How to Resolve the Problem of High Grain Inventories? Market Mechanisms Are Key
In recent years, China's grain sector has seen a phenomenon of "high output, high inventories and high imports," with all three reaching high levels at the same time. Among these, high grain inventories have reached an unprecedented level.
According to calculations by industry insiders, by early July this year, the national reserve rice inventory stood at a high level, with total inventories expected to exceed 60.5 million tonnes, of which early indica rice and mid-to-late indica rice together accounted for about 25 million tonnes, and japonica rice about 35.5 million tonnes; as of mid-October this year, the national temporary reserve wheat inventory stood at 18.23-19.23 million tonnes, 16-17 million tonnes higher than the same period last year. Policy-based wheat inventories stood at 39-40 million tonnes; in 2014/15 the state continued to implement the corn minimum purchase price and reserve policy, and as of 30 April 2015, cumulative temporary reserve corn purchases reached 83.2876 million tonnes; in 2013/2014 the state's total corn reserves exceeded 69 million tonnes, with the two years combined exceeding 160 million tonnes. Consecutive large-scale purchases have made the national reserve inventories unprecedentedly large. According to statistics, this year's temporary reserve corn auctions have so far seen cumulative transactions of 5.669 million tonnes, imported corn cumulative transactions of 148,000 tonnes, and inter-provincial corn transfers cumulative transactions of only 18,800 tonnes. After nearly two years of auctions, of the 30.83 million tonnes of temporary reserve corn from 2012, 21.37 million tonnes were sold, and of the 69.19 million tonnes from 2013, 9.15 million tonnes were sold. As of now, China's combined inventories of corn, wheat and rice amount to about 230 million tonnes, accounting for 76.7% of China's 300 million tonnes of state-owned grain warehouses, the highest in the world.
At a time of high national grain inventories, the auction transaction rate for state policy-based grain has remained consistently low, with failed auctions occurring on many occasions.
The problems brought by ever-growing grain inventories are extremely serious.
Insufficient warehouse capacity has already emerged
This year China's summer grain output hit a new high, reaching 141.05 billion jin, an increase of 4.45 billion jin year-on-year. Because the proportion of wheat with excessive unsound kernels in some provinces was relatively high, as of 30 September, 11 main producing areas including Hebei had cumulatively purchased 66.3 billion jin of wheat, a decrease of 7.3 billion jin year-on-year; 8 main producing areas including Jiangxi had cumulatively purchased 7.95 billion jin of early indica rice, a decrease of 550 million jin year-on-year. The production situation for autumn rice and corn is good, and they have successively entered the market. The minimum purchase price execution plan for rice has been launched successively in Anhui, Sichuan, Henan, Hubei, Jilin, Jiangsu, Heilongjiang and other provinces. The temporary reserve corn policy for the "three provinces and one region" of Northeast China has also been issued, at 1.00 yuan per market jin for national standard grade three quality, which, although 10% lower than last year, is still higher than the market price. A large amount of autumn grain entering policy-based reserves has become an indisputable fact.
According to media reports, Changsha City in Hunan Province expects a citywide mid-to-late rice purchase volume of about 300,000 tonnes. In accordance with the requirement of the "2015 Wheat and Rice Minimum Purchase Price Execution Plan" to mainly establish purchasing points at state-owned grain enterprise warehouses, it plans to arrange 20 minimum-price purchasing points, 12 fewer than the same period last year, with 115,000 tonnes of empty warehouses and a warehouse capacity gap of about 35,000 tonnes, and with a severely uneven distribution, so that some grain-producing areas have no warehouses available for purchasing and cannot meet farmers' need to sell grain nearby.
The Heilongjiang Provincial Grain Bureau, a major grain-producing province, told the media: "Calculated according to the province's existing grain purchasing and storage capacity, after deducting inventories, only about 20 billion jin of purchasing and storage capacity is available for purchasing autumn grain. Based on a conservative estimate of more than 140 billion jin of new grain for the next grain purchasing season, there will be a storage gap of 120 billion jin."
According to data from the National Grain Administration, during the 2013/2014 purchasing period, as of 28 February 2014, the state had cumulatively purchased 32.2 million tonnes of japonica rice and 29.73 million tonnes of mid-to-late indica rice in main producing areas, increases of 8.55 million tonnes and 9.03 million tonnes respectively compared with the same period of the previous year.
On 30 September, the National Grain Administration, the Ministry of Finance and the Agricultural Development Bank jointly issued a document determining the temporary reserve corn purchase scale for COFCO, Chinatex and AVIC as 10 million tonnes for COFCO, 4 million tonnes for Chinatex and 4 million tonnes for AVIC. Last year, the scale for the three was 10 million tonnes for COFCO, 2 million tonnes for Chinatex and AVIC did not participate.
