February 13, 2004
Chinese 2004 Grain Production Not Seen Increasing
For several years China has been shifting from a policy of self- sufficiency to a more economically rational goal of reducing area devoted to inefficiently-produced row crops and increasing area for higher-value, labor- intensive crops in which China has some comparative advantage.
In 2003, however, the decline in area planted combined with poor weather led to the smallest grain harvest in more than a decade. As grain prices suddenly rose for the first time in years, government announcements once again emphasized self-sufficiency and encouraged production. Nevertheless it is believed that a substantial increase in production is unlikely, as land is limited and competing crops give better returns. Stocks of all grains, which had been enormous, are estimated to have fallen to their lowest levels in years, although how low remains a state secret.
In 2004 China will import more wheat than it has in several years, the press release said. Exports are forecast to decline, and feed millers in the South may import corn before the fall harvest if market conditions are suitable.
In 2003, SARS created a sharp short-term drop in demand for livestock products and therefore feed, but the recovery was so fast that overall feed consumption for the year did not fall. As this report is written it is far too early to predict the ultimate impact of the outbreak of avian influenza on feed demand; large-scale depopulating of poultry flocks would obviously reduce feed demand.
How to address the enormous and growing rural-urban income gap is a stated priority of the current administration, now in office for a year. It appears that an internal debate continues on the extent to which China should rely on market forces to rationalize its grain markets and ultimately transform the rural economy. A more market-oriented approach likely would lead to continuing decline in grain production and an increase in imports. A more traditional "managed" approach might include support programs, although how these would be funded is unclear.
Tariff Rate Quotas
On entry to the WTO China instituted Tariff Rate Quotas for wheat, rice, corn, and several other commodities. These quotas were phased in and reached final levels, based on 5% of historical consumption, in 2004. Quota fill rates for grain have been very low and U.S. trade officials have pressured Chinese authorities to increase the responsiveness and transparency of the allocation system. A percentage of the quota is reserved for non-state-owned enterprises: 10% for wheat, 40% for corn and 50% for rice (both short and long grain).
Biotechnology
China remains a leading investor in agricultural biotechnology research, but continues to go slow on commercialization of food crops; so far only transgenic cotton is approved for planting. Risk assessments for import of U.S.-approved transgenic corn, soy and canola varieties have been underway for the past year and are expected to be completed before April 2004 when interim regulations expire. Chinese researchers reportedly have developed a pest- resistant Bt rice variety but so far have not received authorization to release it for planting.
Wheat
Production and Stocks
The preliminary official figure for wheat output in MY03 is about 86 million metric tons; output for MY04 is forecast slightly lower. Winter wheat production accounts for about 95% of total wheat output, the press release said. Despite the government's efforts to encourage more wheat planting, farmers in major winter wheat production region continued to switch to more profitable cash crops such as cotton and oilseeds. According to official data, winter wheat acreage in MY04 is unchanged or slightly lower than previous year. Although higher than the year before, MY03 yields were reduced by both drought in summer and excessive rain at harvest; preliminary surveys indicate that because of late planting MY04 yields will not exceed MY03.
The quality of domestic wheat varieties has improved substantially over the past several years through government breeding support programs. The government will invest more in setting up demonstration wheat farms and seed production bases in the coming years.
Although total wheat acreage has fallen, the share of high quality wheat acreage grew to about 30% of MY03 acreage from 20% in MY02 because of government incentives to seed distributors as well as rising market demand.
Still a state secret, stocks are estimated to be at the lowest level in years with the decline expected to continue, the press release said. MY04 ending stocks are forecast to be less than half of MY02 ending stocks. The state-held wheat reserve is reportedly extremely low.
Consumption
As discussed in the previous annual report, overall wheat consumption has plummeted in the past decade as consumer incomes have risen and diets become more varied. Per capita urban household total grain purchases fell from 130.7 kg in 1990 to 78.5 kg in 2002; per capita rural household wheat consumption fell 7 percent in just two years, from 2000 to 2002. How much farther per capita consumption will fall will depend on the extent to which increased consumption of bread and cakes by urban consumers will offset the drop in consumption of traditional wheat products.
Demand for specialized gluten content wheat has been driven up steadily over the past years as breads and cakes are gaining popularity.
Trade
Despite declining consumption, demand continues to exceed domestic production and MY03 imports will be the highest in several years. Tight supplies and domestic wheat price hikes will boost the competitiveness of imported wheat in MY04, although high ocean freight rates may limit import growth. In addition to market forces, political concerns also may influence government purchases; recent contracts for U.S. wheat coincided with a Sino- U.S. summit meeting in Washington.
China has committed to purchase about 3 MMT in 2004 from Australia, Canada and the United States. Some of this wheat will enter the state grain reserve system, according to trade source.
Currently China is a net wheat exporter, exporting mostly feed wheat. Since late 2001, nearly 20 MMT of old feed-grade wheat has been discharged from the state grain reserve system. As domestic supplies tighten and prices rise, the government has suspended the release of reserve system feed wheat, resulting in a sharp drop in the feed wheat export forecast for MY04.
Although late in 2002 it shipped wheat flour to southern neighboring countries, China's wheat flour exports are not expected to grow significantly.
