It Is Hard to Sustain the Continuous Increase of Domestic Grain Procurement Prices, and the Processing Industry Is Barely Alive

The agricultural products market is now very bad. Cargill, the world's largest grain trader, has been reported to be laying off workers.

This report, which Cargill has already denied, said that due to the agricultural economic downturn, Cargill may lay off as many as 4000 people, about 2.5% of its total workforce. In an official statement released on November 18, Cargill said there was no specific related plan as indicated in the report, and that in the last quarter the number of employees worldwide rose from 153000 to 155000.

However, one part of the rumor is accurate: the agricultural economic situation globally and in China is now under enormous pressure.

In the latest fiscal quarter ended August 31, 2015, Cargill's net profit increased 20% year on year, but revenue fell 17% year on year under the impact of factors such as the sharp drop in agricultural product prices.

Having looked at the situation of the world's largest grain trader, let us then look at COFCO Group, China's largest domestic grain trader. After acquiring Nidera and Noble Agri, in the first three quarters of 2015 COFCO Group's consolidated operating revenue doubled to about 330 billion yuan, but its consolidated net profit posted a loss of about 360 million yuan; in the same period of 2014 it made a profit of about 1.15 billion yuan.

In the international agricultural products market, wheat, rice, and corn are the three main varieties. Among them, rice is the staple food of Chinese people. Taking Thai rice, which is exported in relatively large quantities on the international market, as an example, since November 2011, the export quotation for Thai rice has plunged all the way from about 630 USD/ton to about 370 USD/ton in early November 2015, a drop of around 40%. The situations of wheat and corn are somewhat different, but overall they have also trended downward in recent years, and in the past year the average price decline in the international market has been in the double digits.

Compared with the sharp decline in international agricultural products, China's relatively closed agricultural products market has generally shown a sustained upward trend in prices since 2008. In order to support agricultural production, the relevant authorities have for many years continuously raised the minimum purchase prices for wheat and rice and the temporary procurement prices for corn and others, moving on an independent path.

After so many years, the continuous increase of procurement prices has reached the point where it is hard to sustain. There is so much grain procured and stored that there is nowhere to put it, and the domestic grain processing industry has reached the point of being barely alive.

Wang Wei, director of the public affairs department of Yihai Kerry Group, said when attending the “2015 (Third) China Grain and Food Security Strategy Summit” that in recent years the market-support purchase policy has led to “strong rice but weak rice products” and “strong wheat but weak flour products,” making the grain processing industry even worse, with the whole industry generally in a state of losses and production stoppage. If this situation continues to worsen, China's grain processing industry will fall into a desperate situation, and such consequences are extremely serious.

Market-support purchases are intended to guarantee farmers' income. If farmers are the palm of China's hand, the grain processing industry is the back of the hand, and both the “palm” and the “back of the hand” are flesh. Farmers are upstream in the agricultural industry chain, while the grain processing industry connects farmers with urban consumers. If the grain processing industry, as the “bridge,” becomes “blocked,” and the whole industry generally suffers losses, in the end the entire ecosystem will inevitably collapse.

Wang Wei said that because China's grain market was opened late, opened to a low degree, had many regulatory measures, and was strongly affected by policy, the grain processing industry is not strongly attractive to large social capital.

The fact that the bosses of the domestic grain processing industry are very few in number on the rich list can vividly illustrate the current state of this industry. From 2006 to 2015, among the top 100 rich people on the Hurun Rich List, only three were in the grain and oil industry. One of them was Shao Zhongyi of Chenxi Group, and the other two were in condiments, Pang Kang of Haitian Flavouring and the Meng Qingshan family of Meihua Group. Even if we go further and include the bosses of feed and deep-processing enterprises, such as the Liu Yongxing and Liu Yonghao brothers, among China's rich people, who are as numerous as stars, the rich in the grain and oil industry are still pitifully few, and their rankings are continuously declining. Those at the front of the list are more often bosses engaged in the internet and real estate.

Without wealth effects and without sufficient social capital investment, the only hope for the grain processing industry to achieve modernization is to rely on state support.

Data disclosed by the authorities show that in 2010, scientific and technological investment in the grain processing industry accounted for only about 0.2% of sales revenue, far below the average level of 2% to 3% in developed countries. The processing industry chain is relatively short, the level of comprehensive utilization is low, the comprehensive utilization rate of grain processing by-products such as rice husks, rice bran, and wheat bran is relatively low, the industry chain is incomplete, there is a lack of deep development and utilization, and the added value of products is low. The proportion of rice husks used for power generation and directly burned in boilers is only about 30%; the proportion of rice bran used to produce edible vegetable oil is less than 10%; and the effective utilization rate of processing by-products of miscellaneous grains, soybeans, and others is low.

An industry insider told the reporter that China's grain processing is basically still at the primary level. For example, rice is simply processed into milled rice. Although rice bran is also pressed for oil, the technology for refining crude rice bran oil is backward, the refining grade is low, the yield is low, the cost is high, and many effective nutrients are lost. In contrast, foreign grain processing industry chains are longer, the degree of comprehensive utilization is higher, there is less waste, and the value added by comprehensive grain processing is high. According to some statistics, the processing value added of China's agricultural products is only 1.2 times, while the value added in developed countries can reach 2 to 4 times.

Improving grain utilization efficiency and achieving modernization of the grain processing industry require the power of the market, and should mainly rely on market mechanisms.

When agricultural products at home and abroad are in a bear market, it is necessary to save farmers, and even more necessary to save the grain processing industry.

A healthy and vigorous grain processing industry can pull the upstream planting industry in reverse from the middle and lower reaches, and a grain processing industry operating on market principles is also willing to pay a high price to obtain high-quality agricultural products from upstream.

For state procurement and storage, precious Wuchang rice and ordinary Northeast rice have the same procurement price. Only the grain processing industry could offer a “sky-high price” for Wuchang rice.