Growing Pains for a National Grain Reserve
09-25 08:44 Caijing

China's state-run grain storage firm Sinograin is rapidly expanding into logistics, processing and sales. Will private rivals survive?

By staff intern reporter Zhang Yanling

A dramatic sign at a new rice processing complex, impossible for motorists to miss while traveling the Beijing-Harbin Expressway, mirrors a bold business move by China's largest state-owned grain buying and storage concern -- China Grain Reserves Corp., better known as Sinograin.

State-owned Sinograin recently bought Sanhe Rice as part of a plan to expand its grain business in northeastern China and win not only the largest market share in the region but in Beijing, Tianjin and much of the rest of the country as well.

It's a strategy that has attracted financial support from the central government but misgivings at private grain companies that could be crushed by state-subsidized Sinograin. Some government experts have questioned Sinograin's sudden commercialization. And some in the industry call it unfair competition.

The white-on-red sign at the Sinograin Sanhe Rice Industry Inc. (Sanhe Rice) complex, outside the city of Sanhe, shadows grain storage structures, a six-story rice processing plant and a processing facility for rice bran oil.

The complex opened in July with the formal launch of Sanhe Rice. Financed with capital pooled by the Beijing and Heilongjiang branches of Sinograin, it boasts annual processing capacities of 300,000 tons of rice and 4,500 tons of rice bran oil.

Parent Sinograin has high hopes for Sanhe Rice. From a geographical perspective, the complex is in an excellent marketing location, only 50 kilometers from central Beijing and 100 kilometers from Tianjin. It enjoys rail links in several directions, and has highly developed highway and inland waterway networks.

Sinograin Vice President Liu Xinjiang said Sanhe Rice is establishing a "complete production chain" from paddy to storage, processing, shipping and sales. Rice hulled at Sinograin's facility in Heilongjiang Province is being shipped overland or by waterway to Sanhe Rice.

It's expected to quickly become the No. 1 rice processor for the Beijing and Tianjin markets, and take a lead position nationwide.

Mercantile Ambitions

The government has long supported Sinograin as a major grain reserve. Its chief function has been to stabilize prices through product control. But Sinograin's ambitions were clearly not limited to stockpiling.

A source close to Sinograin told Caijing the company plans to establish six, separate trans-province logistics routes in the northeast part of the country, southeast China, the North China Plain farm region, along the middle and lower reaches of the Yangtze River, and in the Beijing-Tianjin region.

An industry expert predicted total investment would top 400 million yuan. Caijing estimates the initial investment in the Sanhe Rice processing project has already surpassed 100 million yuan, with 60 million yuan coming directly from the budget of the National Development and Reform Commission (NDRC), the government's central planning agency.

Sanhe Rice would be served by just one part of the Beijing-Tianjin logistics system planned by Sinograin.

The die was apparently cast in 2007, when NDRC released a Development Plan for Modern Grain Logistics for 2006-'15 that laid out goals for raising logistics organization levels and building trans-province routes for distributing grain. In late 2008, a Sinograin official wrote in a magazine article that the company would become not only the nation's "grain reserve" but also "the market's grain merchant" through a business transformation.

Sinograin decided to get involved in grain processing apparently because integration was seen as a way to overcome difficulties with sales. Sinograin had been required to buy grain through open auctions, but volumes and prices were often less than ideal because of frequent market fluctuations.

To that end, Sinograin started looking for new direction while launching new projects. Few of these projects caught the public eye, however, due to the company's penchant for keeping a low profile.

No More Mystery

But Sinograin's mysterious veil was lifted when it started investing in the Sanhe Rice project.

Sanhe Rice was not Sinograin's first foray into grain processing. The company already had a strong presence in processing white rice, wheat flour, corn, vegetable oil and other food products. It currently can process more than 1.5 million tons of white rice, 1 million tons of wheat flour, and 1.2 million tons of vegetable oil per year.

But in February, Sinograin flexed its muscles with a big move in Jiangsu Province, where it invested 1.3 billion yuan in a project called Sinograin Zhenjiang Grain and Oil Processing, Storage and Logistics.

According to a report in Zhenjiang Daily, a newspaper in that Jiangsu city, the project is part of a central government, 4 trillion yuan stimulus plan announced in 2008. The project's logistics alone are expected to cost 700 million yuan, of which 200 million yuan will come from NRDC.

