Grain traders hit by hard-to-sell grain; private granaries underutilized
Along with a cigarette, a business card is handed over casually. This is a habitual gesture of grain brokers. On the card, besides basic information, phrases such as “buys grain in large quantities” and “buys grain year-round” reveal the industry needs of the broker community; brokers with a strong sense of service have their bank account numbers printed directly on their business cards.
In the more than 30 years since China's grain circulation system reform began in 1978, the market-oriented reform of the grain circulation system has continued to advance, the grain distribution landscape has quietly evolved, and diverse purchasing entities have gradually emerged. Grain brokers, commonly known as “grain traders”, emerged in response to the times and play an important role in making it easier for farmers to sell grain, broadening grain purchasing and marketing channels, and helping state-owned grain enterprises secure grain sources. They are an important link in the grain circulation system.
⟦NL> Grain brokers are essentially still merchants. Most of their business model is to directly engage in grain purchasing and sell locally to purchasing and storage enterprises or grain operators to earn the price difference. Find a suitable site, build a warehouse, install a weighbridge, purchase necessary equipment such as grain conveyor belts and grain vibrating screens, and a grain purchasing point is open for business.
A grain broker surnamed He in Xincai County, a province-directly-administered county in Henan Province, just entered the industry this year, but the sudden drop in grain prices caught him off guard. He complained to the reporter that he and his partner bought grain from farmers at reference to the state purchasing and storage price, but before they could sell it, grain prices began to fall, and by the end of October they had already lost one to two hundred thousand.
The decline in grain prices has affected the entire industry, and losses among grain brokers are a common phenomenon in Henan and across the country. Large grain growers and grain brokers alike told this newspaper's reporter that losses ranging from tens of thousands to hundreds of thousands are quite normal. Compared with some farmers who do not hold back on selling and sell grain directly to brokers, farmers actually did not suffer losses before the price drop. The brokers who took the grain into their hands bore the transferred risk.
The grievances of grain brokers
Wang Dengfeng, who bought more than 3 million jin of wheat and 600,000 jin of corn this year, had sold only close to 1 million jin of wheat by early November. He poured out his grievances to the reporter: the grain he had already sold had cost him close to 100,000, and if he sold it all, the loss would be even greater, reaching 300,000.
Wang Dengfeng is a grain broker in Queshan County, Zhumadian City. He has been in the grain industry for more than 20 years. Since buying out his position and being laid off from the local grain department in 2006, he has been doing grain purchasing as an individual for nearly 10 years. Locally, Wang Dengfeng is a grain broker with a relatively large scale of operations and relatively rich experience. He owns a granary with a storage capacity of 10,000 tonnes.
“After going independent, whether earning more or less, I basically made money every year, but this year I lost an especially large amount.” Wang Dengfeng said that because he is in the grain purchasing business, working capital is very important, and sometimes 200,000 to 300,000 is needed in a single day. Apart from loans, he can only borrow from relatives and friends.
When he began purchasing grain this year, Wang Dengfeng had 700,000 to 800,000 in working capital on hand, and also borrowed 1.5 million from a local rural commercial bank and more than 1 million through private lending. But the drop in grain prices left him facing a Hamlet-like dilemma of “to sell or not to sell” —— if he sells, the price is bad and the loss is large; if he does not sell, each jin of grain adds one fen in interest every month. For wheat purchased in June of this year, by October the bank interest had already increased by 5 fen.
According to current market conditions, the market price cannot cover the cost price made up of the purchase price and interest. On the day he met the reporter, Wang Dengfeng sold the wheat from three large trucks, but this deal cost him more than 50,000. He said that this kind of situation is a heavy blow to farmers, but an even heavier blow to individual traders. Now he has not only lost his principal but also has to add interest on top of it.
When the grain was harvested and Wang Dengfeng purchased it, he basically followed the market price at the time. Based on experience, he thought that since this year's wheat minimum purchase price was the same as last year's, there should be no problem leaving it stored. Because what the farmers delivered was unprocessed grain (raw grain that had not been cleaned and contained impurities), after subtracting the cost of screening and removing impurities from the minimum purchase price, he paid the farmers as long as there was a profit of one fen per jin of grain.
Because companies downstream in the grain industry chain will push prices down, generally speaking, as long as the grain meets standards, brokers always want to sell to China Grain Reserves Corporation. Although delivering to reserves also involves multiple intermediary links with brokers, and by the time it reaches brokers like Wang Dengfeng the grain price is already not high, this method is relatively stable, and brokers are still willing to choose it.
However, the price drop was still unexpected. Wang Dengfeng said that while wheat was still being purchased and before it could be sold, the price began to fall, and there was no time to sell. This year, anyone who stocked up in large quantities suffered heavy losses. For grain brokers who had just entered the market to purchase this year, a loss of one to two hundred thousand was very normal. “I have a bigger operation and have been in this line a bit longer, so if I lose a bit, so be it; after all, I still have some family assets.”
Wang Dengfeng, who values personal credibility, said that even if he has no money when the time comes, he will sell his house and land to repay the money he borrowed. “These fixed assets are worth several million!” Fortunately, the money from private lending does not all come due at the same time, and the credibility he has accumulated over many years of purchasing has made others trust him especially. He said proudly, “Farmers have idle funds, and because of interest rate cuts and inflation, they are unwilling to deposit them in the bank, so they let me hold the money.”
Speaking of his plans for next year, Wang Dengfeng said he will still continue in the grain industry, but will “learn from a fall into a pit”. Because bank interest is high, he does not plan to take out loans next year. If he cannot see market fluctuations clearly, he will not dare to easily purchase grain in large quantities again, but will instead “buy some and sell some” according to the working capital on hand. If next year's grain prices are similar to this year's, and reserve warehouses again stop purchasing grain because they lack storage capacity, then he will choose to wait and see. “If it doesn't work, then I won't buy grain; if I don't buy, I won't lose.”