Rice prices are falling: is there an opportunity for processing companies?

Rice is one of China's most important staple grains. This year, due to frequent extreme weather, China's main rice-producing areas in Hubei, Anhui, Jiangxi, Hunan and other places suffered disasters of varying degrees. Right now, late rice is still being harvested, yet news of both declining rice output and falling prices has frequently come out of many of China's main rice-producing areas.

Although rice prices are not ideal, looking across the whole industry, the pattern has long been strong rice grain and weak milled rice, that is, compared with rice grain prices, rice prices are even weaker, and many grain processing enterprises are struggling to survive. So with rice prices falling this year, have processing enterprises gained an opportunity? Given this year's situation, how should farmers sell their grain?

Beside a rice field in Yangxu Town, Gao'an City, Jiangxi Province, the reporter met Jin Shuitian, a large-scale grain grower who contracted this land. After working in Guangdong for more than ten years, he returned home the year before last with all his savings and contracted 1,500 mu of land to grow rice. Last year the rice output was high and prices were good, but this year the output is simply not good.

Jin Shuitian: Early rice, middle rice and late rice combined averaged over 1,000 jin per mu last year. This year it is about 900 jin per mu.

Jin Shuitian said this year's reduced output was mainly due to the weather. Starting in late July, the local area suffered sustained high temperatures. From July 21 to August 31, Jiangxi Province's average precipitation was 123 mm, a decrease of 33% compared with the same period in previous years, and this period happened to be the critical stage of rice growth. Both the output and quality of the rice were affected, and the price was also much lower.

Jin Shuitian: The processing plant buys at 133 yuan per 100 jin. This year it is 20 yuan worse than last year.

Li Guoxiang, a researcher at the Rural Development Institute of the Chinese Academy of Social Sciences, said that although some main producing areas have seen reduced output to varying degrees, in recent years China's rice planting area has been relatively stable and output is still growing slowly, with market supply exceeding demand, so prices are falling.

Li Guoxiang: Current rice grain output reaches 200 million tons each year, while our overall consumption, measured as food grain, is far less than 200 million tons. Under these circumstances, a situation of loose supply and demand for rice grain has emerged.

At Ruiqian Rice Industry in Gao'an, Jiangxi, quality inspectors insert a special instrument into bags to test the quality of the rice grain. Local grain broker Hu Huailin said this year's rice grain quality is poor and the purchase price has kept falling.

Hu Huailin: The price is 10 yuan lower per 100 jin than last year. Selling to the rice mill, it is also 5 or 6 yuan lower per jin.

As is well known, China's rice industry has long had a pattern of strong rice grain and weak milled rice. Last year, grain processing enterprises, when the processing plants purchased middle rice, the price was around 138 yuan, but this year the price has fallen to 132 yuan, equivalent to a cost reduction of 6 or 7 fen per jin of rice grain. For price enterprises that normally make less than 3 fen of profit per jin of rice processed, this is good news. Therefore, enterprises feel they should increase loans this year to buy rice grain. Xu Guiping, general manager of Ruiqian Rice Industry in Gao'an City, Jiangxi:

Xu Guiping: The loan is at least 10 or 20 million yuan.

However, enterprises expanding production scale are still a minority. Because rice grain processing profits have been meager in recent years and business is extremely difficult, many rice processing enterprises have actually been gradually leaving this industry over the past two years. Sun Guangmei, agricultural products analyst at Sublime China Information:

Sun Guangmei: The operating rate of rice enterprises nationwide has been maintained at around 30% for the past few months. This is a very low figure.

Processing enterprises have low operating rates and are not active in purchasing, so where should the grain in farmers' hands go? Besides selling to grain processing enterprises, rice grain has another important outlet: selling to state grain depots. To stabilize grain prices and protect the interests of grain-growing farmers, the state established the minimum purchase price policy in 2004. The reporter learned that due to tight state depot capacity, many grain farmers cannot sell their grain smoothly. At the grain depot of the Yangxu Town Grain Management Office in Gao'an City, the last batch of rice grain purchased this year was being prepared for storage. Although the original grain purchase plan lasted more than two months, because of tight depot capacity, this depot had to stop purchasing just 2 days after it began. Luo Wenzhong, director of the Grain Management Office:

Luo Wenzhong: Because this year there is only a capacity of more than 6 million kg, and as of now there is still grain from 2013.

In the end, of the 500 mu of early rice grown by rice farmer Jin Shuitian, only one third was finally sold to the grain depot. Of the remaining grain, half was sold to grain traders, and half could only be stored by himself.

Jin Shuitian: The key problem is that there is not that much grain storage. The policy is very good, but there is not enough storage, so there is no way.

It is understood that local grain depots are also trying to free up capacity, but the current grain rotation and auctions are not progressing ideally. And wanting to **build storage warehouses, or rent warehouses from processing enterprises, the cost is too high. Xiong Gouhua, manager of the Gao'an City Grain and Oil Purchase and Sales Company in Jiangxi Province:

Xiong Gouhua: That requires a guarantee from a small and medium enterprise guarantee company, and it charges a 20% guarantee fee. So calculated this way, it is 70 yuan per ton. If the storage fee is 94 yuan per ton, then a large part goes to the guarantee company. Among this, private enterprises also have to pay 30-50 in guarantee fees, plus 20 or 30 in storage fees.

Li Guoxiang said that this is not only the case in Jiangxi; many main grain-producing areas have the problem of tight warehouse capacity. The poor grain circulation hidden behind this urgently needs attention.

Li Guoxiang: Our stored grain and consumption must maintain an appropriate relationship. If there is overstorage, problems will eventually appear. So on the one hand, we must continue to expand warehouse capacity and build warehouses well, especially in terms of rations, especially under the new situation, to ensure absolute security of food rations. On the other hand, we must ensure our grain production, especially for early indica rice, and increase the intensity of grain structure adjustment.

Data from the China National Association of Grain Sector shows that the production capacity of rice processing enterprises nationwide is nearly 300 million tons, while the actual processing volume is less than one third, indicating serious overcapacity. In fact, there are also many small rice processing plants that are not included in registration and statistics, which has caused the phenomenon of strong rice grain and weak milled rice to persist for a long time. Because the capacity utilization rate of rice processing enterprises is lower than that of wheat, soybean and oil enterprises, we also hope the entire industry can integrate resources and achieve transformation and upgrading.