How can the operational difficulties of grain reserve rotation be solved?
China basically applies a static management approach to grain reserves at all levels. Once the reserve scale is implemented, without approval from the relevant authorities, grain may not be released from storage at will. Under the fully marketized grain purchase and sales system, reserve-holding enterprises often miss rotation opportunities because planned directives are out of step with the market: they cannot rotate grain out when prices are high, and they do not dare to purchase when prices are low. When it is time to rotate grain out, they cannot get it out; when they want to rotate grain in, they cannot get it in.
The summer grain harvest is now drawing to a close. Reserve grain depots in major grain-producing areas such as Anhui and Hubei are actively organizing reserve grain rotation and speeding up policy-oriented grain auctions to free up as much warehouse capacity as possible for summer grain purchases. However, the current grain market is sluggish, and reserve grain rotation often falls into the dilemma of “buying high and selling low.” The price spread in rotation is growing wider and wider, and reserve enterprises are suffering serious losses.
Rotating at the Right Time
Seizing the Initiative in Operations
When the reporter arrived at the Anhui Modern Grain Center Depot, dozens of grain transport trucks were queuing to enter the depot area. Depot director Ge Liang told the reporter that this year their depot had a heavy reserve grain rotation task, with daily outbound volume reaching more than 4,000 tonnes. After more than 2 months of continuous operations, the rotation work was basically completed, freeing up enough warehouse capacity for the purchase of new grain.
It is understood that China basically applies a static management approach to grain reserves at all levels. Once the reserve scale is implemented, without approval from the relevant authorities, grain may not be released from storage at will. During grain rotation, grain may be rotated out only after approval by the management department, and reserve-holding enterprises have no independent decision-making power. Under the fully marketized grain purchase and sales system, reserve-holding enterprises often miss rotation opportunities because planned directives are out of step with the market: they cannot rotate grain out when prices are high, and they do not dare to purchase when prices are low. When it is time to rotate grain out, they cannot get it out; when they want to rotate grain in, they cannot get it in.
In order to break the dilemma faced by reserve-holding enterprises, Anhui has innovated its provincial reserve mechanism, adopting the methods of government-backed guarantees, rotation at the right time, and public auctions, combining static management with dynamic management. For example, the Anhui Modern Grain Center Depot can take into comprehensive consideration market conditions and changes in the quality of stored grain, and rotate grain at the right time.
Dai Shaoqin, inspector of the Anhui Provincial Grain Bureau, told the reporter that there are mainly two reasons why they chose rotation at the right time: First, Anhui has abundant rainfall and high air humidity. If rotation is carried out once every 3 years, it may affect grain quality. Second, grain inventories are currently high and warehouse capacity pressure is great. Rotation at the right time can not only ease inventory pressure, but also reduce rotation losses and lighten the burden of fiscal subsidies.
As a major grain-producing area, Anhui still provides fiscal backing for provincial-level reserve grain despite fiscal constraints. “Because there is fiscal backing, the grain depot has no pressure from rotation operations and can focus solely on managing the depot well.” Ge Liang said. “We adopt advanced grain storage technology and implement strict grain purchase policies. The quality of stored grain is very good. At rotation auctions it is much sought after, and the selling price is often higher than the market price.”
Commercial Reserves
A Win-Win for Storage and Processing
In recent years, the state has raised the minimum purchase price for grain year after year, and grain production and sales prices have become inverted. This has not only left grain reserve enterprises facing the risk of rotation losses, but also made it difficult for grain processing enterprises to operate. Anhui’s implementation of rotation at the right time has temporarily eased the difficulties of grain reserve enterprises, but it cannot change the operational difficulties of grain processing enterprises. In response to the current problems of losses at reserve enterprises and operational difficulties at grain processing enterprises, Hubei has innovated the operational mechanism for local reserve grain, exploring a model of entrusting leading grain processing enterprises to establish commercial reserves, promoting cooperation between grain reserve enterprises and processing enterprises, and achieving complementary advantages.
In 2010, Hubei selected and entrusted part of its provincial reserve grain to 19 capable and reputable grain and oil processing enterprises and large commercial chain enterprises for storage. In normal times, the grain participates in enterprise operational turnover; in emergencies, it is put into emergency supply.
Xiong Guibin, deputy director of the Hubei Provincial Grain Bureau, believes that the innovation in the reserve grain operational mechanism implemented in Hubei is in fact, on the premise of ensuring that the local government’s ownership, right of use, and supervisory authority over local reserve grain remain unchanged, to moderately separate ownership and operational rights of reserve grain, promote the establishment of long-term stable cooperative relations between state-owned grain reserve enterprises and leading grain processing enterprises, and change the traditional business model of “buying raw grain and selling raw grain.”
