt) of that waste is used for feeding hogs and we assume it takes 500 kg of waste to produce a 100-kg hog, that would mean 1.8 mmt of pork produced by the swill farms. If all 60-mmt of waste was used to feed hogs, the number would go up to 12 mmt. By comparison, official statistics say China produced 53 mmt of pork in 2012 (did they count the swill-feeding farmers?).

IF officials are successful at stamping out the swill-feeding, that pork would need to be replaced by grain-fed pigs. With a feed conversion ratio of 3:1, that would imply a need for 4 to 36 mmt of additional commercial feed to replace the swill.

Saturday, May 18, 2013

Shutting Pig Farms to Ease Pollution

This blog has reported on water quality problems created by pig farms in China. In 2010, the Ministry of Environmental Protection called attention to livestock pollution and Shandong Province issued regulations restricting hog farms. Pollution from livestock has gotten more attention recently and its control was included in the 2011-15 five-year plan. Over the past year, the communist party has quietly been mobilizing local authorities to close down pig farms to address water pollution concerns.

In Guangdong Province communist party authorities have been carrying out a remediation campaign to close "scattered, small, and chaotic" pig farms. Party officials are being mobilized to participate, propaganda about pig farms is being disseminated, and pig farmers are required to sign clean-up agreements.

Last October, a village in Guangdong's Yongning Management District closed down a collective hog farm that was sited on the edge of a reservoir. The village communist party secretary said the village will lose income by shutting the farm but it will reduce water pollution and improve environmental quality, and "all the residents support it." Mr. Li, who rented land from the village collective to operate the pig farm, killed off all his pigs before last October's mid-Autumn festival and "hope[s] this will be an example to cadres and the general population in surrounding villages who are still raising pigs." The village party chief says they plan to plant fruit trees on the land.

In Xintang Town, all officials at the rank of vice bureau chief and above are required to take part in the hog farm remediation campaign and they have closed 385 hog farms with over 48,000 pigs to create "beautiful villages." Officials are advised not to let up after the campaign's completion to prevent farms from coming back. A TV news broadcast shows pig farms near Shenzhen being destroyed with sledgehammers.

In a town in Qu County in Sichuan Province, residents posted complaints online about their seriously polluted water. Muck and trash in the water were traced to some upstream pig farms and household waste disposal. Local officials plan to close the farms and move the pigs and stop people from throwing their trash in the water.

In Xinluo District in Fujian Province, 5,180 farms with 400,000 pigs in the Luojin River watershed were slated for closure in January. The reporter asked whether the closures would affect the city's pork supply. An industry official said there would be no problem because most of the local hogs supply pork to cities like Shenzhen, Hangzhou and Shanghai.

This campaign doesn't seem to be reducing the overall supply of pork.  Pork prices plunged during February to April due to a combination of weak demand and abundant supplies. The current "remediation campaign" is a crude means of forcing hog producers to bear the social costs of the pollution they create. It is also, in effect, part of a long-running hog industry consolidation process. There has been a surge of company investment in large hog farms since 2008, and farmers have mostly quit raising a couple pigs in their backyards, but there are still millions of individually-operated farms with dozens or hundreds of pigs. They are now being forced out, making room for company-operated farms with thousands of head.

Tuesday, May 14, 2013

Elevated Policy Status for Corn?

As of May 5, Chinese authorities had purchased 27.5 million metric tons (mmt) of the 2012/13 corn harvest under the price support program in northeastern provinces. The totals by province were: Heilongjiang 12.95 mmt; Jilin 8.73 mmt; Inner Mongolia 3.48 mmt; and Liaoning 2.76 mmt. The total is expected to reach about 30 mmt by the end of May when purchases are now scheduled to conclude. Price support purchases are only conducted in these four provinces.

