Domestic corn temporary storage auction caught in a strange trap: only 5% sold
Corruption incidents at some grain depots in Northeast China. Recently, CCTV reported that some grain depots in Liaoning and Jilin provinces, during the process of policy-based grain procurement, storage and sales out of warehouses, engaged in practices such as passing off old grain as new grain and maliciously pocketing price-difference subsidies. So how do grain depots operate to achieve arbitrage?
Our reporter conducted a dedicated interview with Du Zheng, president of the Academy of Science of the State Administration of Grain, on issues currently existing in the grain sector such as “passing off old grain as new” and the “three highs of grain.”
With grain in hand, the heart is not anxious. In order to ensure food security, China has established a strong national reserve system. Relying on central grain reserves, the state can conveniently allocate resources and stabilize the market; at the same time, through protective-price procurement, it can also protect the interests of grain farmers and promote grain production.
Du Zheng, president of the Academy of Science of the State Administration of Grain, said that in order to ensure the quality of the national reserve grain, grain in state-owned grain depots needs to be rotated regularly, and the frequently appearing “circulating grain” phenomenon in recent years has exploited loopholes in this process:
Reporter: How often is grain in state-owned grain depots generally rotated?
Du Zheng: Wheat 3 years, rice 2 years, corn also 2 years. The grain authorities have been committed to controlling this “circulating grain” for years. Circulating grain means taking grain that should have been rotated out and, with bad intentions, rotating it back in as new grain, deliberately pocketing the price difference. This has been tackled for so many years, but it is difficult. In some cases, the appearance of new grain and old grain is not very obvious. Some grain stored for two years, if storage conditions are good, shows no very obvious change in quality.
Take wheat as an example. Before the market-support procurement, the grain depot tips off enterprises such as flour mills and asks them to help bid for old wheat procured and stored in previous years. When actual procurement begins, the grain depot buys the wheat back from the enterprise. During the transaction, the wheat does not leave the grain depot; it is merely a fake transaction between the grain depot and the enterprise. After “going around in a circle” on the spot, it can bring the grain depot a new sum of fiscal subsidy income.
In the “passing off old grain as new” incidents exposed in Liaoning and Jilin provinces this time, aged grain is also different from “circulating grain”:
Du Zheng: Normal rotation is also for grain depots to push out the old and store the new. When its quality has not changed much, it is pushed out. So, as just said, wheat 3 years, rice 2 years, corn 2 years; at that time it is not called old grain, it is just not new grain. Old grain means the quality of the grain has changed. So-called change means it definitely does not taste good when eaten, does not look good in appearance, and gives off an old smell when sniffed. Only then can it be called old grain.
Du Zheng, president of the Academy of Science of the State Administration of Grain, said that compared with “circulating grain,” the “passing off old grain as new” incidents are even worse. Because to some extent, old grain has already undergone obvious quality changes and is no longer suitable for people to eat:
Du Zheng: True old grain is grain that, after being stored for several years, has undergone obvious quality deterioration due to improper storage. Rice must at least reach the third year before relatively obvious quality changes occur. Wheat generally must exceed five years before quality changes occur and obvious differences can be felt. If changes can be seen with the eye, then that is too brazen, and even more serious.
The original intention of China's establishment of the grain reserve system was to ensure food security. Relying on central grain reserves, the state can conveniently allocate resources and stabilize the market; at the same time, it can also protect the interests of grain farmers. The “passing off old grain as new” exposed this time is a typical case of duty-related corruption of “living off the mountain one relies on” and “living off grain one relies on.”
It is worth noting that this is not the first time the media has exposed problems at Sinograin. According to incomplete statistics, since Sinograin was established, personnel within the Sinograin system under the vertical management system who have been investigated for violations of discipline, corruption and other problems have already numbered more than 100. In particular, some major and important cases have repeatedly occurred in the Sinograin system.
In 2011, multiple incidents of corruption and staff absconding with funds occurred at the Xuchang Directly Subordinate Depot, Anyang Directly Subordinate Depot and Zhoukou Directly Subordinate Depot of Sinograin's Henan Branch. For this reason, Li Changxuan, former general manager of Sinograin's Henan Branch, was investigated by the Central Commission for Discipline Inspection.
In 2012, during implementation of the protective grain procurement policy, Sinograin's Huai'an Directly Subordinate Depot in Jiangsu purchased at low prices and recorded them at high prices, pocketing 23 million yuan in state grain purchase price differences, and also took bribes on a large scale.
In August 2013, procuratorial organs uncovered 110 “big rats” in the Sinograin Henan Branch system; also in August, Sinograin was found to have imported genetically modified rapeseed mixed into Sinograin's temporary storage inventory.
⟧ In September 2013, the central inspection team clearly pointed out that Sinograin had problems such as “internal supervision and management not being strict enough” and “corruption cases at the grassroots level being frequent and widespread.” However, a few months later, a leased site of the Hailin Directly Subordinate Depot in Heilongjiang caught fire again.
