March 20, 2015

20/03/2015: China's grain stockpiling distorts market is sending confusing signals to the world market by importing huge volumes of agricultural commodities it does not actually need, Fred Gale writes for the Nikkei Asian Review.

On March 5, the Ministry of Finance announced that it would spend 33 percent more this year, or US$24.7 billion, to expand strategic stockpiles of grains, cotton, edible oils and related products. In 2014, China imported 114 million tons of these products, far more than any other country. This massive import volume suggests that the country is short of its own harvests, but in fact China has surpluses of nearly all major commodities. During the same year, Chinese authorities bought up 124 million tons of grains from local farmers and stored the commodities in warehouses to support domestic prices. These government purchases exceeded 20 percent of China's 600 million ton grain harvest. The volume of imports and government stockpiling has grown year by year since 2012.

The problem began in 2008, when the National Development and Reform Commission adopted a practice of raising support prices for grains, oilseeds and cotton each year to ensure good returns for farmers. The official stockpiling system also made price increases self-perpetuating. Warehouse managers held grain as long as possible, since they could count on the price rising every year. There was no cost to holding the grain since the government subsidized storage costs. As a result, grain started piling up in warehouses, leaving less available in the market and creating an illusion of shortage.
The initial impact of the policy was to entice Chinese food processors and textile manufacturers to import ever-larger volumes of cotton, soybeans and sugar. This coincided with and fed into the rising prices for these agricultural commodities around the world from 2009 to 2012, which prompted farmers in China and elsewhere to switch use of their land in favor of growing these products.

This distorted system ran on its own logic until 2013, when global grain prices crashed. Chinese grain prices are now much higher than prices in the global market, but the government maintains import quotas to make sure the home market is not flooded. It also turned back US shipments of genetically modified corn until a long-delayed approval for a particular strain was granted in December. Nevertheless, private Chinese mills making animal feeds and starch have cut back on their use of domestic corn -- which remains 60 percent more expensive than imported corn -- and switched to using imported sorghum, barley, distillers grains and cassava instead. Unlike corn, imports of these products are not restricted by quotas.

Smuggling of other controlled products, such as rice, has also spiked.

Read more HERE.

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