Saturday, July 22, 2017

Distrust Breeds Food Adulteration in China

Widespread fraud and adulteration has caused a breakdown in China's food marketing system, according to a July 4 report from Xinhua News Service posted on numerous Chinese news sites.

The Xinhua report describes a fundamentally failed market in which Chinese consumers are willing to pay high prices for quality food, and producers are willing to produce such items, but distrust raises an "integrity barrier" between consumers and producers that undermines the market process.

Consumers have come to expect products to be adulterated or fake as the default. They have learned not to trust brands, packaging, or logos. Xinhua authors point out that consumers have to rely on friends, acquaintances or expensive verification methods to authenticate the food they buy. Consumers in Beijing and Shanghai wishing to buy a type of rice from an area in Heilongjiang Province known for its quality ask friends living there, "Where can I buy authentic Wuchang rice?" Consumers meeting an official visiting from an agricultural province ask him, "Can you tell me how can I buy real ginseng?"

On the supply side, producers must expend considerable energy and expense to prove "I am who I am," the Xinhua writers say. Even if a company spends a lot on advertising, the prevalence of fraud makes consumers distrust the authenticity of the product when it reaches the shelf in the supermarket.

A rice cooperative manager in Heilongjiang's Jiamusi Prefecture explains that their efforts to convince consumers their rice is authentic raise the cost of the rice far above the actual cost of growing it. Grain Bureau officials from Heilongjiang Province holding promotions in southern cities are frequently confronted with questions like, "How do we really know this rice is from Heilongjiang?" and "How do we know government-sponsored sales promotions are for real?"

A production manager at a rice mill in Wuchang acknowledges that integrity issues are the biggest problem in the production, processing and sale of rice. This has been a long-term headache for Wuchang's rice industry since it markets itself as a premium-quality product, but imitators and fakes abound.

A rice producer in Heilongjiang Province's Wuchang City prints on packages of rice: "I am a demobilized soldier; quality food is getting more and more scarce; please believe in farmers' quality; integrity is better than a brand."

The Xinhua authors report on an expensive verification method prompted by the "integrity barrier." A researcher purportedly from a company-sponsored research institute in Zhejiang Province has been sent to Heilongjiang to live in a village and observe, photograph and report on the entire rice production process. The Zhejiang researcher says he came to search for "food with integrity, grain with virtue."

Farmers in Inner Mongolia explained to the Xinhua reporters that 500g of millet sells for only about 2 yuan, but old, stale grain is commonly mixed with the fresh millet so they can make a profit at that price. Farmers told the Xinhua reporters that many organic and grain products are adulterated because otherwise they could not make any money. The farmers say the mindset of most people in the business is that cheating can yield immediate benefits and there is little to be gained from honesty. The Xinhua authors compare the prevalence of adulterated foods to "Gresham's Law," in which bad money drives out good.

The Xinhua reporters explain that mutual distrust has created a vicious circle of adulteration. Farmers feel their weak position in society gives them a right to cheat customers. Their products are frequently downgraded or refused by unscrupulous companies when prices fall. The legal system rarely gives them any protections and companies know the farmers have no recourse. Farmers see a wide gap between living standards in the countryside and city.

In this environment of distrust, Chinese farmers and traders feel no compunction about reneging on contracts or adulterating products. The manager of a major company's rice mill says his company's 60-percent compliance rate for production contracts with farmers is actually quite high for China.

The remainder of the Xinhua article morphs into a promotion of Heilongjiang Province's rice industry and an obligatory nod to "supply side reform." The authors claim that Wuchang rice could meet Chinese consumers' demands for quality and safety at a price just a fraction of the cost of imported Japanese or Thai rice, and they calculate the income that could flow to producers in Heilongjiang. However, the authors offer no practical suggestions for filling the trust deficit other than posting motivational slogans on the wall.

Ironically, the Xinhua article itself breeds the cynicism and distrust that it purports to uncover. The article is presented as investigative journalism, yet it appears to be a veiled promotion of rice produced in Wuchang City, Heilongjiang Province. The references to "supply side reform" and the large number of sites posting the article suggests that propaganda authorities have ordered this to be disseminated. Journalists who pose as purveyors of information but are actually shills for companies and government policies are themselves dishonest in the way they present their work--another source of information that cannot be trusted.