A year and a half ago, both the chairman and general manager of Sinograin were replaced. The new leadership announced “zero tolerance” and “resolute punishment” for the “four pests” of passing off old grain as new, circulating grain, driving prices up and down, and privately setting up slush funds, and published a series of systems and measures, stating that rectifying problems such as the “four pests” would be a major political task for the company at present and for a period to come. Now it appears that Sinograin still has a long way to go to achieve its goals.
It is said that one should know the reasons as well as the facts. The reason these problems of “circulating grain” and “passing off old grain as new” can arise is most fundamentally the “three highs” problem of grain. Under the halo of “11 consecutive increases” in grain production, inventories of the three major staple grains are high. Ren Zhengxiao, director of the State Administration of Grain, publicly stated during the “Two Sessions” that “corn and rice show a superposition of the ‘three highs’ of high output, high procurement volume and high inventory.” At the same time, grain inventories currently face sales difficulties. In particular, in the temporary storage grain auction on April 9 this year, the rice sales volume was only 0.02%. So how should this difficult problem be addressed in the future?
In recent years, China's grain prices have been inverted relative to the international market, the scale of grain inventories has increased daily, and auctions of temporary reserve grain have continued to encounter difficulties, which has also led to more and more grain inventories in state-owned grain depots.
There is more grain, and some varieties are in phased oversupply. International grain prices are relatively low, while domestic grain prices are relatively high. Rice in some southern provinces was previously heavily affected by smuggling, and it is better now. Generally speaking, it is still phased oversupply. This is the main factor.
Take corn as an example. As of March 31, cumulative procurement of temporary storage corn for the 2014/2015 year reached 76.11 million tons, an increase of 12.96 million tons over the same period last year. Under enormous inventory pressure, on April 9 this year, before the temporary storage corn procurement period had ended, the State Administration of Grain launched corn auctions, more than a month earlier than last year, planning to sell 311,449 tons of 2012 national temporary storage corn. However, even though large-scale temporary storage procurement caused a sharp decrease in the market circulation of corn, only 15,968 tons were actually sold, a transaction rate of only about 5%, with an average transaction price of 2,497 yuan/ton. Du Zheng, president of the Academy of Science of the State Administration of Grain, said that if the grain cannot be sold, the state can only cover it fiscally:
Du Zheng: After temporary storage grain is procured regularly, it must be sold quickly. The state keeps auctioning. For temporary storage grain, it wished it could be sold in the same year, but the market does not accept it unless the market price is lowered. The government has to weigh things. Each time it sets a floor price. If the price is below the floor price, the auction has to fail. If it cannot be sold, it can only be sold next time.
Reporter: So what happens if it cannot be sold?
Du Zheng: That is a burden on the state, and the finance department can only cover it. If the grain cannot be sold, no matter which grain depot it is stored in, the state has to pay storage fees. So from the state's perspective, it hopes to sell it as soon as possible, but it is also afraid of suppressing the market. It is not that it absolutely cannot be sold; lower the price, but lowering the price causes too heavy a fiscal loss.
It is understood that the national temporary storage grain auctioned on April 9 this year included corn and rice. A corn transaction rate of only 5% was already pitiful, but this was not even the worst —— of the planned sale of 1,282,297 tons of 2013 mid-to-late indica rice, only 220 tons were actually sold, a transaction rate of only 0.02%.
There are two reasons why the grain cannot be sold: first, quality deteriorates after long-term storage; second, the price is high, and the price difference between domestic and international markets is huge. Imported corn from the United States, after tax, is only 1,570 yuan per ton, nearly 1,000 yuan lower than domestically produced corn. Under market conditions, it is inevitable that temporary storage corn cannot be sold. Du Zheng, president of the Academy of Science of the State Administration of Grain, said that in order to reduce losses caused by grain aging, the state is also making attempts in many aspects:
Du Zheng: The No. 1 Central Document issued by the state this year, from the perspective of national strategy, is to strengthen the conversion of grain, public-interest conversion, making alcohol, making fuel, making ethanol. These are all adjustment methods. The state has many adjustment methods. Large-scale conversion means making fuel ethanol. The state has always controlled ethanol and the like because China's grain is generally in a tight balance overall, and industrial use has always been restricted. But when necessary, appropriate adjustment, loosening when it should be loosened and tightening when it should be tightened, is a means of state adjustment. Only when absolutely unavoidable is it converted to industrial use.
China currently does not publish grain storage volumes, but some institutions have released unverified figures showing that China's corn inventory in 2013/2014 reached a historic high of 106 million tons. Moreover, grain inventory has entered a strange trap: the more stored, the older it becomes; the older it becomes, the less it can be sold; and the less it can be sold, the older it becomes. People often say that with grain in hand, the heart is not anxious, but now more grain has instead become a burden. Watching grain harvested through hard work gradually become old grain, is this not also a kind of waste? Now it is indeed time to solve the problem.