Grain scandal illustrates problems with price supports

By Chen Qingqing in Changchun Source:Global Times Published: 2015-6-17 18:53:01

The public became aware of problems in the grain storage industry in April when State media reported that grain depots in Northeast China were substituting expired grain for fresh grain. But face-to-face interviews by Global Times reporter Chen Qingqing with industry insiders in Jilin Province show that the causes of the scandal go well beyond simple greed.

A worker walks inside the Xinghua Grain Depot in Changchun, capital of Northeast China's Jilin Province on June 9, with a sign saying "Central grain depot, staff only." Photo: Cui Meng/GT

About an hour's drive outside of Changchun, capital of Northeast China's Jilin Province, stands the Xinghua Grain Depot, a storage facility capable of procuring 80,000 tons of corn a year.

The depot is one of many facilities that the State-owned grain storage company China Grain Reserves Corp (Sinograin) uses to stockpile grain for "temporary procurement and stock" - a reserve-based crop price support mechanism.

"The depot can store 20,000 tons of corn, and we are currently holding 11,000 tons," Zong Guochang, the depot's director, told the Global Times on June 9.

Recently, the depot has been the subject of stricter government inspections, Zong said, ever since State media alleged that several grain depots involved in the price support scheme were selling expired grain under the pretext that it was fresh.

In April, State broadcaster China Central Television (CCTV) reported that two warehouses - one in Kaiyuan, Northeast China's Liaoning Province, and one in Songyuan, Jilin Province - had been substituting expired grain for fresh grain to pocket the extra profit.

Media reports also showed that the facility in Liaoning is a private warehouse rented by Sinograin. The warehouse in Jilin is a facility commissioned by the local government.

Authorities seized some 16,000 tons of grain at the Jilin warehouse and 25,000 tons of rice at the Liaoning warehouse, according to media reports.

The incident has cast a spotlight on Sinograin for failing to ensure quality standards, raising questions about the potential side effects of the government's price support programs.

Under pressure

The Xinghua Grain Depot is affiliated with Jilin Grain Group Co.

Unlike many grain depots in Jilin, it can participate in the grain price support scheme, though it needs Sino-grain's permission.

"Because we're a part of Jilin Grain Group, which is not affiliated with Sinograin, we have to get the go-ahead from Sinograin to operate a temporary grain stock business," Zong said.

The price support scheme - which people in the grain industry refer to as "temporary procurement and stock" - is a national program in which the government stockpiles specific crops to support prices. The program's primary purposes are to support rural farmers and ensure the country's food security.

For example, in 2008, the Chinese government introduced a temporary price support program for soybeans to mitigate the drop in prices, according to a report published in December 2014 by the Organisation for Economic Co-operation and Development (OECD).

From 2011 to 2014, the support prices were raised every year, leading to a steady growth in prices for all commodities covered under the price support programs, from which traders and marketing agencies indirectly benefited, according to the OECD.

However, rising support prices have led to overproduction, resulting in excessive stockpiles, said Ma Wenfeng, an analyst at Beijing Orient Agribusiness Consultant (BOABC).

"The country has been maintaining a record-high grain inventory rate, which creates problems when demand isn't strong," Ma told the Global Times Tuesday.

In fact, China's grain production has been growing steadily in recent years. The country produced 607 million tons of grain in 2014, 5.16 million tons more than in 2013, according to data from the National Bureau of Statistics.

One major issue with grain production, especially in Northeast China, is limited storage capacity, which has raised questions about grain quality, the State Administration of Grain (SAG) announced Monday.

Considering the limited storage capacity, Sinograin hires local private and State-owned companies to operate part of its temporary procurement and stock business.

"Sinograin has only a dozen of subsidiaries in Jilin Province, so the company has to depend a lot on local private warehouses, which has made management more difficult," a person close to the matter, who preferred to be unnamed, told the Global Times on June 9.

The situation has put a lot of pressure on Sinograin to keep track of the grain, the person said. A dozen employees from Sinograin's Jilin subsidiary have to manage more than 70 local contracted grain depots. It's challenging for them to carry out full-scale inspections on a daily basis.

Price problems

The procurement price for corn in Jilin Province is 2.24 yuan ($0.36) per kilogram in 2014, almost the same price compared to 2013, according to data published by the SAG in January.

However, from 2007 to 2012, China doubled price supports for rice and raised the wheat support price by about 70 percent, according to a report by US Department of Agriculture in May.

"Market demand has been sluggish since 2008 due to the economic downturn, which weighs on grain prices, so the government has to encourage farmers to grow grain by offering a higher procurement price," the person close to the matter said.

A senior manager in Jilin Grain Group, who preferred to be unnamed, told the Global Times on June 9 that there is a dilemma in setting prices for price support programs.

"Because farmers and grain dealers know they can get better prices by selling grain to Sinograin for the stockpiling program, many of them aren't willing to sell grain on the market, which has created Sinograin's excessive grain reserves," he said.

And because Sinograin purchases grain for above market prices under the temporary procurement and stock program, it has trouble selling that grain on the market, Ma said.

Due to the unbalanced price system and large stockpiles, grain companies are constantly seeking to sell old grain, Ma said.

Better oversight

However, Sinograin cannot monitor the every movement of grain dealers and merchants after they buy its grain, the person close to the matter said.

"For example, let's say a company purchases old grain that is supposed to be only used for animal fodder and alcohol production, but instead it mixes that grain with newly harvested grain for the policy support. Sinograin has no way to know where that grain goes after the transaction is done," he said.

The State Council, China's cabinet, has set a goal to improve grain storage capacity in Northeast China by 50 million tons by the end of 2015, according to the SAG announcement. Meanwhile, an information platform is expected to improve the grain stock and management system.

Still, there is more that could be done, said Cao Baoming, a professor from Nanjing University of Finance and Economics,

"It's necessary to build up a third-party team that carries out routine inspections, in which the SAG should also play a bigger role," Cao told the Global Times in an earlier interview in April, noting that particular improvement needs to be made to the management of rented and commissioned warehouses.
Newspaper headline: Trouble in stores

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