From the above data, it can be seen that China's state-owned warehouse capacity of only 23.3% can by no means meet the needs of policy-based grain purchasing. Without sufficient warehouse capacity, it will be difficult to solve farmers' problem of "difficulty in selling grain."
Heavy fiscal burden
At present, one important aspect of China's main measures to protect the interests of grain-growing farmers is the policy-based grain purchasing policy. However, China's grain minimum purchase price policy and temporary reserve policy dominate the market, and high inventories of grain have made the public finances pay a huge price.
Purchasing costs are considerable. According to Ministry of Finance regulations, for every jin of policy-based grain purchased, the state must pay 0.025 yuan in purchasing costs. For every additional 1 million tonnes of grain purchased, an additional 50 million yuan in purchasing costs must be spent.
Storage costs are enormous. Current state policy stipulates that the annual storage fee for policy-based grain is 0.047 yuan per market jin per year. For every additional 1 million tonnes of grain purchased, an additional 94 million yuan must be spent each year.
Interest expenses cannot be underestimated. Calculated at the current state benchmark loan interest rate of 4.6% per annum, for every additional 1 million tonnes of grain purchased, an additional 9.2 million yuan must be spent each year.
The above three items combined mean that for every additional 1 million tonnes of grain purchased, 153.2 million yuan in interest and fees must be paid each year.
Quality price differentials are huge. According to the life cycle of grain, generally speaking, the storage periods for corn, rice and wheat are 2 years, 3 years and 4 years respectively. If the grain cannot be auctioned out of the warehouse within the storage period, its quality will decline. Once it reaches the aging stage, it can no longer be used as ration grain and can only be sold as feed. The quality loss per jin of grain is not a matter of a few fen, but a matter of a few mao. The huge losses from grain variety price differentials are massive losses!
Serious waste of grain resources
Grain is an important commodity and strategic material on which the people depend for survival, and obtaining grain resources comes at the cost of various resources. As a country with a large population and little land, and with very limited per capita resource possession, China's grain production is hard-won.
To ensure self-sufficiency in essential ration grains such as domestic wheat and rice, more than 90% of China's 1.8 billion mu of arable land must be planted with grain. The resource waste caused by high grain inventories equals a waste of arable land resources.
Apart from the special geographical environment of Northeast China, where only one season of grain crops can be grown per year, grain production in other regions of China, with two seasons or even multiple seasons per year, consumes large amounts of resources. At present, China's fertilizer use may be the highest in the world. In 2012, China's fertilizer use in pure nutrient terms reached 58.39 million tonnes, pesticide use was 1.8 million tonnes, and agricultural film use was 2.38 million tonnes, with about 1 million tonnes of fragments and residues remaining in the soil each year. Various pollutants emitted by agricultural production account for about half of the country's total pollutant emissions. A certain degree of land pollution and decline in soil fertility are both related to the pursuit of high grain yields. In addition, grain production also consumes large amounts of water, energy and other resources, as well as labor resources. The waste caused by high grain inventories comes at an incalculable cost.
The rapid development of industrialization and urbanization has made China's grain production distribution increasingly uneven. The past pattern of transporting grain from the south to the north has changed to transporting grain from the north to the south. From the perspective of regional distribution, China's 13 main grain-producing areas account for 76% of national output, of which 7 northern main producing areas - Hebei, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Shandong and Henan - account for nearly 50% of national output. Grain inventories in main producing areas and main sales areas account for 71% and 9% of the national total respectively, while consumption accounts for 62% and 17% respectively. Transporting grain from concentrated producing areas to main sales areas incurs extremely high logistics costs. In recent years, the state's arrangement to move Northeast corn southward has come at enormous cost.
The series of social problems brought by high grain inventories has reached the point where it urgently needs to be solved. As a general commodity, grain needs market mechanism solutions to resolve the high inventory problem.
Use "subtraction" to resolve high inventories
Under China's current policy, policy-based purchased grain must be sold through public auctions at prices that cover costs plus a reasonable profit. Under this method, however, the stored grain is difficult to sell. The main reason is that the current policy-based grain purchase prices in China are generally higher than market prices, so the auction transaction rate is very low and the expected results cannot be achieved.
Under market economy conditions, whether selling general commodities or special commodities, the laws of the market economy must be followed. When market supply falls short of demand, market prices rise accordingly; when commodities exceed demand, market prices naturally fall. If commodities in oversupply do not adapt to market conditions, they will be in long-term backlog. Over time, inventory costs will rise greatly, while use value will decline greatly, to the point of losing use value.