Tuesday, July 18, 2017

Wanted: Premium Rice Prices

The upcoming harvest of another summer rice crop is a reminder of the growing contradictions in China's agricultural policy. Officials entice farmers to keep growing poor quality rice they don't want to grow and that is no longer demanded by the market, but officials are afraid they won't meet their food security targets without this rice that no one wants to eat.

In a handful of hot, humid provinces of southern China, officials encourage farmers to grow two crops of rice--an early crop planted in the spring and harvested in mid-July followed by a late crop harvested in late fall. Two crops increases the physical amount of rice produced, but the early crop doesn't taste good, is shunned by the market and mostly ends up in government warehouses.

A Grain and Oil News article on prospects for the early rice harvest this month notes that production of the early rice crop has been gradually sliding downward because market demand is less than the supply. Now that farmers have full bellies and money in the bank, they are not inclined to invest the extra time and money to grow two crops; many have instead switched to growing a single rice crop that requires fewer trips to the field. The 30-million-ton early season crop is about 15 percent of China's rice output, but it is mostly shunned by the market because of its poor taste as consumers become more discerning about the rice they consume. The article says the early rice crop is mainly used in food processing or stored in government reserves.

In view of the excess supply of early rice, authorities have cut the minimum price two years in a row. The recent summer grain purchase work meeting anticipated that market prices for this year's crop will be less than the minimum price of 2600 yuan per metric ton, triggering more government rice-buying this summer.

Grain and Oils News observes that authorities are under growing pressure to dispose of rice stocks. Authorities have had a hard time selling their stockpiled rice; 25 auctions have sold only 1.87 million metric tons of early rice this year. No auction has sold more than 5.6 percent of the rice offered. 

A Farmers Daily article by Ministry of Agriculture economists in March also raised concerns about bulging rice inventories. The economists cited a 2016 survey that showed a 10-percent increase in rice stocks held by farmers that they interpreted as a sign that the bulging inventory phenomenon has spread to farmers who presumably are unable to sell all their rice. This article also observed the dichotomy between excess supplies of low-end rice and shortages of high-quality rice demanded by consumers.

Medium grain rice produced in northeast China--generally considered to be high-quality--is also in surplus, according to an analysis by a local Price Bureau in Anhui Province from last October. There is considerable pressure to de-stock medium grain rice, but doing so would push prices downward. This analysis also notes that farmers who produce high-quality varieties or have low moisture can get better prices, but they face little risk of a decline in price due to the minimum price program. In Anhui, farmers harvested and sold their rice as quickly as possible to get the guaranteed price (presumably so they can return to their off-farm jobs or mah jong games).

In Hubei Province rice inventories are generally low-quality due to hot weather and flooding last year. Analysts say supplies of quality rice are tight. The difference between China's rice prices and Asian export prices has narrowed; the price of Thai Grade B rice is above the price of Chinese early indica rice for the first time in nearly four years. Nevertheless, China's rice imports were 1.3 million metric tons during the first four months of 2017, less than 1-percent less than the pace set last year.On June 12, customs inspectors and police held a joint crackdown that nabbed 39 rice smugglers and destroyed 2000 tons of smuggled rice; preliminary estimates of rice smuggling were put at 300,000 metric tons.

The core problem identified by the economists writing in Farmers Daily is a rising cost structure that prompts officials to put a floor under prices. The Farmers Daily writers pointed out that China's production costs are higher than those of producers in Vietnam, Cambodia, and Pakistan. Imports from these countries tend to put downward pressure on prices for low-grade rice in China. However, officials don't want to let Chinese rice prices fall low enough to compete with international prices because they fear farmers would stop growing rice or protest over falling incomes. While they did cut the minimum price for early rice two years in a row, the cuts were small and cautious.

Chinese officialdom's strategy is to urge farmers to produce high-quality rice that will justify the high prices needed to cover rising production costs. Strategic plans and guidance documents are filled with exhortations to build brands, grow organic, and obtain certifications to get premium prices.

