Can the reform of the procurement and storage policy solve the grain collection dilemma?
“Corn in crisis, wheat in crisis, rice in crisis……”
Recently, when people in the grain business occasionally got together, a certain trader could not help but adapt a scene from a TV drama to mock his current business predicament.
Data shows that in 2014 the national grain output reached 607 million tons, while the quantity of commercial grain was 398 million tons. In addition, according to supply and demand balance analysis data from the China Grain Network, the annual surplus of the three major staple grain varieties - wheat, rice and corn - (the difference between new supply and consumption) in 2015/16 is estimated at about 53.9 million tons. A huge gap in grain storage capacity has emerged.
According to National Bureau of Statistics data, in 2015 China's summer grain output reached a new high of 141.066 million tons, up 3.3% year on year.
On October 8, the National Food Administration issued a notice stating that China's grain inventory has reached a new high, that the amount of grain stored by various grain and oil storage enterprises is unprecedented, and that the amount of state policy grain stored in open-air and simple storage facilities is also unprecedented. The contradiction of insufficient warehouse capacity in major grain-producing areas is prominent.
Has China's food security really changed from a “shortage crisis” to a “supply crisis”? Is China's grain inventory situation really “as precarious as a pile of eggs”?
According to an analysis by a person from the grain bureau of a major producing province, although China's grain production has increased for more than 10 consecutive years and warehouse capacity is now generally tight, from a long-term perspective China's grain supply and demand still remain in a tight balance, and work must not be taken lightly.
In recent years, as the cost of growing grain has continued to rise, coupled with lower international grain prices and greater import pressure, the production and sales prices of some grain varieties have inverted, banks have tightened credit, financing for small and micro enterprises has been difficult, and some grain processing enterprises have suspended production and transformed. Enterprises barely operating, due to thin profits or even losses, have lowered their enthusiasm for purchasing grain to a low point, and their existing procurement and storage capacity has not been brought into play. Multiple factors have led to periodic tightness in warehouse capacity, and “difficulty in selling grain” has appeared in some areas, creating in the short term the appearance of “severe oversupply.”
The “Research Report on the Changing Trends of China's Grain Consumption Structure,” produced in October 2015 by the China Grain Network Yida Research Institute, shows that in 2014 China's per capita grain consumption was about 461 kg, an increase of 22% from 377.7 kg per capita in 2004. For example, due to rigid population growth, annual rice ration consumption increased from 311 billion jin in 2007 to 324.5 billion jin in 2015, showing a year-by-year growth trend.
The report of the 18th National Congress of the Communist Party of China proposed doubling both GDP and per capita income of urban and rural residents by 2020 compared with 2010. With GDP growth, China's per capita income will maintain a continued growth momentum. According to World Bank data, because grain consumption is closely related to income, China's future grain consumption may continue to increase as income levels rise. Yida Research Institute estimates that China's grain demand will reach 670 million tons by 2020 and 700 million tons by 2030.
Shi Shaolong, deputy director of the Hunan Provincial Grain Bureau, believes that although China's grain currently exists in a state of “high warehouses and full storage,” one cannot therefore conclude that China's grain is “excessively abundant” and that “less can be planted.” Affected by macroeconomic and other factors, rural population ration consumption in China is currently decreasing, and some industrial grain use has declined somewhat; with improvements in agricultural planting technology, seed grain use also shows a downward trend. But from a long-term perspective, the pattern of a “tight balance” in China's self-produced grain supply and demand has not changed, and will continue for a long time.
Can the “reform” of the procurement and storage policy solve the grain collection dilemma? What exactly are the reasons and background for the introduction of the policy?
Several recently issued policies have attracted industry attention: First, the 2016 minimum purchase price for wheat remains consistent with 2015, remaining stable once again. Second, the 2015 state temporary storage corn listing purchase price (national standard third-class quality standard) is 1 yuan/jin, an average decrease of 12% compared with last year.
Professor Hong Tao, director of the Commercial Economics Research Institute of Beijing Technology and Business University and dean of China's Food (Agricultural Products) Safety E-commerce Research Institute, believes that as of the end of May 2015, the raw grain inventory of grain enterprises nationwide increased by 24% year on year, among which wheat inventory increased by 19%, rice by 16%, corn by 36%, and soybeans decreased by 17%. A comprehensive assessment places China's grain in a “relatively safe” condition, but factors affecting food insecurity have increased. The contradiction between grain imports and domestic grain inventory continues to grow, and China's grain urgently needs “de-stocking.”