Gong Wei, director of the Regulation Division of the Hubei Provincial Grain Bureau, believes that the new reserve grain operational model has achieved a win-win for grain reserve enterprises and processing enterprises. For reserve enterprises, in the past, in order to prevent risks in reserve grain rotation operations, they established reserve grain rotation risk reserves to make up for rotation losses. But with the current severe inversion of grain prices, reserve grain rotation risk reserves are unable to make up for rotation losses. By cooperating with leading grain processing enterprises, grain reserve enterprises transfer the grain that needs to be rotated out to processing enterprises for processing and sale. The two sides agree on a settlement price. Within a certain period, regardless of whether market prices fluctuate, the processing enterprise is responsible for rotating new grain in, and the reserve enterprise does not bear rotation risk. For processing enterprises, they obtain the grain source urgently needed for processing and reduce operating costs.
Hubei Jingzhou Fuwawa Group Yinxin Rice Industry Co., Ltd. is a national-level key enterprise in agricultural industrialization integrating grain purchase, rice processing, and sales. Liu Shoujun, administrative director of Fuwawa Group, told the reporter that their company began undertaking provincial commercial reserve grain storage in 2009. In 2014, the company purchased 22,500 tonnes of provincial commercial reserve grain, with the warehousing price of paddy at 1.43 yuan per jin. The provincial finance department allocated 3.95 million yuan in storage agency subsidies, including 3.65 million yuan in interest subsidies and 300,000 yuan in storage fee subsidies. In order to manage the commercial reserve grain well, Fuwawa Company established a purchasing team responsible for the full-process management of reserve grain, exercising strict control in the purchase and management stages. Over several years, the grain stored by the company has had no quality problems whatsoever.
“Since the company began undertaking the purchase and storage of provincial commercial reserve grain, it has achieved considerable economic benefits while also enhancing social benefits, promoting the development of the local grain processing industry, and playing its due role in local emergency grain supply and market regulation.” Liu Shoujun said.
Setting Storage by Sales
Encouraging the Purchase of High-Quality Grain
Experts believe that grain reserves are not better the more there are. A model of setting storage by sales should be explored, encouraging purchasing and storage enterprises to purchase high-quality rice. Grain reserves should attach importance both to quantity and to quality, and should calculate both the safety account and the economic account.
Jingzhou in Hubei is a major producing area of high-quality paddy. High-quality rice planting accounts for more than 90 percent, and high-quality paddy does not have the problem of inversion between production and sales. It is often purchased as soon as it comes on the market. The current national grain purchase and storage policy is not conducive to the development of high-quality paddy, and reserve enterprises should be encouraged to store high-quality rice. However, high-quality paddy has a short storage time. If stored for more than 1 year, its quality will change considerably, and the selling price will decline noticeably accordingly, posing relatively great storage risk.
Zhang Youqing, director of the Jingzhou Grain Reserve Depot, told the reporter that in the past two years reserve grain has fallen into the dilemma of buying high and selling low. The national minimum purchase price plan for grain requires purchase at no less than the minimum purchase price, but sales are completely marketized, causing enterprises to suffer rotation losses year after year. In one year, the loss reached as much as more than 3 million yuan. Although the reserve grain rotation risk reserve can make up for some losses, the inversion of grain prices is severe, and the problem cannot be fundamentally solved. “Last year the loss dropped sharply, with a loss of only more than 800,000 yuan. This is because we purchased some high-quality paddy and achieved a profit during rotation.” Zhang Youqing said.
During interviews, the reporter learned that the current paddy market is sluggish, but the market for high-quality paddy is rising. Dong Zengyu, deputy general manager of the Hefei National Grain Trading Center, told the reporter that recently, while organizing national policy-oriented grain auctions, they found that the transaction rate for high-quality grain was very high, while the transaction rate for ordinary grain was almost zero. This shows that grain processing enterprises have very strong demand for high-quality grain sources.
The shortage of high-quality grain on the market is related to national policy orientation. The market-support purchase policy makes it difficult for high-quality grain to give full play to its advantages. A large wheat grower in Binzhou, Shandong, told the reporter that he planted more than 20 mu of high-quality wheat. High-quality wheat has lower yields and is difficult to manage in the field, and is easily affected by adverse weather. But when selling to reserve enterprises, the price of his high-quality wheat was no different from that of ordinary wheat, and high-quality wheat could not fetch a good price.
For reserve enterprises, high-quality grain has a short storage cycle and high requirements for storage conditions, which is not conducive to storage. Current national policy stipulates that policy-oriented grain is generally stored for 3 years, while the storage cycle for high-quality paddy is generally 1 to 2 years, which limits enterprises’ enthusiasm for storing high-quality grain.
Gong Wei believes that to change the problems of high policy-oriented grain inventories and poor sales, consideration should be given to promoting a reserve model of setting storage by sales, adhering to a consumption orientation, encouraging purchasing and storage enterprises to purchase and store high-quality grain that is suited to market demand, storing by variety, shortening the rotation cycle, and selling at the right time according to the storage characteristics of high-quality grain. This can not only reduce the rotation operational risk of reserve enterprises, but also encourage farmers to plant high-quality grain and substantially increase the area planted with high-quality grain.