Category Archives: Agriculture

China Is Also Buying More From US Farmers Because It Needs To

Chart of China's monthly agriculatural imports from the United States, 2017 v 2020

DESPITE HEFTY PURCHASES that could lead to a record year for US food, produce and seafood exporters, China is still behind the pace necessary to meet its ambitious agricultural commitments under the Phase One US-China trade agreement signed in January. 

As of October, China had bought $23 billion of US agricultural products this year, according to a status report on the agreement released jointly by the Office of the US Trade Representative (USTR) and the US Department of Agriculture (USDA). 

As part of the trade deal, China promised to increase its purchases of US agricultural products by $32 billion over two years from a 2017 baseline of $24 billion. That implies an annual run-rate of $40 billion.

The $23 billion figure includes purchase contracts that have not yet been completed. Actual imports in the first nine months were worth $12.9 billion. They would have needed to have been around $25 billion-27 billion at that point to be on track (although as this Bystander has noted before, Beijing has the full two years to make good on its commitment, so there is time to catch up.)

Intriguingly, the US report puts a favourable spin of China’s performance, by calculating China is at the more creditable level of 71% of target for 2020, a number it has arrived at by taking into account that the agreement did not come into force until mid-February. For the Trump administration, that approach also puts a gloss of success on a deal that has been a political headliner for the president.

The US report also notes, probably more importantly, that Beijing has implemented 50 of the 57 commitments with deadlines that it made to reduce and eliminate structural, non-tariff barriers to US agriculture in China’s market. 

A lot of the market-opening measures are the quotidian work of trade negotiators down in the weeds of the six-digit level of trade classifications, such as lifting restrictions on US almond meal pellets and cubes and expanding the list of ports through which processed meat may enter China. Some of it is, frankly, cosmetic, such as the ending of the four-year ban on poultry imports because of avian ‘flu concerns that was wrapped into the agreement but would probably have happened regardless. 

Nonetheless, the latter has given US poultry farmers $436 million in sales in the first eight months of this year, and the cumulative impact of the changes to import rules and regulations will most likely have longer-lasting benefits for US farmers than the headline-grabbing target of two years of additional exports.

Sales of US corn, sorghum, soybeans, beef and pork have been strong, pointing to record years for several of those categories. That is in part because of the market opening measures of the agreement, and in part for reasons of domestic Chinese demand. Swine ‘flu decimated domestic herds, creating a massive shortage of pork. Food crops, especially cereals, have been hit by a bad year for flooding, drought and insect infestation. This year China needs larger than usual imports of corn and soy for animal feed, as well as more beef to satisfy the appetite of a growing middle-class that can afford and wants to eat more meat.

China’s diminishing ability to feed itself has been a long-standing concern. Urbanisation and desertification have reduced its arable hectarage to close to levels at which the country cannot grow all the food it needs to sustain itself. For many years, China has been securing foreign feedstocks, produce and farmland

President Xi Jinping recently warned that China must maintain what he called a sense of crisis about food security, which may be overegging the pudding. It is a concern, not a crisis. The country has made steady gains in raising yields from shrinking hectarage and maintains a high degree of food self-sufficiency.

However, the number of mouths to be fed is not getting smaller. Nor are expectations of richer and more varied diets diminishing, requiring ever more animal feed for Chinese farmers to produce the meat and dairy products to satisfy growing demand in the affluent cities. 

Higher agricultural productivity as well as crop yields will be critical. Last week’s Plenum communique notably highlighted developing agribusiness and reforming the rural economy as objectives of the next five-year plan and the longer-term goals to 2035. For now, foreign imports will be need in some volume. US farmers can be relieved that creating a US-free food supply chain is not yet at least the national priority that it is with technology.

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Severe Floods Compound China’s Year Of Crises

Open sluices in the Three Gorges Dam discharge floodwaters downstream into the Yangtze River in Hubei Province, central China on June 29, 2020. Photo credit: Xinhua/Xiao Yijiu.

IN ANOTHER YEAR, the worst flood season in more than two decades would be a significant crisis to test authorities. The damage to crops and livestock from June and July’s torrential rains, precipitation that was far heavier than usual, is substantial, and a reported 3.7 million people have been displaced. But the economic loss — put by state media at 145 billion yuan ($21 billion) as of the end of July — is not as severe as that caused by the Covid-19 pandemic.

