Securing grain

New policies address grain concerns in China and allow the country to remain grain self-sufficient.

Lan Xinzhen

THE current drought that has depleted water resources in many parts of China is the worst in nearly 60 years. However, the Chinese government has launched new measures to fight the natural disaster.

The State Council unveiled 10 measures to support grain production at an executive meeting presided over by Premier Wen Jiabao on 9 February (see box). The following day, the Chinese premier held a conference to address national grain production, drawing universal concern about China's food security.

Ding Shengjun, a professor at the Academy of State Administration of Grain, said this reflects China's concerns about worldwide price hikes in grain and future increases in grain production.

In early February, the Food and Agriculture Organisation of the United Nations (FAO) issued a report warning of grain production decreases in many countries as a result of extreme weather conditions. On 15 February, the World Bank said an additional 44 million people may have fallen into dire poverty in low- and middle-income countries due to rising food prices since June 2010.

China has suffered a long spell of drought since October 2010. According to figures from the Ministry of Agriculture (MOA), by 9 February, drought had affected 7.73 million hectares of winter wheat farmland in eight provinces, accounting for 42.4% of the total planting area in these provinces.

The State Council's 10 new measures to boost grain production show the government's commitment to addressing this problem and will help reduce the negative influence of natural disasters upon grain production, Ding said.

Ensured food security

Despite droughts and floods, China was still able to produce 546.4 million tons of grain in 2010, an increase of 2.9% year on year. While keeping an increase in grain production for seven consecutive years, China is able to maintain a small surplus after achieving grain self-sufficiency.

According to the State Administration of Grain (SAG), at present China has sufficient grain supplies, with a balance kept between demand and supply, and with inventory hovering at a comfortable level. In 2010, local grain and edible oil reserves increased by 26% and 208% respectively compared with those of 2005.

China has 13 primary grain-producing regions, Heilongjiang, Jilin, Liaoning, Inner Mongolia, Hebei, Henan, Shandong, Jiangsu, Anhui, Jiangxi, Hubei, Hunan and Sichuan, contributing almost 80% of the country's total grain output. The grain production in these regions features a large scale and the use of advanced production techniques. The SAG figures show that with vigorous government support, significant progress has been made in creating priority industrial belts of grain crops. So far nine such belts for wheat, rice, corn and soybean production have been set up in China.

Since China is self-sufficient in rice, wheat and corn, according to MOA figures, it is less dependent on the international market for these products. Excluding soybean, the proportion of imported grain among the country's total grain output has been kept below 5%.

MOA information released on 17 February showed that after vigorous irrigation efforts and precipitation earlier that month, the spreading drought had been curbed and even eased in a few areas.

'Even if wheat output decreases this year, the reduction won't be that big,' said Li Guoxiang, a researcher with the Rural Development Institute of the Chinese Academy of Social Sciences. 'China can cope with the reduction by using inventory and won't need to increase its imports of wheat.'

Lurking dangers

'For China, which has a population of 1.3 billion, the bowl for our people must be in our own hands,' said Ding. 'Right now, the mainstay of Chinese food security is not at all solid, and actually it's likely to weaken.'

Ding said there are six points of concern for Chinese food security that need attention.

First, some local governments do not put enough stress on food security. Although the central government has set national food security as an important strategic task, some local governments are still advancing industrialisation, commercialisation and urbanisation at the price of sacrificing agriculture and grain production.

Second, grain consumption will soon surpass available supplies. With population growth, improved food structure, as well as development of modern food industries and expansion of the feedstuff industry, the country's total grain demand will show rigid growth, Ding said. It's estimated that by 2020 China's total grain demand will top 600 million tons, which will surpass the country's total grain supply at the same time.

Third, grain production is more restricted by agricultural resources, such as declining per capita cultivated land and water resources, deteriorating land quality, and environment pollution for grain production. MOA figures show that at present the per capita cultivated land in China is less than 953 square metres and per capita water resource is about 2,070 cubic metres, both much lower than the world average level.

Fourth, the resource allocation and structure for grain production are increasingly unbalanced. South China used to be the main wheat- and rice-growing region, but has now become a major grain consumer. North China, which lacks water resources, now contributes more to the grain output, but faces more serious shortages in water resources for irrigation.

Fifth, China lacks a quality industrial force for modern grain production. Chinese agricultural production now mainly depends on small-scale family operations. Women and the elderly now constitute the main labour force in rural areas that lack young, strong hands and talent well versed in science and technology.

'For a country that relies so heavily on grain, it's worrisome that a quality contingent of agricultural workers is lacking in rural areas,' Ding said.

Sixth, foreign grain merchants look to nibble away at China's food industry. The weak US dollar has further driven up international grain prices denominated in dollars, stimulating and driving international speculative capital to flow into bulk farm produce markets. Now the four biggest transnational grain merchants - Archer Daniels Midland Co., Bunge Ltd., Cargill, Incorporated and Louis Dreyfus SAS - monopolise 80% of the world's grain transactions and control absolute grain-pricing power. China has almost no say in the international grain market.

'There are lurking risks or hidden troubles for China's sustainable food security, so we must be careful to cope with it,' Ding said.                