As of April 25, the grain bureau says that the total volume of corn purchased by all buyers was 102.5 mmt in 11 major producing provinces. That suggests that 27.5-mmt support-price purchases constitute about one-fourth of corn marketed has been sold. The reserve purchases constitute 13 percent of the 208 mmt corn produced.

Much of the corn purchased for reserves has high moisture content, but corn had to meet minimum standards to be purchased for the reserve. Reports indicate that a lot of corn in northeastern provinces did not meet the standards and remains unsold.

From 2008 until now, the corn support price has been referred to as "temporary reserve" purchase (临时存储玉米收购). A yumi.com commentary detected in last week's State Council announcement an elevation of the status of the corn price support when Premier Li Keqiang called for a reasonable increase in the minimum purchase price for corn ("合理提高玉米最低收购价格"). Until now, only rice and wheat had "minimum purchase prices" while corn, soybeans, rapeseed, and cotton had "temporary reserve" interventions.

The yumi.com commentary interprets the use of "minimum purchase price" for the corn price support as elevating corn to the same policy status as rice and wheat. That means the support price is announced before planting (the "temporary reserve" prices are announced after the crop is harvested) to give farmers more certainty about the price and encouragement to plant the crop. The 2012/13 temporary reserve corn price was announced in November 2012--after the corn had been harvested. The yumi.com author speculates that a minimum price for the 2013/14 corn harvest will be announced in May since there are a few farmers who haven't planted their crop yet. And in the future he anticipates that the corn price will be announced in February or March (like the rice price; the wheat minimum price is announced in September or October; cotton's program is called a temporary reserve but the price is announced before planting).

The yumi.com commentary reviews past trends in support prices to predict the new corn price. In the last two years, the corn "temporary reserve" price in Jilin Province was slightly higher than the wheat "minimum purchase" price. The early-season indica rice price was raised faster (to encourage farmers to keep producing this crop no one wants to grow--or consume). In 2013, the early rice price was raised 0.12 yuan/500g and wheat 0.10 yuan, so he anticipates the corn minimum price could be raised by 0.05 to 0.10 yuan/500g, bringing it to 1.11-1.16 yuan/500g, or 2220-2320 yuan/metric ton ($352-$368 per metric ton, or about $9/bushel).

Thursday, May 9, 2013

Long Grain Rice Shunned by Chinese Consumers

China's rice market is becoming segmented. Short grain japonica rice--especially that from the northeastern provinces--is gaining popularity while hybrid indica rice is increasingly shunned by consumers who can afford better-tasting rice. Indica rice is diverted to food processing, liquor, and flour where it has to compete with cheap rice imported from Vietnam and Pakistan.

A report from Hangzhou describes Old Song's shop that used to sell a lot of cheap hybrid indica rice to elderly people and migrant workers, but now stocks short-grain japonica rice almost exclusively. According to market managers, it's now hard to find indica rice in Hangzhou--one of China's most prosperous areas. People there consume mainly rice from the northeastern provinces or japonica rice from Jiangsu and Anhui. Only about 10 percent of the rice in the market is indica and it's bought mainly by food processors and factory cafeterias.

Japonica rice has a short, rounder grain--Guangdong people call it "fatty rice" because of its round shape. Its taste and texture are preferred to indica rice which has a longer, thinner grain and is not as sticky.

As with many Chinese food commodities, the price of indica rice has been falling this year. According to one market manager, the Chinese economy has been slow since last year and fewer migrants--who like to buy cheap indica rice--have been coming to coastal areas.

Cheap indica rice from Vietnam and Pakistan is competing with domestic indica rice. In Ningbo, imports of rice have grown nearly five-fold this year compared with the same period last year. Of the 3000 metric tons imported, 2000 metric tons came from Vietnam and 1000 metric tons came from Pakistan. According to a rice analyst, Vietnam eliminated its price floor for rice and anticipates a big harvest this year that could drive the price even lower.

Early this year the price of Vietnam rice in Guangzhou’s wholesale market price was 1.67 yuan/500g or so, and it has fallen to 1.61 yuan.