Another big public step came in late June, when Sinograin Northern Logistics Co. Ltd. was formally registered -- another sign that Sinograin's integration of logistics and resources was on a fast track.

By the end of August, construction was under way for three oil processing facilities, while research and development had begun for another two projects. Research is also being conducted on a plan to establish Sinograin Seed Co.

Sinograin's success indicates its plan for a vertically integrated system is quickly taking shape.

Unfair Competition?

However, reactions to Sinograin's thunderous entrance into commercial grain processing have been mixed in the industry and even in some government circles. Few doubt that the entire industry is undergoing a major reshuffle.

Taking a direct hit is Beijing Yudeshun Rice Industry, a private company that processes up to 400 tons of rice daily. Before Sanhe Rice entered the market, it was Beijing's largest rice processing enterprise.

Yudeshun General Manager Tian Jingsheng thinks the biggest problems facing private grain processing enterprises are lack of capital, inadequate storage and weak transportation. But these are strengths for Sanhe Rice, he said.

"Sinograin's grain reserves are backed by a loan from the Agricultural Development Bank of China, its finances are subsidized, it has advanced storage technology and developed railway transport lines," Tian said. "These are all advantages that private enterprises have difficulty matching.

"Sinograin's entry into the grain processing industry is unfair to privately run enterprises," he said.

Some experts have criticized Sinograin's shift from simply a state-owned grain reserve to a commercial seller of grain. They note that the State Council, China's cabinet, has often said Sinograin should limit its operations to grain buying, storage, management and policy-related operations. Indeed, the company was barred from most commercial activities.

"Sinograin should not mix policy-related operations and turnover-related operations," said Cui Xiaoli, a research fellow at the Rural Economy Research Department at the State Council's Development Research Center (DRC). "In other words, they should not be allowed to profit both from policy decisions and the commercial market."

But supporters of the move say vertical integration will help Sinograin guard against abnormal changes in grain prices caused by natural disasters and market fluctuations. It's beneficial for the central government, they say, to take these steps so that it does not merely depend on buying and selling unprocessed grain to handle market regulation and control.

One scholar thinks getting involved in commercial grain processing was a necessary move for Sinograin to reduce financial burdens tied to holding massive grain reserves. Also, after Sinograin enters the processing industry, it can compete with foreign companies such as the Wilmar Group, a Singapore-based agriculture company.

But DRC's Cui said Sinograin's core business involves buying, storage and management of the central government's grain reserves, and that it should not venture too far into processing and compete with private enterprises. Rather than engaging in large-scale grain processing to make up for inadequate subsidies, he said, the total amount of grain reserves should be reduced and private enterprises should be given more room to develop.

Some scholars worry Sinograin's entry into commercial grain processing will not only create a government monopoly that strangles private enterprise, but also could increase financial burdens and risks for the central government.

Economists warned that policy-related operations and commercial operations can be difficult to separate effectively. Without proper supervision, company insiders could grab cuts as soon as projects turn a profit. Or if losses are incurred, the government would bear the burden.

Who is Sinograin?

Founded in 2000 with registered capital of 16.68 billion yuan, China Grain Reserves Corp. (Sinograin) is a state-owned enterprise playing a key role in government initiatives for economic growth. Entrusted by the State Council, Sinograin is now the country's largest state-owned grain buying and storage concern.

Since 2000, Sinograin's mandate has been to manage grain reserves, a task that includes procurement, storage and administration. Since market reform for the nation's grain distribution system began in 2004, Sinograin has been mainly responsible for buying grain according to "minimum" prices set by the government. When grain prices fluctuate, Sinograin regulates the market with reserves and by shipping grain to secure market stability.

Since 2004, minimum prices have been set for staples such as rice, wheat and corn. Sinograin and other enterprises help implement this government policy. Meanwhile, the policy bank Agricultural Development Bank of China provides loans. The central government budget covers storage costs and loan interest payments.

China has enjoyed bumper harvests for five consecutive years. Last year's total grain output was 105.7 million tons. When prices fluctuated wildly on the international market and slumped at home, Sinograin managed to buy 93.25 million tons of grain and oil. Experts estimate Sinograin bought about 70 percent of the grain available on the commodity market.

http://english.caijing.com.cn/2009-09-25....