In 2003, the fill rate for the wheat TRQ was only 5%, according to trade data. To overcome problems with allocations too small to be economically viable, several private end users in southern China pooled their individual quotas and purchased a full vessel of wheat in 2003. TRQ allocation information is not published, but market sources report some 2004 allocations have been made for larger quantities than in the past. The wheat TRQ for CY04 is set at 9.936 MMT.
As noted in the previous annual report, TCK-related phytosanitary restriction still dampen traders' enthusiasm in bringing U.S. Pacific Northwest wheat to China, especially Northern China, despite a 1999 bilateral agreement to eliminate them.
Corn
Production and Stocks
Corn planted area for MY04 should be slightly higher than in MY03. Although domestic corn prices rose last fall, the increase in prices of competing cash crops such as cotton, groundnuts and soybean far outpaced that for corn, so without unprecedented incentives area planted is unlikely to increase. The government's efforts to increase total grain output so far appear to focus more on wheat and rice than corn. Prior to the 2003 fall harvest, when corn market prices rose on prospects of much lower production, the government set the floor price for corn only five percent higher than the previous year, well below the market price. The support price in MY04 also is lower than the actual market price.
There are no official figures on China's corn stock level. Some sources believe that a quarter of annual production is a level for corn stocks that the government can support, but barring a drastic change in market conditions MY03 ending stocks will fall below this level and MY04 ending stocks even lower.
Consumption
China's feed sector continues steady growth. The sector recovered quickly in the second half of 2003 after SARS was contained in China. The availability of feed wheat in the past two years reduced the feed demand for corn to some extent. Previous estimates of corn consumption might underestimate the substitute effects of feed wheat and even feed rice for corn.
Industrial corn use is on the rise as investment in both dry and wet- milling capacity has increased. An estimated ten million tons of corn were used for starch production in 2003.
Trade
China corn exports in the last quarter of 2003 reached a record high of 5.67 MMT, the press release said. So far, the government has made no new policy announcements on corn export policy for 2004. As corn stocks have fallen to a great extent, there is good reason to believe central government subsidy of corn exports will stop in 2004, although it is possible that provincial governments in the Northeast may continue to support corn exports. Soaring trans-Pacific freight rates increase Chinese corn competitiveness over U.S. and Argentine product in South Korea and Japan.
These same high freight rates from North and South America may limit China's willingness to import corn to southern regions where supplies are expected to become very tight before the fall harvest. If freight rates fall or domestic prices rise sharply, imports to the South may be economically feasible in MY03.
Significant corn imports are far more likely in MY04, assuming ocean freight rates return to historical levels, as stocks are depleted and consumption continues to exceed production.
Although the need for grain self-sufficiency remains a subject of debate within the government, feed grain self-sufficiency is politically less important than food grain self sufficiency, so programs to increase output are more likely to target rice and wheat than corn.
Even with tight supplies, it is expected that for local political reasons China will continue to export some corn from the Northeast in MY04, while simultaneously importing in the South.
Rice
Production
Because of the option to double or even triple crop in many areas, rice is the only grain with potential for a significant increase in planted area and production. Farmers in southern China are forecast to increase rice acreage in MY04; the overall national increase, however, likely will not exceed 5% overall because of the higher profitability and lower labor requirements of other cash crops. For example rice prices rose about 30% in 2003, but cotton prices rose 50%. Many farmers have been forced to seek labor in the cities in the past several years, reducing the rural labor supply.
Consumption
Generally speaking, consumers eat less rice as their incomes rise, except the poorest sectors of the population who switch to higher-priced rice from coarse grains or tubers. The use of rice as livestock feed, especially low- quality or older stocks, increased in 2003 as supplies of other feed grains like corn were short. Feeding of rice is more likely at the household level rather than at large-scale commercial enterprises, hence is difficult to quantify. An estimated 80% of China's pigs and poultry are raised by individual households.
Trade
The rice TRQ for 2004 is set at 5.32 MMT including long grain and short grain varieties, the press release said. China's actual rice imports in 2003 filled less than 6% of the quota. Most rice imports are fragrant rice from Thailand, preferred by affluent consumers in southern coastal provinces. Due to the improving quality of domestic fragrant varieties, demand for Thai fragrant rice is unlikely to grow quickly despite the Thai government's promotion activities.
China's rice exports for MY04 are forecast to drop significantly from the previous year.
Although there is no hard proof, there is anecdotal information of past government export assistance to move surplus rice overseas rather than add it to stocks. Presumably, lower production will make such exports less necessary in MY04. The drop in government-financed exports will affect indica varieties of low and average quality traditionally shipped to Africa; profitable commercial exports of higher-quality japonica varieties for its northern neighboring countries will be unaffected.
China's research on breeding of traditional rice varieties has been very successful and yields and quality have improved considerably over the years. Chinese researchers reportedly have developed a transgenic pest-resistant Bt rice variety but so far have not received authorization to release it for planting.
Barley
Overview
No official figures are available so far for MY03 barley production. Industry sources believe total barley production will rise in MY04, mainly because of increased malting barley production. Consumption of feed barley, about half of total production, has been stable. China reportedly became the world's number one beer producer in 2003; production is estimated at 24.5 MMT.
Imports account for more than half of malting barley use. In response to global shortage of malting barley in 2002, China's malting barley acreage and production has increased in the past two years. The trend will continue in MY04. High prices for imported barley have led brewers not only to use more domestic barley but also to use more other grains such as rice and wheat. Although the brewing sector continues to grow, high global price are expected to limit growth in barley imports.
Source: USDA