Current domestic grain prices are higher than international market prices and are approaching the “ceiling”; global grain output has hit a new high, inventories have hit a new high, consumption growth has slowed, and price increases have slowed. At the same time, domestic grain production has a cost “floor” problem; grain subsidies are approaching the “yellow line”; excessive use of cultivated land to develop grain production has brought about damage to grain ecology, among other things. Guiding grain production, procurement and storage, and consumption through price means is the “core meaning” of the policy's introduction, and from a long-term perspective it is conducive to promoting the development of the agricultural industry and grain production in the direction of “scientific, reasonable, economical, low-carbon, green and environmentally friendly.”
Hu Feng, specially appointed expert of Yida Research Institute and senior economist at the Guangdong South China Grain Trading Center, believes that maintaining or lowering the purchase prices of the three major staple grains is a rational measure based on objective reality. At present, international grain prices are significantly lower than domestic grain prices, domestic warehouse capacity is in urgent shortage, and inventories are high, so there is no capital or condition to continue raising the minimum purchase price. In the long run, grain prices should be decided by the market, and the state should not directly intervene.
Hu Feng said that the reason the temporary procurement and storage policy for soybeans and corn is difficult to sustain is mainly that the state purchases at above-market prices while being unwilling to sell at market prices, resulting in years of “more in than out” and ever-higher grain inventories. This is the direct cause of the current “high warehouses and full storage.” Thai rice had a similar situation back then: the rice mortgage policy introduced by the Yingluck government planned to purchase at high prices and sell at high prices, but the result was that high-price purchasing was easy while high-price selling was extremely difficult. The backlog of rice meant there was no warehouse capacity to purchase new grain, and more importantly, funds could not be recovered; the Thai government's fiscal funds were tight and there was no money to carry out the originally planned purchases. At present, the situation of China's soybeans and corn has not yet reached the level of Thai rice, but taking preventive measures and promptly revising the policy is very necessary.
State policy grain procurement and storage has made indispensable contributions, and market-oriented reform of grain has a long way to go
According to National Food Administration statistics, as of September 30, 11 major producing areas including Hebei had purchased a cumulative 6.63 million tons of wheat, 8 major producing areas including Jiangxi had purchased a cumulative 7.95 million tons of early indica rice; 6 major producing areas including Jiangsu had purchased a cumulative 1.45 million tons of mid-to-late indica rice, up 400,000 tons year on year.
According to Han Jianfeng, general manager of Sinograin Henan Branch, as of September 30 when market-supporting procurement ended, Henan Province had launched 1,371 procurement and storage depots in 5 batches, purchasing 8.95 million tons of market-supporting wheat, accounting for 46% of the province's summer grain purchases and 43% of the country's market-supporting wheat purchases, and rough estimates suggest it helped farmers directly increase income by nearly 1.5 billion yuan. In addition, Lan Yong, dean of the Business School of Hunan Agricultural University, also said that during this year's market-supporting procurement period, Hunan Province alone purchased 2.43 million tons of new early rice (including Sinograin rotation purchases of new early rice), of which 1.43 million tons were purchased at the minimum price, directly promoting an increase in farmers' income of 816 million yuan through market support. Lan Yong believes that since the introduction of the minimum purchase price policy, it has played a positive role in stabilizing grain production, maintaining market stability and safeguarding farmers' interests, and the policy itself is not wrong.
At present, new changes have taken place in the international and domestic grain markets, and all sectors of China are further advancing into the deep-water zone of market-oriented reform. Properly adjusting relevant policies is a manifestation of “advancing with the times,” even though it must endure short-term “growing pains.”
Lan Yong believes that Sinograin, as the main body implementing the state-authorized minimum purchase price and temporary procurement and storage policy, together with relevant parties actively organized policy-oriented grain and oil procurement, effectively preventing “cheap grain hurting farmers,” protecting farmers' enthusiasm for growing grain and stabilizing the basic income of grain-growing farmers. In the process of implementing this policy, Sinograin, local state-owned grain departments and relevant enterprises undertaking policy-oriented procurement all made indispensable contributions.