Grain Procurement Prices to Rise Next Year
10-14 13:52 Caijing

China will continue to raise minimum government procurement prices of wheat and high-quality rice in 2010, Premier Wen Jiabao said at a State Council executive meeting Oct. 12.

China witnessed a fifth consecutive year of corn output growth in 2008, thanks to the system of minimum government procurement prices launched in 2004.

Wen warned of long-term grain supply strains due to wafer-thin margins in crop planting and frequent natural disasters, justifying the current policy.

Farmers might gain limited benefit from the favorable prices set by the government because most of it goes to grain brokers, argued Yu Baoping, an agriculture expert at a State Council-affiliated think tank.

http://english.caijing.com.cn/2009-10-14....

China to Boost 2010 Purchase Prices for Grain
10-16 18:40 Caijing

Reacting to a rise in grain output, the NRDC moves to increase government purchasing prices; Economists debate government expenditures currently devoted to grain purchases.

By staff reporter Zhang Yanling

China will continue to raise minimum government purchasing prices of wheat and high-quality rice in 2010, Premier Wen Jiabao said at a State Council executive meeting Oct. 12.

The government's purchasing prices for varieties of wheat will increase by 0.03 yuan per 500 grams next year, with white wheat to reach 0.9 yuan and red and mixed wheat to be 0.86 yuan. China has planned to carry on with the system of temporary procurement and storage of corn, soybean and rapeseed to stabilize market prices.

In China, 2008 marked the fifth consecutive year of growth in corn output, reaching a record 528.5 million tons, thanks to the system of minimum government purchasing prices launched in 2004.

The continuing growth in output has exerted a considerable downward pressure on grain prices and the new government pledge of higher purchasing prices is aimed at reassuring farmers financially and maintaining stabilized crop acreage, stated Jiang Changyun, an economist at the China's top economic planning agency, the National Development and Reform Commission (NDRC).

The Chinese premier cited long-term grain supply strains due to paper-thin margins in crop planting and frequent natural disasters as reasons for the 2010 policy implementation.

According to Nie Zhenbang, director of China's State Administration of Grain, Chinese farmers had earned an additional income of 50 billion yuan in 2008 due to government purchasing of grain at higher prices. However, there is a different picture in the eyes of other experts on rural economy. Farmers might gain limited benefit from the favorable prices set by the government because most goes to grain brokers, argued Yu Baoping, an agriculture expert at a State Council-affiliated think tank.

Jiang maintained that although the existing intervention prices do shield farmers from exposure to the fickle market, the system distorts grain prices and hampers the development of the grain market in the long run. Moreover, it adds to the financial burden imposed on governments at various levels.

By the end of March, China's state-owned grain enterprises had a grain stock of 225.4 million tons, according to the data released by the NDRC on Oct. 9. Cui Xiaoli, another expert at the State Council-affiliated think tank, pointed out that the proportion of grain stock to national grain consumption is closer to 60 percent, compared to the internationally accepted standard of 17 to 18 percent, creating a storage problem. The central government launched a plan of purchasing and storing 40 million tons of corn in October 2008, after having imposed substantial challenges to storage capacity in Northeast China. In Jilin and Heilongjiang, over half of procured corn is piled in open air storage.

Jiang advocated that China's grain policy should shift its focus from increase in output to growth in grain circulation. The authorities should upgrade the structure of agricultural products and reduce production costs by expanding investment in agricultural infrastructure.

Yu suggested that the system of intervention prices should be abandoned to remove restraints on the functioning of market mechanisms. The government expenditure currently devoted to grain purchases might be more economically efficient if transferred to subsidize urban low-income households.

http://english.caijing.com.cn/2009-10-16....

i say we ship them grain laden with opium

The half acre farmers over there are about to get a lesson in conglomerate agriculture. The growing pains out of this one are going to hurt!

China Autumn Grain Harvest Likely to Rise
10-27 13:44 Caijing

China's grain output in 2009 is likely to increase slightly from the previous year, the first time production to increase for six consecutive years since 1949, dispersing fears about falling output due to a drought earlier this year, according to a government think tank forecast on Monday.

The autumn harvest, which accounts for 70 percent of total output, is likely to rise 2.2 percent year-on-year to 123 million tons, according to a report by the Research Center for Rural Economy, which is affiliated to the Ministry of Agriculture.

China reaped a record grain harvest this summer, the ministry said earlier.

http://english.caijing.com.cn/2009-10-27....