COFCO's Transformation Reflects the Plight of China's Grain and Oil Processing Industry
On the eve of the Spring Festival of the Year of the Sheep, some media reported that COFCO Group's pilot plan to become a state-owned capital investment company had been approved, and that COFCO Group was making specific arrangements and plans in accordance with the requirements of SASAC, formulating a detailed plan.
Why has COFCO Group, once primarily engaged in grain and oil operations, now the leader of China's grain industry and one of the world's Fortune 500 companies, transformed into an investment company? We can get a glimpse of the answer by looking at its 2014 annual report. Its 2014 earnings forecast showed that the company expected a loss of 765 million Hong Kong dollars. China Foods, another major listed company under COFCO, lost about 64 million Hong Kong dollars in the first half of 2014, and its full-year 2014 performance figures are not yet known.
Compared with the poor performance of its main business, COFCO's investment returns are much better. In 2011, 2012, 2013 and at the end of March 2014, COFCO Group's investment income was 5.496 billion yuan, 6.273 billion yuan, 5.142 billion yuan and 956 million yuan respectively, accounting for 67.57%, 107.62%, 154.93% and 156.21% of operating profit respectively, a very high proportion. Investment income being more than 100% of operating profit means that without the profit contributed by investment business, COFCO Group's other businesses might have been operating at a loss.
COFCO Group's difficulties in grain and oil operations are merely a microcosm of China's grain and oil processing industry.
After a sharp reduction in grain production in 2013, China adopted a series of major policy measures, enabling the country's total grain output to increase for 11 consecutive years. In 2014, the national total grain output reached 1,214.2 billion jin, an increase of 10.3 billion jin over the previous year, up 0.9%, reaching a record level.
The consecutive years of increased grain harvests have laid a relatively solid material foundation for ensuring domestic grain supply. The “tight balance” in the supply of major grain varieties has greatly improved, and people's three daily meals are basically guaranteed.
While China's grain production has continued to develop steadily, grain production in the world's major grain-producing countries and in countries neighboring China has been growing day by day. Unlike China, grain exports from the world's major grain-producing countries and China's neighboring countries have not only continued to grow in quantity, but what is most devastating is their low prices.
The total cost of US No. 2 soft red wheat after tax at Chinese ports was 2,226 yuan in mid-January 2014 and 2,124 yuan at the end of December, with a maximum of 2,558 yuan per ton, while China's 2014 minimum purchase price for wheat was 2,360 yuan per ton. Entering 2015, US wheat prices continued to decline. On January 2, the total cost of US No. 2 soft red wheat after tax at Chinese ports was 2,026 yuan per ton, and on February 11 it fell to 1,932 yuan.
On February 13, 2015, Thai 5% broken rice was quoted at 405 US dollars to 415 US dollars per ton, about 2,530.6 yuan to 2,593 yuan; 55 US dollars higher than Vietnamese rice of the same specification, or 343.65 yuan per ton; Indian 5% broken rice was quoted at 395 US dollars to 405 US dollars per ton, about 2,468 yuan to 2,530.5 yuan; 50 US dollars higher than Pakistani rice of the same specification, or 312.4 yuan. China's 2014 minimum purchase price for mid-to-late indica rice was 2,760 yuan per ton.
Data from the Ministry of Agriculture showed that in November 2014, the domestic and international price gaps for the three major grains - rice, wheat and corn - were as high as 1.08 yuan, 0.58 yuan and 0.52 yuan per kilogram respectively, all wider than in 2013.
Against the backdrop of such a large domestic and international price gap, foreign grain has marched into the Chinese market on a large scale. According to customs statistics, China imported 19.51 million tons of grains and grain flour in 2014, a year-on-year increase of 33.8%. Among them, 2.97 million tons of wheat were imported; rice imports were 2,557,240 tons, a year-on-year increase of 312,940 tons, or 13.94%. Although in total terms the import volume does not account for a very large share of domestic consumption, imported grain, which is far cheaper than domestic grain, has not only firmly secured markets in China's major grain-deficient areas, but has also continuously eroded markets in China's main grain-producing areas, leaving domestic grain to be mainly purchased and stockpiled by the government at minimum purchase prices. Very few domestic grain processing enterprises are able to start production, and a large number of national processing enterprises are in the predicament of losing a little when operating a little and losing a lot when operating a lot, struggling to hold on and finding each day as long as a year.
Grain is a special commodity related to the national economy and people's livelihood, and grain processing enterprises are likewise enterprises related to the national economy and people's livelihood. Although China implements market-oriented grain purchase and sale and diversified business entities, if the current situation is allowed to develop, in the near future China's national grain processing enterprises will undoubtedly follow the old path of oil processing enterprises.
Looking back at China's current oil processing and oil market, it is not difficult to see that it was precisely the lack of regulation in opening up the oil market at that time that caused foreign oils to rush in, and large numbers of domestic oil enterprises either went bankrupt or were acquired and merged by foreign-funded enterprises. After a period of turmoil, foreign capital controlled China's oil processing enterprises and terminal retail market, and China has since lost its voice in edible oils.
COFCO Group, with its abundant strength, is now finding it hard to hold on in the grain processing industry. This shows just how dire the predicament of China's grain processing enterprises has become today.
As an important link connecting production and consumption, grain processing is indispensable. Just as we cannot let our rice bowl be held by others, we absolutely must not let this crucial link of grain processing be controlled by foreign capital.
If foreign capital once controls the grain processing link, it can then control the consumption link, and ultimately control the production link. By then, foreign capital will be able to summon wind and rain in China's grain market. Not only will the interests of grain consumers be harmed, but grain producers will likewise suffer, and domestic stability will be difficult to maintain.
Protecting the national grain processing industry means protecting the interests of domestic grain producers and consumers and protecting national food security. Therefore, the relevant state departments should, just as they do with grain production, use multiple policies and measures such as tariff leverage, credit policy and cracking down on smuggling to support the development of the national grain processing industry at critical times.