The Yangtze and its tributaries in Hubei, Jiangxi and Anhui in central and eastern China are the areas worst affected by the flooding, with the response in Jiangxi said to be on ‘a war footing’. Thanks to improved flood control and emergency management, however, the death toll has been relatively light for the scale of the disaster: 158 people dead or missing, according to the latest available figures.

Early in June, a 1960s-era dam in Guangxi collapsed under the pressure of building floodwaters, raising concerns about the safety of hundreds of other similarly aged dams, and for the massive and iconic Three Gorges Dam (seen above) on the Yangtze (which is of later vintage, having not been completed until 2003).

Those concerns were amplified by state media reports of non-critical parts of the dam becoming slightly deformed’, although the main structure was said to be intact. Its collapse would be a disaster not only in human terms for the millions of people who live downstream, but also the Party. Its flood gates have had to be raised repeatedly to ease the pressure — and again three times this week ahead of a renewed surge in floodwaters expected on Friday — but so far, so good.

None the less, the impact on agriculture is being reflected in the pick-up in inflation in July as food prices rise. More than two-thirds of China’s rice is grown in the Yangtze basin, and this year’s crop would have been near to harvest when it was flooded.

Authorities have been releasing crops from strategic reserves both to ensure adequate supply and to keep a lid on inflation. This includes more than 60 million tons of rice, 50 million tons of corn and more than 760,000 tons of soybeans, surpassing the volumes released during the whole of 2019.

Food price inflation-driven civil discontent remains authorities’ perennial concern.

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China’s June Trade Figures Bolster Optimism For Q2 GDP Rebound

WE ARE DUE to get a reading on China’s economic recovery on Thursday with the publication of the second-quarter GDP figures.

The consensus forecast of economists is 2.5% year-on-year growth, turning around the 6.8% decline in the first quarter, which was slammed by the onset of Covid-19. Stimulus measures, including more fiscal spending, tax relief and cuts in lending rates and banks’ reserve requirements, should be starting to take effect.

Today’s trade figures provide some support for that outlook. Both exports and imports rose in June, reversing year-on-year falls the previous month. Exports rose by 0.5% year-on-year in June after falling by 3.3% in May, and merchandise imports rose by 2.5% year-on-year having fallen by 14.2% and 16.7% in April and May, the General Administration of Customs reported.

The numbers require some careful unpicking, however,

First, although increased exports reflect demand beginning to recover in the rest of the world as countries reopen, within China supply is recovering faster than demand, suggesting a drag on growth.

Second, imports from the United States rose by 11.3% year-on-year after three months of double-digit declines. A clue to why lies in China’s total imports of agricultural products, up 17.8% in June year-on-year after a 29.0% gain in May; imports of soya beans rose by around one-third for a second month.

Separately, the US Department of Agriculture reported that China has made to of its three biggest single-day purchases of corn within four days of each other in July, a total of 3.12 million tonnes of the grain.

This suggests efforts on Beijing’s part to implement the Phase One US-China Trade Agreement signed in January, despite the frayed relations between the two countries over a range of geopolitical issues from the Covid-19 pandemic to renewed contestation over the South China Sea.

Nonetheless, China’s US purchases are behind pace to meet the ambitious goals of an additional $200 billion of additional US imports, $80 billion of which are to be agricultural produce. However, China has until the end of the stipulated two years to meet the targets. In contrast, US Donald Trump needs demonstrable evidence his trade deal is working ahead of November’s US presidential elections.  

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China Aids Exotic-Animal Exports

OUR MAN WITH his pocket calculator in one hand and value-added-tax (VAT) rebate tables in the other draws our attention to a curious fact. Beijing is using this particular export-stimulus technique to promote the overseas sale of wild and exotic animals.

A month back, the finance ministry announced increased export VAT rebates for almost 1,500 products, effective from March 20. Two-thirds of the products qualify for a 13% rebate, the rest a 9% rebate, effectively cutting export VAT to zero or thereabouts for those goods.

Export VAT rebates are a standard, targeted tool to give a short-term boost to specific exports. Steel and other building materials seem to be the main focus this time around. China is going to have a lot of construction materials it cannot use at home until the recovery from the Covid-19 slowdown is well underway. A push to sell it overseas is an obvious policy response.

A careful reading of the rebate list reveals some other priorities. One appears to be some of the agricultural products of which China committed to buy more from the United States under the US-China Phase One trade agreement, such as live breeding animals, meat and dairy. It looks as if Beijing might be encouraging exports of those to make room for additional US imports.