The cost prices of China's currently high-inventory grain are not only higher than domestic market prices, but also much higher than international market prices. Judging from the domestic and international grain market situation in recent years, if no major natural disaster occurs in the coming years, or no relatively large-scale international conflict or war occurs, the possibility of grain market prices rising is not great. To resolve the crisis of China's high grain inventories, "subtraction" must be used. When sales at prices covering costs plus profit do not work, we should decisively adopt the method of referring to market prices, appropriately determine the auction reserve prices of policy-based grain, and actively organize auctions. On the one hand, this allows buyers to make a profit and dare to participate in bidding; on the other hand, it allows high inventories to fall relatively quickly, reduces interest and fee expenditures and quality price differentials, frees up warehouse capacity, alleviates farmers' problem of "difficulty in selling grain," and can also align with the international market and enhance the competitiveness of the domestic grain market.
Use "addition" to resolve high inventories
The policy-based grain stored in state warehouses is basically raw grain. Digesting this raw grain mainly depends on grain processing enterprises. Raw grain auctioned above market prices, against the background of "strong rice but weak milled rice" and "strong wheat but weak flour," attracts little interest from grain processing enterprises.
The continuously sluggish grain prices of recent years have already caused many domestic grain processing enterprises to go bankrupt and close down, and even the large and medium-sized grain processing enterprises that have managed to barely survive are also precarious. After purchased raw grain is processed into finished grain, if profits are slow in coming, which enterprise would still take even half a step beyond the line?
To enable grain processing enterprises to actively participate in auctions, we must dare to use "addition." In this regard, Jilin Province's approach is worth learning from.
On 14 October, Jilin Province issued a subsidy policy: in the fourth quarter of 2015, continued subsidy support will be given to corn deep-processing enterprises in the province with annual processing capacity of more than 100,000 tonnes. For state temporary reserve corn and provincial reserve rotation corn that is auctioned out of the warehouse (before the end of the year) and used for self-processing, the original subsidy standard of 150 yuan/tonne is planned to be raised to 350 yuan/tonne, of which the state subsidizes 100 yuan/tonne, the 250 yuan/tonne difference is subsidized by the provincial government, and for auctioned provincial reserve rotation corn the full 350 yuan/tonne is subsidized by the provincial government. For enterprises in the province that purchase and use corn themselves in the fourth quarter, the provincial government will give a subsidy of 250 yuan/tonne based on the actual amount processed and consumed.
Some grain from China's main grain-producing provinces, such as japonica rice and corn from Northeast China, has a market in the south. However, because transport costs are high, buyers are deterred. In this regard, transport subsidies can continue to be adopted to encourage southern enterprises to buy.
Using the "addition" method can effectively stimulate grain processing enterprises' enthusiasm to operate at full capacity. This method is worth promoting in other provinces and municipalities.
Use "division" to resolve high inventories
China is a major oil-importing country, and with the steady development of the social economy, its dependence on foreign oil is rising day by day. Making full use of domestic resources to ease the oil shortage is a good approach.
During periods of grain shortage, China restricted the production of energy products using grain as a raw material. Now, the high inventories of policy-based grain have reached the point where they must be dealt with. Rather than letting this precious grain go to waste, it would be better to let it play its full role.
Referring to the experience of developed countries, using grain - mainly corn - to produce fuel ethanol is an effective way to resolve policy-based grain inventories. The United States is the world's largest producer of fuel ethanol. At present, U.S. fuel ethanol production accounts for about 33% of world output. According to the U.S. Department of Energy's plan, by 2025 biofuels produced from renewable biomass will replace 75% of oil imported from the Middle East, and by 2030 biofuels will replace 30% of current gasoline use. The U.S. government encourages the further development of fuel ethanol and plans to raise the fuel ethanol blending ratio from 10% to 15%. Through legislation, it binds large oil companies to blend fuel ethanol in specified amounts and strives to distribute profits to ethanol production plants and farmers. Judging from data from previous years, on average 30%-35% of total U.S. corn output is used to produce fuel ethanol, 34% for livestock feed, and 12% for export.
As early as 2006, relevant Chinese departments approved the construction of four designated production plants: Jilin Fuel Ethanol, Heilongjiang China Resources Alcohol, Henan Tianguan Fuel Ethanol and Anhui Fengyuan Fuel Alcohol. These plants, which have good production conditions, together with plants that went into operation later, should now be allowed to operate at full capacity.
Using corn to produce fuel ethanol not only increases domestic automotive fuel supply, but also reduces air pollution. For fuel ethanol production, which both increases fuel supply and can help resolve the problem of high grain inventories, the state should provide corresponding policy support.