According to the rice analyst, the price of an Anhui Province brand of indica rice fell from 2 yuan/500g at the beginning of the year to 1.85 yuan now. The paddy rice price was 1.35-1.36 yuan at the beginning of the year, and fell to 1.25 yuan/500g. In a region of Jiangxi Province, the price of paddy rice has fallen below the price floor.

Reportedly, sales are slow for rice mills and they are not buying much paddy rice. In one region of Hubei Province, sales are only half their usual level and many mills are idle. Slow sales at this time of year are common, but the decline in rice prices this year is unusual.

In Hangzhou wholesale markets, the average price for late indica rice from Anhui Province averaged 1.78 yuan/500g on May 7, down 12 percent from a year ago. The price of japonica rice from Jiangsu Province was 2.04 yuan/500g, down 9 percent from last year. The price has increased only for the best quality japonica rice from northeastern provinces--2.39 yuan/500g, up from 2.34 yuan last year. An analyst foresees tight supplies for northeastern rice as it becomes the preferred type of rice nationwide.

This trend also raises questions about China's "food security" strategy. Authorities are supporting the price, giving subsidies and officials have been leaning on farmers keep planting two crops of indica rice per year. Yet it turns out this rice is unwanted by Chinese consumers and is increasingly used for liquor, monosodium glutamate, and instant noodles--not exactly vital food products.


Wednesday, May 8, 2013

State Council: Agriculture Worries

A May 8 meeting of the State Council on agricultural problems was chaired by Premier Li Keqiang and featured at the top of the page on the Peoples Daily. The article was also posted on Central China TV and read out word by word.

While the article insisted that agriculture is overall stable and this year's wheat and early-season rice crops are doing well, it warns that "agriculture faces major difficulties":

  • The northeast has had serious spring flooding
  • Drought in the northwest and southwest regions still has not eased
  • Hog prices are falling
  • Supplies of beef and mutton are tight
  • H7N9 avian influenza are causing serious losses in the poultry industry
  • The April earthquake in Lushan, Sichuan Province seriously affected agriculture in that region
In light of these problems, warns the article, it is critical to take precautionary measures to prevent inflation, maintain balance between supply and demand of agricultural commodities, and keep farmers' income growing. 

The article--apparently written for local officials--called for keeping a tight grip on production of grain, pork, poultry, doing a good job on spring cultivation and planting, guiding production of early-season rice and wheat, guaranteeing seed supplies in the northeast, and carrying out various measures to mechanize production. It calls for support of large farms and family farms as the foundation of modern agriculture. 

The article included shout-outs to beleaguered sectors. It called for a "reasonable" increase in the support price for corn as an encouragement to producers now facing low prices and weak demand. 

The article addressed low pig prices, calling for expansion of government and private pork reserves and stabilization of pork prices. It obliquely addressed the dead pigs in the river incident by calling for support for "above scale" hog farms (the dead pigs came from relatively small household operations) and establishing a dead animal disposal system. 

High beef and mutton prices are to be addressed by promoting "standardized" beef and sheep farming, fully utilizing the improved breed subsidy program, and giving financial support to major production counties. 

Officials are ordered to do a good job on prevention work against H7N9. The article calls for maintaining poultry breeding capacity--reflecting a concern that the kill-off of poultry will result in a short supply that will lead to soaring prices later in the year when the fear of eating poultry has faded away. Poultry enterprises are to get short-term subsidized loans for working capital to keep them afloat.

Consumer food safety fears are addressed by calling for a crackdown on sale of fake and adulterated livestock products. Inflation worries are reflected in a call for food subsidies for low-income people to protect them against the effects of rising food prices. 

