China's grain prices rank among the world's highest, and high-price market-support purchases have led to grain piling up in warehouses
China is not the world's most developed country, yet China's grain prices have for several years running remained higher than the international market. Large-scale grain and oil reserve purchases have kept China's grain prices rising steadily, and the China Grain Reserves Corporation (hereinafter “Sinograin”), which handles the grain and oil reserve purchases, has maintained a relatively high rate of return, while other grain processing enterprises that bear the risks of market competition are full of complaints.
Sinograin's latest "2012~2013 Social Responsibility Report" discloses that China's main grain varieties, such as wheat and rice, have maintained a steady upward trend in recent years, and cumulatively, China's grain prices are far higher than the international market.
Looking at the trend of Chinese and US wheat prices from 2005~2013, the US wheat market price was at one point in 2007~2008 about 1000 yuan/ton higher than the Chinese market; after US wheat soared to about 2800 yuan/ton in 2008, it fell sharply and fluctuated around 1500 yuan/ton for a period of several years, while Chinese white wheat prices consistently maintained a steady upward trend. By the end of 2013, Chinese wheat had risen to about 2500 yuan/ton, US wheat was about 1300 yuan/ton, and the price difference between Chinese and US wheat was about 1200 yuan/ton.
As for corn, the Chinese and US corn price curves crossed twice in 2008, at a price of about 1600 yuan/ton; but afterward, US corn prices began to fall, dropping to about 900 yuan/ton in mid-2009, while Chinese corn prices maintained a steady-to-rising trend from 2005, climbing to about 2250 yuan/ton by the end of 2013, with a price gap between the two countries of about 1250 yuan/ton.
Rice produced in the United States has limited influence on the international market, so Vietnamese rice is used as the object of comparison. Looking at the Chinese and Vietnamese market price comparison from 2005~2013, during 2005~2008 the price trends of China and Vietnam were close, with the FOB price of Vietnamese 5% broken rice (converted to paddy) slightly lower than China's. From 2008~2009, after Vietnamese rice climbed to a high of about 5000 yuan/ton, it plunged sharply; by the end of 2013, Chinese paddy was about 2900 yuan/ton, while the FOB price of Vietnamese 5% broken rice (converted to paddy) was about 1900 yuan/ton, with the price difference between the two countries reaching about 1000 yuan/ton.
Sinograin stated: “Since 2005, through the vertical Sinograin system's effective reserve throughput regulation, the overall grain situation and the stable operation of the macroeconomy have been maintained. In sharp contrast to the sharp rises and falls and frequent fluctuations of international grain prices in recent years, the market prices of major domestic grain varieties have maintained a stable operating trend, and China has become a ‘safe island’ in the world food crisis.”
China's grain prices remain high, the costs of grain processing enterprises increase year after year, and their performance has been greatly affected as a result. Beidahuang (600598.SH) has seen the phrase “rising raw material prices” appear repeatedly in its annual reports since 2009; as one of the largest rice processing enterprises in China, apart from a profit of 7.19 million yuan in 2009, Beidahuang Rice Industry lost 170 million yuan, 560 million yuan and 422 million yuan in 2011~2013 respectively.
China Agri-Industries Holdings (00606.HK), besides rice processing, is also one of China's leading domestic soybean, corn and wheat processing enterprises, and the year-by-year rise in China's grain prices has also placed considerable pressure on its performance. In terms of return on net assets, since 2009 China Agri-Industries Holdings has generally shown a downward trend, with returns on net assets over the years of 11.11%, 6.06%, 13.16%, 4.63% and 5.41% respectively.
Grain prices do not only affect the profitability of rice, flour and oil processing enterprises. Corn is one of the main components of feed, and rising corn prices have pushed up the costs of feed enterprises, but weak terminal consumption of meat has made life extremely hard for feed enterprises. An executive of a large domestic feed enterprise said: “From our understanding of agriculture, because of the state's floor-price purchases and subsidies, farmers still make a profit from producing grain, but farming households engaged in livestock breeding have been losing money for a year and a half straight because of the economic downturn and falling demand.”
Grain processing and feed production enterprises facing full market competition have meager profits or even losses, while Sinograin, which handles market-support purchases, has a relatively more stable rate of return. From 2009~2013, Sinograin's return on net assets was 9.66%, 10.24%, 10.5%, 9.26% and 6.34% respectively; apart from 2009 and 2011, when it was lower than China Agri-Industries Holdings, Sinograin stayed ahead in the other three years.
In 2013, Sinograin completed a cumulative total of 88.1 million tons of policy-related grain purchases of various types for the whole year, a record high purchase volume; the 2013 purchase volume accounted for 32.6% of the country's total grain purchases, and the various types of policy-related grain under the company's management accounted for more than half of the total stock of grain enterprises nationwide. Sinograin's operating revenue reached 189.3 billion yuan in 2013, and its total assets exceeded 500 billion yuan.
In the field of reserve purchasing, Sinograin is dominant and unmatched by anyone. Grain and oil processing enterprises have much to say about this, and local state-owned grain systems are even more resentful.
Last year Sinograin purchased nearly 90 million tons of grain, but only 36.36 million tons of policy-related grain was sold through wholesale market bidding. A large amount of the grain purchased for market support, because of its higher price, holds little interest for grain processing enterprises and can only be piled up in warehouses, leaving Sinograin's warehouse capacity strained.Premier Li Keqiang of the State Council recently, during an inspection of the Zhuzhou Directly Subordinate Depot of the Central Grain Reserve, proposed that stored grain must be bought in, stored well, and sold out.
Several industry insiders contacted by the First Financial Daily reporter believe that China's large-scale grain reserve purchasing mechanism needs reform, and that a new balance point must be found between market-based operation and administrative intervention.