Beijing’s rice subsidies buoy imports

By CnAgri2013-08-27 11:24:49 Print

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According to an ancient Chinese proverb, “without rice, even the cleverest housewife cannot cook”.

Today, housewives around China are unlikely to run short of the grain. The country, which has ample domestic supplies on the back of near record production levels, is this year set to become the largest rice importer for the first time, overtaking Nigeria.

Historically, China has been the world’s largest producer and consumer of rice. Apart from years where bad weather led to crop shortages, it has been a net exporter, shipping surplus output to Asia and Africa. In 1998, China was the fourth-largest exporter, accounting for 14 per cent of the global market, according to the US Department of Agriculture.

In the past three years, however, it has become a net importer of rice, actively buying supplies from countries including Vietnam, Pakistan and Myanmar.

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The main driver behind the import rise has been Chinese mills turning to cheap overseas rice at a time when Beijing’s price support for the grain has led to high prices. Ma Wenfeng, crop analyst at Beijing Orient Agribusiness, says: “Since the cost for enterprises to purchase domestic rice is far higher than the cost to import rice, they prefer to import.”

In order to incentivise agricultural production, China has provided farmers with subsidies as well as putting in place a minimum procurement price for certain grains in order to reduce volatility in the domestic rice market. However, this has meant that domestic prices for certain agricultural products has “decoupled” from the international market.

Beijing’s minimum procurement price for domestic long grain rice is set at $420 per tonne, but spot prices are at about $600 per tonne, some 50 per cent higher than the Vietnamese rice benchmark.

In 2012, China imported 2.9m tonnes of rice compared with Nigeria’s 3.4m, and is expected to purchase 3m from overseas markets this year, overtaking the African country’s imports of 2.4m.

“China’s rice imports are largely a policy-driven phenomenon,” says Fred Gale, senior economist at USDA. “The Chinese government has used price support policies to ensure rice prices don’t fall to maintain profit margins for farmers.”

The country’s growing prominence in the world rice market would be worrying rice traders were it not for the recent rise in global output, including the bumper crop expected this year. Global rice production is forecast to total a record 479m tonnes for the 2013/14 crop year, thanks partly to government subsidies in leading exporting countries, including India and Thailand, according to the USDA.

Thailand’s official rice stockpile of 17m-18m, designed to boost farmers’ incomes, represents almost half of the world’s rice trade and is also adding to the bearishness surrounding rice prices. With the new Thai crop set to be harvested in October, Bangkok needs to dispose of its existing inventory to raise money for the new purchases and prospects of sales have weighed on rice prices.

Amid the bearish environment, “the few bright spots in the market include China’s growing rice imports,” says Samarendu Mohanty at the International Rice Research Institute.

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Another reason cited by some analysts for the rise in rice imports is the recent cadmium contamination scare. Concerns about soil pollution affecting the grain from Hunan and Guangdong may have added further impetus to the buying from overseas markets, they say.

The main question troubling traders is whether China will remain a rice importer, as it does with other cereals, or go back to its limited role in the international arena, focusing on domestic production. The country is the world’s largest soyabean importer, and its overseas corn purchases are also growing. Heavy rains in some growing regions means that China will become the second-largest wheat importer after Egypt this crop year.
Mr Mohanty says that due to the country’s growing food demand, unless Beijing tries to stop overseas imports with trade barriers, “it is reasonable to assume that Chinese imports will continue in the near to medium term”.

However, in the face of rising agricultural imports, worries about self-sufficiency and food security have started to surface in China, with articles in the domestic press about the lack of competitiveness of the country’s agricultural sector. In another sign that officials are on alert, a Ministry of Agriculture report at the start of the year pointed to the “upside down” price phenomenon, noting the growing difference between international and domestic food commodity prices.

Although China has tariff rate quotas for rice imports, there have been large amounts of the grain smuggled through the borders say analysts. Ultimately, it will be international prices that will determine the level of China’s rice imports. “The future flow of rice depends on whether supplier countries continue to have lower prices than China’s,” says Mr Gale.