But tucked alongside Livestock (Breeding), Meat (Fresh, Cold, Frozen, Byproducts), Dairy, and Cotton, Flowers, Vegetables, Fruits, Oils, Nuts, Spices is Wild Exotic Animals (Live, Frozen, Horns, Claws, Fur, Feathers).
For those that do not have their trade categorisation indexes to hand, that last category includes monkeys, edible snakes and reptiles, turtles, raptors, ostrich, pigeon, beaver, civet and rhino horn.

The SARS-CoV-2 outbreak is held to have originated in the giant South China Seafood market in Wuhan, leading to February’s ban on wet markets across China. Promoting the export sales of such exotic animals seems bizarre, or, if it is an attempt to keep the trade going until the wet-market ban can be lifted or ignored, something altogether more mendacious.

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Covid-19 Will Slow Progress on Phase One US-China Trade Deal

THE COVID-19 PANDEMIC raises questions over the implementation of the Phase One US-China trade agreement that came into effect on February 14. Officials are acknowledging that. For example, China says it is streamlining the process for registering new US feed products that can be imported, in response to delays caused by the infection.

Agricultural trade was a centrepiece of the Phase One deal. The headliner was China’s commitment to buy $80 billion worth of US farm exports this year and next over and above sales levels in 2017, the last full year before the two countries started slapping tariffs and counter-tariffs on each other’s exports. Yet, as politically useful as a single, big number is for US President Trump to parade before US farmers, a core electoral constituency of his, it is the mundane work of opening access to the Chinese market by dismantling regulatory, sanitary and phytosanitary barriers that will make the long-term difference.

US officials and farm industry leaders speak of future billion-dollar markets for US beef, pork and poultry products in China. Those will only come after trade negotiators have spent long hours immersed in the minutiae of rules and regulations and the HS six-digit product codes used to classify international trade.

Most countries protect their farmers with non-tariff barriers. China is no exception, only more so. The Phase One agreement contains much that is aspirational in dismantling such barriers but also specifies a lot of processes for doing so being started within the first three months. Despite the disruption to physical trade Covid-19 has caused, officials from the two countries have held at least three sets of meetings to advance implementation of the technical aspects of the agreement. Some low-hanging fruit has been plucked. China has:

  • Fully lifted the ban on US poultry and poultry products exports (imposed after an outbreak of avian ‘flu in 2015 and raised for US chicken meat in November);
  • Agreed not to impose a national ban on poultry in the event of regional US outbreaks of disease;
  • Proposed levels of some hormones in beef it would accept;
    Expanded its list of beef, pork and poultry products that may be imported;
  • Lifted age restrictions on the beef cattle from which beef or meat products are made;
  • Updated its list of US facilities, such as slaughterhouses, processing plants and cold storage, allowed to export beef, pork and poultry to China;
  • Updated its list of US facilities approved to export dairy, infant formula, seafood, fish oil and meal, animal protein, pet food and industrial tallow;
  • Expanded its list of US facilities that can export distiller’s dried grains with solubles (DDGS – a by-product of ethanol made from corn used as fodder for livestock and a billion-dollar export market for US producers before China enforced anti-dumping duties on US DDGS in January 2017;
  • Updated its list of feed additives that can be exported and streamlined the process for registering new feed products for export;
  • Eased restrictions on pet food imports;
  • Agreed a protocol for the import of fresh chipping potatoes and Californian nectarines;
  • Put in place a process for US exporters to apply for exclusions from retaliatory tariffs; and
  • Announced new tariff exclusions n hardwood products.

That list only scratches the surface of the rules and regulations that will have to be changed for US agri industry to realise its starry-eyed, long-term goals for sales to China. These are predicated on a growing appetite of an increasingly wealthy middle class to consume higher-value foods and of an expanding Chinese agricultural sector that is transitioning from a base of rural small farms to large-scale and international agri-businsesses.

Both sets are suitable markets for the foods and feedstocks that the United States produces. Equally, China will not abandon its long-term strategy of diversifying its sources of agricultural imports nor neglect the way it can use agriculture to extend its economic diplomacy push around the world.