Relevant materials show that in the ten years from 2005 to 2014, Sinograin completed a cumulative 560 million tons of market-supporting and temporary storage grain purchases and 410 million tons of policy-oriented sales. During this period, international grain prices fluctuated by more than 40% in several years, while domestic raw grain price increases remained at a moderate level of about 10% annually, successfully responding to the impact of the international food crisis and promoting overall macroeconomic stability in China. “Practice shows that in recent years China's grain macroeconomic regulation policies and specific measures have generally been effective and capable.” Lan Yong said.
Professor Ding Junqiang of the Institute of Science, Technology, Economy and Social Development at Hunan University said that the state's establishment of the minimum purchase price policy itself is not wrong. Developed countries and regions such as the European Union also have minimum purchase price policies, only their prices are not too high. The market-supporting procurement policy stipulates that within a certain period the purchase price of new grain shall not be lower than the minimum purchase price, safeguarding the interests of grain-growing farmers. But the “three rural issues” involve a very broad area and are a systematic project, and one cannot expect a single market-supporting procurement policy or temporary storage procurement policy to completely solve farmers' household income problems.
The Third Plenary Session of the 18th Central Committee of the Communist Party of China proposed “letting the market play a decisive role in resource allocation.” Standing at the overall and long-term perspective, and based on grain production and market conditions, the state timely adjusts relevant policies and makes decisions to “raise, lower or keep prices unchanged,” which is an objective requirement under market economy conditions. The reform of the procurement and storage policy has brought a direct impact on “difficulty in selling grain,” but it is not the root cause. “The reasons for difficulty in selling grain are many-sided and comprehensive, including production, reserves, sales, as well as economic, social, consumption habits and other factors.” Ding Junqiang said.
Zhang Yunliang, chairman of Hunan Junyi Ecological Agriculture Co., Ltd., which has an annual rice processing capacity of 65,000 tons and existing warehouse capacity of 20,000 tons, said that the essence of farmers' “difficulty in selling grain” is not entirely a problem of grain itself, but one of a series of problems China faces in solving the “three rural issues,” because agriculture is still currently the most vulnerable industry. Because the policy-oriented procurement system is single and cannot reflect high quality at a high price, farmers are unwilling to grow high-end products needed by the market.
Many years ago, selling grain was the main source of farm household income, but now wages from working elsewhere have become the main source of income for most rural households in major grain-producing areas. There is little rural labor, and villagers who return home briefly for the harvest rush to sell grain and crowd together to sell it because they must hurry back to the cities for work, which is also a direct cause of “difficulty in selling grain.” Zhang Yunliang suggested that the state continue to increase support for out-of-area sales of grain from major producing areas and give better support to production-sales linkage, standard setting and green logistics channels.
“Since China introduced the minimum purchase price policy in 2004, on the whole it has mobilized farmers' enthusiasm for growing grain, but drawbacks still exist.” Shi Shaolong suggested, “In the grain purchase and sales system, before the target price system is successfully piloted in major producing areas for major rations such as rice and wheat, the state may make small and minor adjustments to the minimum purchase price policy, but it should not cancel it immediately.”
An industry insider who was unwilling to be named said that in 2014 Sinograin, as the main body entrusted by the state to implement the market-supporting policy, organized and completed a cumulative nearly 125 million tons of policy-oriented purchases for the whole year. Calculated on the basis of China's full-year grain output of 607.1 million tons in 2014, about 20.59% of the country's grain entered the state reserves managed by Sinograin. When Sinograin was established in 2000, its original purpose was, entrusted by the State Council, to be specifically responsible for the operation and management of central reserve grain, and later the function of “accepting state entrustment to execute regulatory tasks such as policy-oriented grain and oil purchase, sale, transfer and storage” was added. Over the years, Sinograin's work has been affirmed by all sectors.
Now that grain production, the storage situation and the purchase and sales market have all undergone new changes, it is suggested that when carrying out policy-oriented purchases such as the minimum purchase price, the method of “separate lending and separate repayment, each taking responsibility, and combining responsibility with authority” be adopted, fully mobilizing the enthusiasm of the administrative heads responsible for food security in major grain-producing provinces as well as in city and county local governments, and guiding qualified grain enterprises of all types to participate widely in grain procurement, storage, purchase and sales. “‘Letting the market play a decisive role in resource allocation’ is an objective requirement. The direction of China's grain macroeconomic regulation further advancing toward marketization remains unchanged, even though the path of reform cannot be smooth sailing. After enduring the growing pains, China's grain market will surely be even more full of vitality and hope.” This person said.