The Farmers Daily authors describe the minimum price policy as inappropriate for the growing market segmentation in the rice market. Higher quality rice sold to government warehouses at the minimum price doesn't get a premium to encourage improvements in quality. Instead, the authors suggest promoting vertical linkages between growers and rice companies, creating brands of rice, and using e-commerce to market high-quality rice.

Now China is attempting what might be called a "Great Leap Sideways." Just a few years ago, the "China Price" was the absolute lowest price for knock-offs and generic commodities. Now China is trying to re-position its products as high-end designer goods to justify high prices needed to cover rising production costs. That's quite ambitious for a country that was synonymous with food safety calamities a decade ago and whose rice, in particular, is still under a cadmium-tinted cloud.

Monday, July 17, 2017

2016 China Feed Industry Statistics

China's animal feed industry output rose 5.7 percent during 2016 to reach 209 million metric tons, according to statistics reported by China's feed industry office. More feed was produced last year despite a 1-percent decline in production of meat and eggs reported by the National Bureau of Statistics last year. Last year's growth continues a string of moderate growth rates in feed output that followed a burst of extremely rapid growth from 2007 to 2012.

Broiler and duck feed led the growth in 2016, as the sector recovered from an avian influenza-driven dip in production during 2013-14. Swine feed output recovered slightly after declining during 2015. Feeds for laying hens, aquaculture, ruminants and other livestock grew modestly.

Production of complete compound feed grew 5.4 million metric tons (3.1%) and output of additives and premixes grew 185,000 metric tons (2.8%). Output of feed concentrates fell 1.26 mmt (-6.4%). Meat poultry and hogs accounted for most of the growth in compound feed, probably reflecting growing popularity of the "company + farmer" vertical linkage model in which companies supply farmers with piglets/chicks, specially formulated feed, and veterinary medicines.

The statistics reported 191.5 million metric tons of raw materials were used by feed manufacturers during 2016. (Note that this is not an exhaustive measure of all feeds used in China--many farms use their own feed materials or mix them on their farm.)  Corn accounted for more than half of raw materials used by China's feed manufacturing industry, with a total of 105 mmt used. The amount of corn used by feed manufacturers in China increased 21.5 percent last year, according to the report. Feed manufacturers used 11 mmt of wheat, which declined 22 percent during 2016. The increase in corn use was likely a response to a 14.4-percent decrease in wholesale corn prices in 2016. The support price for corn was cut 10-percent for the 2015/16 market year, and elimination of the policy was announced in April 2016. Wheat is now an expensive feed material relative to corn, since its price is still supported by a minimum price policy.

China animal feed industry use of raw materials, 2016
Raw materials  2016 Use Change

Million metric tons Percent
All raw materials 191.49 7.0
Corn 104.97 +21.5
Cottonseed meal 3.55 -18.3
Soybean meal 37.80 -1.5
Rapeseed meal 4.48 -5.0
Fish meal 1.85 -39.3
Other meals 4.92 13.2
Wheat 11.01 -22.0
dicalcium phosphate 2.44 -16.3
other raw materials 20.47 -1.0
Source: China Feed Industry Office.

The statistics show decreased use of the major types of protein meals during 2016. Soybean meal was the second-largest ingredient used by feed manufacturers, with a total of 37.8 mmt used during 2016. Soybean meal use by the feed industry decreased 1 percent during 2016, according to the statistics. The average price of soybean meal fell 3.1 percent in 2016. Rapeseed meal use totaled 4.5 mmt and was down 5 percent. Fish meal use declined 39 percent, and cottonseed meal use fell 18 percent. Use of "other meals"--which likely includes peanut, sesame, and sunflower meals--totaled 4.9 mmt and increased 13.2 percent.

Use of "other" raw materials totaled 20.47 mmt. This may include sorghum, distillers grains, and barley--grains that were widely used as substitutes for corn. However, the report says use of "other" raw materials declined only 1 percent during 2016, but customs statistics said imports of these grains declined by a much larger 40-50 percent last year.