Nor can a billion dollars’ worth of US poultry or ethanol dregs, let alone ten-billion-dollars’ worth of US beef turn up in China overnight, but market access is the necessary prelude to sales. Establishing it will be a long and unglamorous slog for a large number of unheralded trade negotiators. That work will inevitably be slowed for now by the attention both governments are having to pay to more pressing matters — and, for as long as the Trump administration is in office, at risk of an unpredictable policy intervention by the US president.

With the trade agreement barely a month old and the lag in gathering trade data, it is too early for any progress to show up in the bilateral trade figures. The current success story for US farm exports to China — pork — has nothing to do with the Phase One deal. Sales in January (the latest available month) were up more than sevenfold by volume year-on-year, because of the devastating impact of African swine fever on domestic herds.

However, as this Bystander has noted, achieving the additional $80 billion of farm imports over the next two years is going to be a stretch, absent Beijing ensuring large, politically driven purchases. That was true even before the domestic and International disruption to supply chains and distribution networks caused by the global pandemic.

It will take several months at least for domestic demand to get back on an even keel, and US farmers will be preoccupied immediately with supplying their home market, too.

However, forecasts from Virginia Tech’s Centre for Agricultural Trade presented in mid-February, suggested that across six main categories of US farm exports (soybeans, corn, wheat, beef, pork and poultry, which collectively account for more than half the total) would rise by $5.5 billion this year and $9.5 billion next, 40% and 70% increases, respectively, over the 2017 baseline, but still far from dragging US farm exports as a whole over the line of the two-year $80 billion increase.

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US Farmers Will Struggle To Fulfil Trump’s Deal With China

A farm seen alongside US Rte 322 in 2018. Photo credit: Mike Procario. Licenced under Creative Commons CC BY-ND 2.0.

THE DEEPER ONE peers into the phase one trade agreement announced with the United States on December 14, the more opaque it becomes. Neither side appears to agree on what they have agreed.

To say the devil will be in the details is not the half of it. A big-figure dollar target for Chinese purchases of US agricultural products, energy and services makes for easily digested headlines. However, for producers, especially farmers who by their nature have to plant a season in advance, it will be the categories and volumes that matter.

For now, those remain unknown, and, we hazard, still not finalised. Take farm produce. We can guess that soybeans, the largest US agricultural export to China by far in the past, and hogs, much needed to compensate for the domestic African swine fever epidemic, will feature prominently in the buying, but not much more than that.

What of other US agricultural products such as beef and poultry, both recently unbanned by China and, one assumes, about to have retaliatory tariffs removed but still facing non-tariff barriers such as regulations on hormone use? Or rice, corn and wheat, which have not significantly figured in the bilateral trade and of which China has had reasonably abundant harvests this year, according to the UN’s Food and Agriculture Organization?

Related, will the energy sales be of crude oil products or ethanol, which in the United States is produced from corn and is a crucial government price-setting mechanism for the crop? And what of cotton, which although covered by import quotas, could be converted in China into more of the millions of T-shirts that Americans buy yearly? China’s textile manufacturers need higher grade cotton to stay competitive in international export markets where low-cost Asian producers are undercutting them.

China’s US farm imports in 2017, the baseline year being used in the phase one agreement and the last full year before the tariffs war started, totalled just over $24 billion (see the table below for a breakdown.) To lift them by the nearly $16 billion necessary to meet the target the United States says has been agreed of $40 billion a year for the next two years — a two-thirds increase — will not be easy.

China’s agricultural imports from US, 2017

$m

Oil seeds, inc soya, and oleaginous fruits

14,560

Cereals

1,510

Fish

1,315

Hides

1,199

Meats

1,187

Cotton

1,073

Fruit and nuts

766

Fodder and forage

522

Misc prepared food

442

Dairy

428

Prepared vegetables and fruits

272

Tobacco

170

Animal and vegetable fats

139

Beverages

138

Prepared cereals and flours

120

Misc animal products

112

Sugar and confectionary

79

Vegetables

45

Fur skins

41

Cocoa

29

Malts and starches

24

Gums and resiins

21

Coffee, tea and spices

18

Wool

17

Animals

16

Misc vegetable products

9

Prepared meats and fish

5

Plants

4

Silk

<1

Source: UN Comtrade

Total: $24.3 billion

To put the task in some sort of context, in recent years total US exports of corn, soya beans, beef and pork have averaged the $40 billion a year China alone is now meant to be buying. This raises the question not only of China’s capacity to absorb imports on that scale but also that of US farmers and ranchers to produce them in the near term without disruptively switching their exports from other markets. China, too, has concerns about not disrupting broader geopolitical relationships with import partners such as Argentina and Brazil, and with staying compliant with its World Trade Organization commitments.

