Focus on China

by World Grain Staff
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China is a large country with a huge demand for food and an ample agricultural sector to supply it. To satisfy that demand, which has been spurred recently by spectacular economic growth, takes a balancing act as the authorities struggle to balance the need to keep prices in check while making sure farmers get a decent return to encourage sufficient production.

The most recent estimates from the International Grains Council (IGC) put China’s 2008 total grains crop, not including rice, at 277.8 million tonnes, up from 271.7 million tonnes the year before, making it second only to the United States. The IGC put China’s wheat production at 112.5 million tonnes, the highest level since 1999, up from 109.9 million, with the corn (maize) crop at a record 156 million tonnes, up from 151.8 million.

China’s 2008 barley crop is estimated at 3.5 million tonnes, down from 3.6 million, and the sorghum crop is 2 million tonnes, down from 2.6 million. China has also produced an unchanged 600,000 tonnes of oats and 700,000 tonnes of rye, also unchanged.

According to the IGC, China will import a total of 1.7 million tonnes of grain in 2008-09, up from 1.4 million in 2007-08. It will export 2.8 million tonnes of grain, down from 4.1 million. Wheat imports will be 100,000 tonnes, down from 200,000, while wheat exports will be 2.1 million tonnes, down from 2.4 million. Corn imports are an unchanged 100,000 tonnes, while exports are set to fall to 500,000 tonnes from 1.4 million.

China will import 1.4 million tonnes of barley in 2007-08, up from 1.1 million the year before. It will export 100,000 tonnes of sorghum, down from 250,000.

The IGC put China’s imports of soybeans in 2008-09 (October-September) at 36.8 million tonnes, up from 36.5 million in 2007-08. Soybean exports are unchanged at 500,000 tonnes, while China is also expected to export an unchanged 700,000 tonnes of soymeal. It also has China importing 800,000 tonnes of rapeseed in 2008-09, down from 900,000.

China is a huge producer of rice, with the 2008 crop at 187.3 million tonnes, according to the IGC. That compares with 185.4 million in 2007.

China also imported 300,000 tonnes of rice in 2008 (January to December), compared with 500,000 the year before. Its rice exports are estimated at 1 million tonnes for 2008, compared with 1.3 million in 2007.

China’s big crop this year has made it pretty well self-sufficient, Cary Sifferath, senior director at the U.S. Grains Council in Beijing, told World Grain, "The very large winter wheat harvest they had this summer means there should be enough corn and feed wheat," he said. "Because of the price of corn, we expect some wheat to move into feed channels. We don’t see China importing corn or feed grains in the next nine months or so. A year from now may be different."

Government policy makes it unlikely that China would be shipping any grain abroad. "At the same time, the government has put on fairly strict controls on exports of corn, rice and wheat. So we don’t see China becoming an exporter."

CONTROLLING INFLATION
The government’s aim is to insulate China from potential inflation caused by movements in world markets. "They are trying to maintain stock levels and control food inflation by holding onto all the grain they have," Sifferath said. "It keeps them off the market."

In more normal times, some of the Southeast Asian countries like South Korea have been traditional buyers of grain from China.

The policy is meant to prevent price increases, but it also prevents prices in China from reacting to falls in world prices. "The U.S. corn market has come down, but you saw corn prices in China not correlated with the rest of the world," Sifferath said.

"The Government of China (GOC) has managed price inflation through the implementation of policy measures that included price caps and export controls to protect consumers and give the impression of sufficient grain reserves amidst the sudden jump in global grains prices," the USDA attaché in Beijing said in a report issued in August. "The GOC has traditionally priced agricultural commodities low in order to exploit the countryside’s abundant human resources to fuel urbanization.

"However, with a mounting producer price index (PPI) appreciating at a precipitous pace, the GOC is scrambling to offer protection to the supplied side of China’s agriculture: the rural sector," the report said. "Subsidy allocation is not a clear-cut solution to solving the issue of high producer costs. The question that remains is who will be on the receiving end of such an appropriation: direct cash payments to farmers, middle consumers (food processers), or cede to imports for the sake of maintaining what the GOC would consider an acceptable national grain supply."