Bags of soybean meal and feed mixing apparatus at a Chinese pig farm:

Thursday, July 13, 2017

China MOA Ag S&D Estimates July 2017

The July 2017 China Agricultural Supply and Demand Estimates (CASDE) from China's Ministry of Agriculture boosted its estimate of soybean imports and slashed its estimates of corn imports for 2016/17.
China soybean supply and demand (Ministry of Ag, July 2017)
Item Unit 2016/17 June 2016/17 July 2017/18 June 2017/18 July
Planted area 1000 ha 7,156 7,208 7,899 8,196
Harvested area 1000 ha 7,150 7,202 7,899 8,196
Yield Kg/ha 1758 1796 1785 1797
Production MMT 12.57 12.94 14.1 14.73
Imports MMT 89.45 91.55 93.16 93.16
Consumption MMT 103.69 106.16 108.59 108.63
--Crushing MMT 89.01 91.09 92.50 92.50
--Food MMT 11.18 11.18 12.04 12.04
--Seed MMT 0.6 0.64 0.6 0.64
Loss and other MMT 2.9 3.25 3.45 3.45
Exports MMT 0.14 0.13 0.22 0.22
Surplus MMT -1.81 -1.81 -1.55 -0.97

The 2016/17 soybean import estimate was raised to 91.55 million metric tons, 2.1 mmt higher than the estimate made in June. CASDE explains that the higher estimate reflects mainly a larger use for crushing, which the authors attribute to increased demand for soybean meal. This, in turn, partly reflects recovery of pig and poultry inventories, but it also reflects substitution of soybean meal for shrinking imports of distillers dried grains (DDGS) and smaller supplies of other protein meals, they say. The decline in DDGS imports reflects antidumping duties imposed to curb imports from the United States (DDGS is used as a substitute both for corn and for soybean meal in China). The decline in other protein meals reflects largely a drop in rapeseed production as farmers in central China shifted land into wheat and other crops after the support price for rapeseed was abandoned in 2015. CASDE raised seed use of soybeans slightly, reflecting estimates of increased soybean area planted this spring. Loss and other uses of soybeans were also increased.

CASDE raised soybean production for 2017/18 to 14.73 mmt. CASDE estimates that imports of soybeans will reach 93.16 mmt in 2017/18. That represents an increase of only 1.6 mmt from 2016/17.

China corn supply and demand (Ministry of Ag, July 2017)
Item Unit 2016/17 June 2016/17 July 2017/18 June 2017/18 July
Planted area 1000 ha 36,760 36,760 35,590 35,496
Harvested area 1000 ha 36,760 36,760 35,590 35,496
Yield Kg/ha 5,973 5,973 5,947 5,970
Production MMT 219.57 219.57 211.65 211.91
Imports MMT 1 0.8 1 1
Consumption MMT 210.72 210.72 214.07 214.57
--Food MMT 7.82 7.82 7.89 7.89
--Feed MMT 133.03 133.03 135.03 135.03
--Industrial use MMT 58.25 58.25 59.75 60.25
--Seed MMT 1.61 1.61 1.57 1.57
--Loss and other MMT 10.01 10.01 9.83 9.83
Exports MMT 0.3 0.15 0.3 0.3
Surplus MMT 9.55 9.50 -1.72 -1.96

China has choked off corn imports to a trickle. The only change in the 2016/17 corn balance sheet is a cut in estimated imports from 1 mmt last month to just 800,000 mt this month. Corn imports for 2017/18 are estimated at 1 mmt.
CASDE cut its estimate for 2017/18 corn area due to a faster-than-expected decline in summer corn planting in Hebei, Shandong and Henan Provinces. Drought in eastern Inner Mongolia prompted some farmers to switch from corn to soybeans and minor grains. The corn yield is forecast at 5970 kg/ha, raised 23 kg from last month. CASDE says rains brought relief from drought conditions in parts of the north China plain which is very favorable for growth of spring and summer corn. The estimate of overall 2017/18 corn output was raised to 211.91 mmt. Industrial use of corn was raised by 500,000 mt.