Next year’s US soya crop will have to go into the ground in the spring (around the time of the first party primaries to select the nominees for next year’s US presidential election.) The 2020 corp is forecast to be the fourth largest on record based on planned expansions of acreage. But even that would only likely let US farmers get back to the little more than their 2017 export levels to China (32.8 tonnes, worth $13.9 billion) unless they were to cut into their domestic sales.

However, the demand for soya in China has fallen. Its two main uses in China are as oil and meal for pig feed. China’s herds have more than halved because of African swine flu. That opens possibilities for more pork exports as well as for other meats, once China removes the tariffs on US meats, so they are competitive with Australian, Brazilian and European exports. Even then, the issues over non-tariff barriers will persist; the flow of new red tape on both produce and proceed foods in the name of food safety has been incessant.

US pork exports to China were worth $286 million in 2017. US estimates of the potential market for US pork in China have ranged from $8 billion a year upwards. Last year, China’s total pork imports were worth barely $2 billion, which seems a more realistic short term target for US pork producers (the largest of which is Chinese owned). Similarly for beef, of which China imported $4.6 billion worth last year. US ranchers and meatpacking companies lay great store on the hope that a more prosperous China will be a beef-eating China. US poultry producers, whose products were banned until November on health concerns, also see a market potentially worth $2 billion a year to them.

Dairy products are also a promising category, riding on the back of Chinese middle-class consumers’ preference for foreign foods, ingredients and nurishment for children perceived as safer than domestic varieties. Overall dairy consumption is stable, but changing in composition as consumers, especially young professionals in the tier one cities, turn to higher-end products such as fresh UHT milk and yoghurts. Similarly, with nuts, where imports such as almonds, pistachios, pecans, and macadamias are increasingly vying with domestic walnuts as a health food. Regulation of e-commerce channels in China that let consumers buy directly from abroad is a point fo trade friction waiting to happen.

China’s farm sector is modernizing and consolidating, turning what was a vast patchwork of smallholdings into regionally or vertically integrated agribusinesses that span farming to food processing and distribution. These will potentially be formidable competitive barriers for US exporters.

One point of entry into these supply chains is animal feeds. The demand for imported high-quality fodder and forage, such as alfalfa for dairy herds, is expected to increase. The drive to upgrade domestic animal husbandry will require nutritional and efficient feed that China cannot currently produce itself in quantity..

In the same vein, getting market access to second- and third-tier cities will be critical to US agricultural exporters. These are largely untapped markets for them. Up until now, most US food imports have not ventured far from from the ports near first-tier cities, with their large populations. Improvements in the ‘cold chain’ and logistics along with the rise of e-commerce means this no longer needs to be so.

Putting together all these opportunities still leaves adding $16 billion a year in US farm exports looking a stretch over the next couple of years, short of authorities buying for purely political reasons. Given the repeated references in state media to buying US farm products at competitive prices, there will be no free lunches, so to speak.

There are, however, two ways the numbers could be massaged. One is that higher prices could boost the dollar sales numbers. Global farm commodity prices are at cyclical lows with an upswing having been stalled for more than a year by the US-China trade dispute. Some increase would be in the natural order of things. When the US exported a record $29.6 billion in agricultural goods to China in 2013, the soya bean price, for example, was more than $14 a bushel; it is currently $9. For much of 2017, the price was below $10 a bushel.

The other is to include forestry products in the grand total. In 2017, US wood, pulp and paperboard exports to China were worth $8.3 billion. Adding in those would raise the baseline to $33 billion, making $40 billion appear a lot more achievable.

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United States Puts Trade War On Hold

THE US-CHINA trade war is on hold. Official. Or official, at least until the US president tweets that it is back on, or was never off or is over.

US Treasury Secretary Steve Mnuchin says the Trump administration will not, for now, impose tariffs on up to $150 billion in Chinese imports for alleged violations of US American intellectual property and unfair trade practices. The rationale, according to Mnuchin, who was speaking on one of the United States’ Sunday morning TV talk shows, is the progress made in last week’s trade talks towards a ‘framework’ for cutting the $375 billion merchandise trade surplus with the United States.