Provincial governors are reminded of their "rice bag" responsibility system for ensuring that provincial grain supply and demand are in balance, and mayors are reminded of their "vegetable basket" responsibility system which demands that local authorities ensure supplies of vegetables, meat and fish. Officials are urged to keep up the pace of reform and innovate in their thinking on agriculture, perhaps a sign of a new approach to agricultural policy is on the horizon.

Tuesday, May 7, 2013

Corn Support Price Purchases Extended

China is having trouble supporting corn prices. Purchases of corn at support prices were scheduled to conclude on April 30, but the Grain Bureau has extended the purchase period another month, to May 31, 2013.

China introduced a "temporary reserve" program to support the price of corn in 2008. The program operates only in four northeastern provinces. A floor price is set for each province and China's grain reserve corporation buys corn if the market price falls below the floor. About 35 million metric tons of corn were purchased during the first year of the program. Purchases of the 2009-2011 harvests were relatively small since strong demand pushed prices higher.

Stockpiling corn at a depot in Hegang, Heilongjiang Province.

Following the 2012 corn harvest a perfect storm of conditions put downward pressure on corn prices in the northeast. Overall, the quantity harvested was large (but in some districts of Jilin Province yields were down 30 percent due to pest problems and typhoon lodging). Wet weather in the northeastern provinces after the harvest raised the moisture content of the corn and caused mold problems. The lackluster economy slowed demand for starch and other industrial products made from corn, and a build-up of hog inventories drove hog prices down, reducing demand for feed. The dead pigs in the Shanghai River exacerbated the weak feed demand problem and the H7N9 avian influenza outbreak led to a kill-off of chickens, further weakening corn prices.

From November 15 to mid-April 2013, 20 million metric tons of the 2012 corn harvest was purchased for the temporary reserve to support prices. That's the largest amount since 2008-09 and roughly 20 percent of the corn marketed so far during 2012/13. About half of purchases were made in Heilongjiang Province. The quality of corn in the northeast was not good and mold problems are common. The corn price in the northeast is still falling despite the reserve purchases.

In North China, the 2012 corn harvest and the quality were good. A lot of corn was sold out of that region soon after the harvest. However, prices in northeast and north China are linked. Industrial processors are the largest buyers who usually drive the market, and they have been in loss-making mode since the second half of 2011. They are not buying much corn now, and many smaller processors have shut down.

In Hegang Prefecture, Heilongjiang Province, 120,000 metric tons of corn remain unsold. As the weather warms up, wet corn is more likely to get moldy and farmers worry that they won't be able to sell it. At No. 8 grain depot, trucks are lined up to sell corn. Normally, all the corn is sold by March but this year the depot is working around the clock in May to stockpile farmers' unsold grain. Technicians have been sent to villages to test grain before it's sold and recommend storage and drying techniques to prevent mold from growing.

Since the end of 2012, the Hegang branch of the Agricultural Development Bank of China has lent 4.3 billion yuan ($690 million) to 26 grain companies to ensure they had sufficient funds to buy 1.2 million metric tons of corn. Companies are buying moldy corn and taking losses on it as their "social responsibility." According to the head of one company, moldy corn can be used to make ethanol, but the price of ethanol has fallen 900 yuan per metric ton. They lose 400 to 500 yuan on each ton of corn used for ethanol.

Several articles reported on reserve purchases in Inner Mongolia. In Ordos, farmers reportedly had 100,000 metric tons of corn still unsold in mid-April. One farmer had 100 metric tons piled in his courtyard, harvested from 120 mu (20 acres) of land. He said farmers are accustomed to waiting at home for traders to come to buy grain but this year no one comes. Grain traders are afraid to buy corn because they might get stuck with it. They have no room to store it and have cash flow problems. According to the manager of a grain warehouse, no one in the supply chain--farmers, traders, or corn depots--are benefiting from last year's big harvest. Farmers are ready to plant the new crop but lack cash to buy seed and fertilizer.

Ordos authorities have designated the Sinograin branch and 18 buying stations to buy corn for temporary reserve to address the problem of unsold grain.