This article is reproduced from Beijing Review (Vol. 54, No. 9, March 3, 2011).

Farmers storing grain is not the fear, hot money speculation is
Haiying Zhang

FROM late last year, an uncommonly prolonged drought has struck northern China and the Yellow River and Huai River basins. This has caused a gradual rise in grain prices, which are said to be the most fundamental of all prices. Despite the fact that the current purchase price is significantly higher than that of last year, some journalists discovered in Shandong Province that little grain can be procured. Many farmers have grains in hand, but still prefer holding on to selling off. Some of the middlemen who purchase directly from farmers have also been storing up grains and some processors even experienced supply cut-offs.

Due to droughts, severe cold and other extreme weather events, domestic grain prices have been on the rise since the latter half of last year. Also, the international grain price index reached a record high in January after successive increases in the previous seven months. Given the rising international as well as domestic grain prices and the expansion of the areas hit by drought in China, it is not difficult to see why farmers are not selling, middlemen are storing up and processors are deprived of supplies. 

Threat of hot money

In response, the State Council recently announced 10 measures to promote grain production and to stabilise grain prices. These measures are rather comprehensive and powerful. However, I believe that one important element is lacking - measures to crack down on grain speculation by hot money. It is widely known that last year the hot money phenomenon added new terms to the popular vocabulary, such as 'Suan ni hen1', 'Dou ni wan2' and 'Jiang ni jun3'. Thus the public is already aware of the dangers of hot money speculation. Now as grain prices are expected to increase further, one has to be alert to hot money grain speculation.

Some might think that, in contrast to speculation on garlic and other crops, grain speculation requires large amounts of financial capital, and that national grain reserves can stabilise the prices. Therefore there is seen to be little possibility of grain speculation. In fact, however, as long as it is profitable, hot money will still swarm into the grain market and drive up the prices just as in the case of garlic. The fact that the middlemen in Shandong Province are storing up is a precursor to hot money speculation.

China's monetary policy has sought to reduce liquidity in the economy by raising interest rates, the deposit reserve ratio, and so on. However, one has to be aware that there is still a great deal of idle money with nowhere to go due to a lack of investment channels. New government policies restricting real estate speculation and the stock market downturn have only made the situation worse in this regard. In addition, extreme weather and increasing grain prices domestically and internationally have created conducive conditions for grain speculation. Thus, it is not impossible that hot money might stir up the grain market.

What is worrisome is not only the domestic hot money that created the garlic crisis, but also the international hot money trying to corner the Chinese grain market. In 2008, the transition period allowed under World Trade Organisation (WTO) rules for China to limit the entry of foreign investors into the grain distribution sector ended. According to some sources, the foreign grain businesses that already control 60% of the soya processing capacity in China are now targeting other grain industries in the country. How to avoid foreign investors'monopolisation in the grain market has thus become a crucial issue.

Supply chain tensions

Any link along the grain supply chain, from the farmers and middlemen to the processors, wholesalers and retailers, can drive up the price. For example, farmers may not be willing to sell when they see that the price is on the rise, thereby worsening tension in the supply chain. The middlemen can take in and store large amounts of grains in order to make profits, which further hikes up the price. In addition, mark-ups at the wholesale and retail levels may also increase the price.   

Of all these factors, I think the farmers are not the most problematic. The reason farmers hold on to their goods is simple - to get a better price. As soon as the government increases the purchase price, the farmers may sell. By contrast, the goal of middlemen who store up large amounts of grain is very different - to gain huge profits. And then there is hot money speculation. Such speculation, which involves only short-term trading, is a fundamentally different issue. It can by no means promote grain production, but only push up prices and exacerbate inflation.

Therefore, one need not be concerned about the farmers, but about the middlemen who are storing up stock and about hot money speculation, in case major grains are subjected to the price spikes that hit garlic and mung beans. In particular, one has to be alert to large amounts of hot money and middlemen conspiring together in driving up prices. 

 Some scholars have pointed out that the current regulations on grain distribution passed in 2004 are littered with loopholes which allow hot money to legally trade large amounts of grain. In addition, the agriculture law aimed at establishing a national agricultural security system is already outdated and cannot adapt to the current situation, and thus needs revision. It is clear that there exist institutional loopholes for hot money grain speculation. In order to stabilise grain and all commodity prices, we need not only to crack down on grain speculation and control hot money, but also to revise the relevant laws and regulations.      

The above is translated from the Chinese by Xu Chengcheng, a researcher with the Third World Network. The original article appeared in China's National Business Daily (16 February 2011).

Endnotes

1     This phrase usually means 'fine, you win'. But suan is also how garlic is pronounced in Chinese, so with a change in the character, the phrase comes to refer to the surprisingly high price of garlic.

2     The usual meaning of the phrase is 'to make fun of you'. But dou here alludes to mung bean that experienced an unusual price hike last year.

3     This is originally a term in Chinese chess meaning 'to win'. As jiang is also the pronunciation of ginger, it refers here to the hike in ginger prices.

*Third World Resurgence No. 247, March 2011, pp 23-25