High-level US trade officials met their opposite numbers from Beijing in Washington last Thursday and Friday, which was followed by a communique that vowed that neither side would launch a trade war against the other.

China said it would buy more agricultural and energy products from the US as part of a substantial cut in its trade surplus with the United States, which will include still-to-be-discussed purchases of US manufactures and services.

Both of those, and particularly the latter, require structural reforms on Beijing’s part likely to come later rather than sooner.

Beijing said it would drop it anti-dumping investigation into US sorghum, but that at best will protect existing US exports now at risk, rather than create new business in itself. Also, while the US has plenty of energy, particularly liquefied natural gas, it could sell China it would have to build distribution infrastructure to deliver it. Privately, US trade officials say it could take three to five years to double US energy exports to China.

Sales of agricultural commodities could be ramped up within a crop season, however. China bought $19.6 billion-worth of US farm produce in 2017, making it US farmers’ second largest foreign market. The United States is hoping for a 40% increase this year. If that comes about, there will be only another $188 billion to go to the $200 billion cut in the trade surplus that the United States reportedly seeks.

Beijing also promised to address US concerns about intellectual property protections (although that is pushing against an open door given that Chinese firms have an increasing amount of intellectual property of their own to protect these days).

Whatever short-term concessions might be made to provide Trump with an arithmetical win on the trade deficit, Beijing will do nothing that compromises its Made in China 2025 industrial policy, which is the real war.

Meanwhile, our man in Washington sends word that President Donald Trump’s U-turn on sanctions against telecoms equipment maker ZTE got a rebuff from the US Congress last week.

The House Appropriations Committee snuck into an appropriations bill an amendment that forbids the Commerce Department from changing the sanctions on ZTE that it imposed last month for trading with Iran and North Korea.

The inclusion of a seven-year ban on US companies selling components to ZTE has led the company to cease operations, and it was that ban that Trump, surprisingly, a week ago ordered the Commerce Department to rescind and replace with a less onerous alternative.

There is a long distance between an amendment being passed in committee and making it into law, a distance few such amendments survive. However, even getting past the first step, acceptance into a bill, shows how driven US-China trade relations are going to be on the US side by domestic politics, and especially in the run-up to November’s mid-term Congressional elections.

The Democrats — and it was one of their number, Dutch Ruppersberger, a Congressman representing a district in Baltimore, that proposed the amendment — are attacking Trump’s policies at every turn, scenting the opportunity to recapture control of at least one house of Congress from the Republicans in the mid-terms.

This partisan dimension further complicates the already complex trade relationship between the two countries. There may be no war-war for now, but there will be plenty of jaw-jaw.

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Subsidies As High As An Elephant’s Eye

Harvesting wheat in Shulyu Village in Tangxian County, Hebei Province, June 8, 2014.

FARM SUBSIDIES, STARTING with corn and other grains, are to be withdrawn, state media report. The People’s Daily quotes Chen Xiwen, deputy head of the central agricultural work leading team, as saying, “the price will be decided by the market and [the state] will no longer play the role of subsidising farmers” (via FT).

China’s farmers have produced a string of record grain harvests in the face of natural and man-made disasters and shrinking hectarage. At an estimated 621 million tonnes, last year’s annual grain harvest set another record high for the 12th consecutive year.

However, supply still struggles to keep up with the demands of a richer and growing urban population. Stocks and imports cover the gap. China imported 3m tonnes of wheat, 3.4m tonnes of rice and a record 4.7m tonnes of corn (mostly used for animal feed) last year.

While removing incentives for grain production seems counterintuitive in such circumstances, all the state’s guaranteed minimum purchase prices — currently double world prices — is doing is building up record levels of domestic stocks. The US Department of Agriculture estimates those of corn at the end of the 2015/16 crop year will account for more than half the world total, at 113m tonnes.

Policymakers have long recognised that this structural distortion of China’s domestic agricultural commodities markets is not sustainable. So the removal of subsidies has been expected, though it will have to be implemented in ways that do not risk social instability if rural incomes fall too sharply. Subsidies provide on the order of a 20% top-up to farm incomes. Authorities have just announced a new (if sketchy) agriculture investment programme.

That level of support is not out of line with international averages, but the numbers involved are, inevitably, large. The OECD, the rich-countries think-tank, estimates China’s support to its farmers at 1.8 trillion yuan ($292.6 billion) in 2014, the latest year for which comparative figures are available. That is double the amount of five years previously (other countries have been cutting back farm subsidies over that time) and equivalent to 2.5% of GDP, making it a bill worth trimming.