CASDE explains that corn prices have been rising in China despite robust sales of corn from reserves due to constraints in transportation and moving corn out of storage. This has created spot shortages in some regions, CASDE said. 
China cotton supply and demand (Ministry of Ag, July 2017)
Item Unit 2016/17 June 2016/17 July 2017/18 June 2017/18 July
Begin inventory MMT 11.11 11.11 9.23 9.13
Planted area 1000 ha 3,100 3,100 3,200 3,200
Yield Kg/ha 1,555 1,555 1,572 1,594
Production MMT 4.82 4.82 5.03 5.10
Imports MMT 1.00 1.00 1.10 1.00
Consumption MMT 7.69 7.79 7.69 7.74
Exports MMT 0.01 0.01 0.01 0.01
End Inventory MMT 9.23 9.13 7.66 7.49

Cotton auctions have injected 1.78 mmt of cotton reserves into the market as of July 7, 2017. CASDE raised 2016/17 cotton use by 100,000 mt to 7.79 mmt. Accordingly, ending cotton stocks for 2016/17 were reduced by 100,000 mt. No other changes were made in the 2016/17 cotton balance sheet.

Cotton imports remain at 1 mmt in 2016/17 and 2017/18 cotton imports were cut from 1.1 mmt last month to 1 mmt this month. Cotton yield for 2017/18 was raised, based on plenty of sun, adequate rainfall, and low levels of pest damage. Cotton production for 2017/18 was raised to 5.1 mmt. Estimated carry-out stocks for 2017/18 were reduced to 7.49 mmt, slightly less than annual consumption of 7.74 mmt estimated for 2017/18.

China edible oils supply and demand (Min Agriculture, July 2017)
Item Unit 2016/17 June 2016/17 July 2017/18 June 2017/18 July
Production MMT 26.57 27.06 27.07 27.21
--Soy oil MMT 15.58 15.96 15.92 16.05
--Rapeseed oil MMT 5.64 5.76 5.71 5.71
--Peanut oil MMT 3.18 3.18 3.24 3.24
Imports MMT 5.6 5.6 6.2 6.2
--Palm oil MMT 3.25 3.25 3.75 3.75
--Rapeseed oil MMT 0.75 0.75 0.85 0.85
--Soy oil MMT 0.58 0.58 0.58 0.58
Consumption MMT 31.46 31.46 31.63 31.63
--Urban MMT 21.5 21.5 21.65 21.65
--Rural MMT 9.96 9.96 9.98 9.98
Exports MMT 0.13 0.13 0.13 0.13
Surplus MMT 0.58 1.07 1.52 1.66

CASDE increased its estimate of edible oils production for 2016/17, reflecting increased imports of both soybeans and rapeseed. CASDE thinks increased soybean meal demand prompted greater imports of soybeans and consequently greater soybean oil production. Excess domestic reserves of rapeseed oil have been exhausted, leaving a deficit in the domestic market that is filled by crushing imported rapeseed. Imports and consumption of edible oils for 2016/17 were not changed this month. The increased crush of imported soybeans and rapeseed goes into higher ending stocks of edible oils. CASDE sees another increase in soybean oil production in 2017/18 and another surplus that will swell stocks of oils.

CASDE made no changes in the sugar balance sheet.

China sugar supply and demand (Ministry of Ag, July 2017)
Item Unit 2016/17 June 2016/17 July 2017/18 June 2017/18 July
Planted area 1000 ha 1351 1351 1472 1472
--sugar cane 1000 ha 1183 1183 1277 1277
--sugar beets 1000 ha 168 168 195 195

--sugar cane MT/ha 60 60 60 60
--sugar beets MT/ha 52.5 52.5 52.5 52.5
Sugar output MMT 9.29 9.29 10.47 10.47
--sugar cane MMT 8.24 8.24 9.23 9.23
--sugar beets MMT 1.05 1.05 1.24 1.24
Imports MMT 3 3 3.2 3.2
Consumption MMT 15 15 15 15
Exports MMT 0.07 0.07 0.07 0.07
Surplus MMT -2.78 -2.78 -1.4 -1.4

Wednesday, July 5, 2017

China's Agricultural Processing Plan

China is prioritizing development of agricultural processing industry, according to an article in Farmers Daily last week. The plan is logical and elaborate, but relies on a host of subsidies, tax breaks, and coordination among officials in two dozen ministries and bureaus.