The government wants grain prices to remain high enough to encourage farmers to grow corn and wheat. "At the same time, they are trying to cut the price of feed grains so pork production can increase without higher prices by locking out China from the rest of the world of grain prices," said Sifferath.

The average Chinese diet includes some bread and lots of noodles. "Rice and wheat, because of human consumption, are probably even more tightly watched than corn," he said.

The story for the oilseeds is completely different. "Soybeans and oilseeds have been completely opened up," he said. "They’re the biggest importer of soybeans in the world. They import and crush it for oil and protein meal for the livestock industry."

In an attempt to maintain a steady supply of oilseed products and curb inflation, preferential tax/duty policies were put in place at the end of 2007. "However, the 1% import duty for soybeans, effective from January 1 to September 30, 2008, will be eliminated," the report said. "The soybean import duty returned to 3% as of October 1, 2008."

IMPORTANCE OF VEGETABLE OIL
The Chinese Authorities have stressed the strategic importance of the soybean industry. "On August 22, China’s National Development and Reform Commission issued a directive on the promotion of the domestic soybean industry," a report from the USDA in Beijing said. "The directive gives guidance to Chinese ministries about regulating the oilseed industry and marketplace. The main message is that vegetable oil supply is a food security issue and that NDRC supports steady growth of domestic production at a reasonable price."

However, it is vague. "This type of directive is not direct policy, but is used and interpreted by various ministries as they regulate this industry," the report explained.

Despite the government’s concern about food prices, there are some grain-based ethanol plants. "The government is controlling that by not allowing any new licenses for plants which rely on grain as a raw material," said Sifferath. "There are currently five plants that use grain. Even then, some of these plants are running on corn and wheat blend or corn and paddy rice blend."

Corn is also used for starch and sweeteners. "The government is trying to cap it by saying there is a maximum of 26% of all corn use that can be used for processing," he said, noting that this includes industrial use and ethanol. "We are expecting demand for corn starch to decline and for sweeteners to decline into 2009 because there is an abundant sugar harvest," he said.

FLOUR EXPORTER
China is a significant exporter of wheat flour, according to the IGC. It puts total Chinese flour exports at 850,000 tonnes in 2008-09, compared with 845,000 tonnes in 2007-08. However, Hong Kong, which as a special administrative region is not generally considered part of China, is a significant importer of wheat flour, with imports forecast at 440,000 tonnes in 2008-09, compared with 420,000 tonnes in 2007-08.

According to the State Administration of Grain, which describes itself as responsible for macro control of grain distribution, the liberalization of the grain market has led to fierce competition between processing enterprises. "After restructuring, many large-scale processing enterprises have branched out," it said on its website. "According to the statistics from China National Association of Grain Sector, in 2005 there are 2,797 grain enterprises with daily processing capacity above 100 tonnes, and 8,321 enterprises with daily processing capacity below 100 tonnes, among which 7,260 are rice millers, 2,815 are flour millers, and 1,043 are vegetable oil crushers and refiners."

China’s biggest wheat processor is COFCO, which controls seven flour processing enterprises that mill nearly 1.5 million tonnes of flour each year.

Demand is changing, according to the USDA in Beijing. "As urban demand for traditional wheat products (Chinese steamed bread) declines in favor of convenience foods, including instant noodles, biscuits and bakery products, wheat quality is becoming more of a factor for millers," it said. "Unlike traditional homemade or homestyle Chinese food products, flour for processed foods requires specialized gluten content and consistent quality. Domestic flour millers usually try to satisfy these requirements by blending imported wheat with lower-quality domestic wheat."

Chris Lyddon is World Grain’s European editor. He may be contacted at:
chris.lyddon@ntlworld.com.

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