However, the bigger goal is the critical need to improve agricultural productivity overall as China’s shrinking farmland runs up against the limits of what is needed for China to feed itself. The current five-year plan promotes large-scale farming as a priority. By contrast, most grain farming is inefficiently small-scale and labour-intensive.

On average, each farmer plants half a hectare. In mechanised Europe, the ratio is more than 20 times that and in the Big-Agri United States upwards of 100 times. Furthermore, Chinese farms lose or waste some 35 million tonnes of grain a year in the course of storage, transportation and processing, according to state media.

Grain also needs lots of water, an issue in an increasingly water-scarce country, and an acute one on the evermore arid North China Plain, China’s breadbasket. One of the unintended consequences of grain subsidies has been to discourage small farmers from switching to cash crops that make better use of the available land.

Policymakers see large-scale, efficient and technologically advanced farming as the way to address all those challenges — and cut some hefty import and subsidies bills.

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Drought Hits Northern China, El Niño Threatens Worse

EL NIÑO, THE periodic warming of sea-surface-temperatures in the Pacific, is already if prematurely being blamed for the worst drought to hit northern and central China in 60 years. State media says more than 27.5 million people are facing water shortages across at least six provinces.

Previous El Niños caused flooding in the southern rice-growing regions, as they did so disastrously along the Yangtze River in 1998, even as they brought drought to the wheat-growing provinces of the north. The extreme weather produced by El Niño in 1876–77 caused one of that century’s most deadly famines across Asia, with 13 million people dying from hunger in northern China alone.

While the latest El Nino conditions are only just starting to form in the Pacific, they are exacerbating the hot, dry weather in northern China, which was already suffering from serious water shortages as a result of years of deforestation, industrialization and urbanization.

The previous El Niño in 2009 triggered a sharp fall in wheat output. State media say that drought in Liaoning Province has so far devastated 2 million hectares of crops. An El Niño would ratchet up that number significantly.

Drought is also severe in Jilin, Inner Mongolia, Shaanxi, Henan and Hubei, affecting a further 2 million hectares of crops. The overall effects on harvests could be significant. A break to a run of 11 consecutive years of rising wheat harvests looks likely. The key question is whether this turns out to be a short El Niño lasting a few months, or a more long-standing event lasting as long as a couple of years.

China is not alone in being affected by El Niño. The net effect around the Pacific could be to cut global grain harvests by upwards of 2%. Sugar, beef, cotton, palm oil, cocoa and coffee output could also be hit, pushing up prices of those commodities. China’s cotton fields are south of the Yellow River, and like the rice paddies, subject to El Niño-related flooding.

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China’s Soybean Importers Threaten More Defaults

CHINA’S SOYBEAN IMPORTERS are hardening their line on defaulting on contracted shipments in an attempt to force down prices in face of burgeoning stockpiles and slowing demand. China is the world’s biggest buyer of soybeans, accounting for three-ffiths of global imports. The main use for the beans is to be crushed into meal to make poultry feed. Demand for feed has fallen by an estimated 15% following last year’s outbreaks of bird ‘flu.

Since late February Chinese importers have cancelled 1 million metric tons of orders from the U.S. and South America, particularly from Brazil, though to put that in context, China imports 70 million metric tons a year. In the Chicago commodities futures markets, soybean prices have risen by more than 14% this year.

Trading firms mostly clustered in Shandong province have refused to make payments for about 20 shipments, Shao Guorui, general manager of Shandong Sunrise Group, reportedly says. Chinese buyers face losses of as much as $7 million dollars on each shipment, he adds. The crushing companies they sell onto are suffering, too, with around half the industry’s capacity idle because of over-expansion. 

Sunrise accounts for one-eighth of China’s soybean imports. It is part of Shandong Chenxi Group Co., run by Shao’s multi-millionaire brother Zhongyi.

The issue could flare up into a trade dispute with Japan.  Shandong buyers have 80 to 100 cargoes booked for delivery from the Japanese trading giant, Marubeni, through July. Marubeni accounts for a quarter of China’s soybean imports. “Marubeni is deluded in thinking that payments will come once the cargoes have sailed,” an unidentified industry executive based in Shandong was quoted as saying.

 

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