Officials are now working to develop agricultural processing and integrate primary, secondary, and tertiary industries as ordered by General Secretary Xi Jinping and Premier Li Keqiang and directed by a guidance document issued in December by the State Council.

While agricultural processing has already become a "pillar industry" in China's countryside with 81,000 enterprises and gross income of 20 trillion yuan, Farmers' Daily says the industry is still weak, is not in sync with the requirements of modern agriculture, and cannot adequately meet the needs of the changing structure of food consumption.

Farmers Daily says developing an agricultural processing industry is urgently needed to correct the mismatches in China's food system. China produces large volumes of generic farm products with few branded, quality or "green" products. Grain is produced predominantly in the north and shipped south, while vegetables are shipped from the south to the north, raising transportation costs. Special strains of crops or livestock for particular uses are few. Livestock production is not coupled to feed supplies. Processing companies are needed as intermediaries to pass market information from consumers to farm producers in order to ensure that farm output matches what consumers want. This, in turn, ensures that farmers can sell what they produce.

The State Council's document sets a goal of raising the ratio of value added in agricultural processing to 2.4 times the value added in farming by 2020. It also hopes to raise the processed proportion of agricultural products to 68%. The campaign will boost primary processing of grains, oilseeds, potatoes, fruit, vegetables,  tea and mushrooms as well as higher value added processing. It also calls for utilization of processing by-products like straw from crops, rice hulls, wheat bran, oilseed meals, fruit and vegetable material, skins, bristles, bones and blood of livestock and fish bones and innards.

Farmers Daily complains that indigenous innovation is weak and industry is over-reliant on imports of technology. The strategy calls for innovating new technologies and figuring out how to disseminate the techniques to processors. Ideas include setting up technology exchange centers and a pilot program to make scientists shareholders in companies that use the technologies they invent. The plan calls for concentrating processors in industrial parks, matching up processing regions with final markets, and syncing up livestock with feed supplies. The campaign will incorporate ag processing in poverty alleviation efforts by locating processing industries in poor regions.

The ag processing strategy hopes to link up new family farmers, cooperatives and agribusiness enterprises through cooperative ventures and alliances.

The state council recommended that food processors be allowed to use the subsidy for agricultural machinery purchases to buy food processing equipment. Funds to support food processors should be expanded. Imports of equipment may be exempt from value added tax. Other value added tax and business tax exemptions are also recommended. Local authorities are urged to actively support construction of agricultural processing raw material bases, public infrastructure, logistics and delivery systems.

Banks are encouraged to steer loans toward agricultural processors via government loan guarantees. Processing enterprises set up by farmer cooperatives will be included in loan guarantee schemes. Use of assets like farm buildings, contracts, and accounts receivable as security for loans will be explored. Insurance will be introduced for guarantees of microloans. Policy banks will extend credit for agricultural processing.

Acquiring land in rural China is a headache because land is collectively owned and zoned for particular uses. The ag processing plan calls for including agricultural processors in land use plans and facilitating acquisition of land for agricultural industry parks. Arrangements for village collectives to hold equity shares in processing enterprises in exchange for land should be worked out.

Officials will encourage companies to develop quality management, food safety control, seek traceability system certification, and support companies in acquiring "pollution-free," "green food," organic, HACCP, and GAP certifications. They plan to promote brands, agricultural trademarks, and registration and protection of geographic indicators. A food export demonstration base program will continue to receive support.

Officials will try to increase the supply of technicians, managers and scientists to support the industry by encouraging institutes to establish food science and processing programs, setting up food business incubators, and encouraging rural-urban migrants to return to their hometowns to set up processing businesses.

The State Council document calls for a dozen or more types of support measures and specifies 25 different government ministries and bureaus for involvement in various aspects of the program. Farmers Daily warns that developing agricultural processing will not be easy:
"Each level of agriculture department must actively fight to include agricultural processing industry development in local party committee and government agendas and to strengthen coordination among Finance, Development and Reform, and Ministry of Land Resource departments to actively push policy implementation so it will take root and bear fruit."