China Grain Production Strong
15 March 2006 China’s total grains output rose in 2005/06 over the previous year as a result of good weather and increased acreage, and the numbers are expected to remain strong due to improved management and government incentives, according to the US Department of Agriculture’s Foreign Agriculture Service (USDA-FAS).
Increased acreage was in response to higher market prices since the fall of 2003 and from government support programs such as price supports, export incentives, direct payments, and tax incentives. Maize production for 2005/06 is estimated at 134 million metric tons (MMT), up 3% from 2004/05. In 2006/07, maize production is forecast at 132 MMT, driven by growth in the livestock sector and expanded ethanol production. Wheat production in 2005/06 is estimated to be 97 MMT (up 5%) and rice output for 2005/06 is estimated at 182 MMT (up 1.5%).
According to China’s Ministry of Agriculture (MOA), in 2005 net per capita farm income rose 6.2% year-on-year to US $403, the second highest growth rate since 1997. For grain farmers, the average net profit per hectare (Ha) of wheat, maize, and rice in 2005 is estimated to be lower than 2004 due to the rising cost of agricultural inputs.
Aiming to support rice production, in 2004 the government of China began guaranteeing farmers a minimum price for rice — if prices drop below the price floor, the government directs Sinograin (a state enterprise responsible for holding grain reserves) or its provincial counterparts to purchase rice at the floor price. The floor prices for early indica (unmilled) and Japonica (unmilled) are US $173 per ton and US $186 per ton, respectively. The price floor for 2006 is forecast to remain unchanged.
Also in 2004, the government reduced the agricultural tax on farmland and introduced a system of direct payments to farmers. For decades prior to 2004, there had been a 7% tax on agricultural production. In March 2004, the government announced it would eliminate the tax over five years, but provided the provinces the option of moving faster if they wished. In 2006, the government stepped up the process by announcing that all Chinese provinces would eliminate the tax.
The government also introduced a program of direct payments to grain growers in 2004, also to be implemented at the discretion of the provinces. Implementation is inconsistent across provinces, with some providing the subsidy based on planted area and others providing it based on production.
Grain Gains
Ideal weather conditions contributed to higher than average yields in 2004 and 2005. Wheat and rice areas in 2006/07 are forecast to rise slightly in 2006 after substantial increases in area and output in 2004 and 2005. While the price for grains was down by about 5% in 2005 from the previous year, they are still above historical averages. Despite increased production, government price support programs have kept prices close to recent highs.
MOA reported that maize acreage in 2005/06 reached a record high, and it is forecast to be up slightly again in 2006/07 as programs support expanded area.
Wheat prices were up 50% in 2004, increasing both total production and planted area in 2005. Wheat production in 2005/06 is estimated to be 97 MMT, up 5% from the previous year. In both the 2004/05 and 2005/06 marketing years, good weather and MOA’s production support programs contributed to high yields. Overall, the quality of the 2005/06 wheat crop was not as good as the previous year, in part because in some production areas excessive rainfall close to harvest time reduced the crop’s quality. The acreage in 2005/06 is estimated to be 22.8 million Ha, up 6% from the previous year.
Wheat production in 2006/07 is forecast to be 97.5 MMT. Although wheat prices in production regions are down slightly more than five% during 2005, planted area in 2006/07 is forecast to be 22.9 million Ha, slightly higher than the previous year, in part because wheat and other grains are considered lower risk income crops when compared with vegetables, canola, and cotton.
Winter wheat planting area accounts for more than 90% of the total planting area in China and is usually double-cropped with maize.
Maize production for 2005/06 is estimated at 134 MMT, up 3% from previous year, reports USDA-FAS. Favorable weather and increased acreage contributed to the high yield. Maize area in 2005/06 is estimated at 26.2 million Ha. Maize production in 2006/07 is forecast at 132. 2 MMT. Yields are forecast to be higher than average, but lower than the previous year. Maize area for 2006/07 is forecast to be slightly higher than the 2005/06 record high.
Rice production is estimated at 182 MMT (unmilled) in 2005/06, up 1.5% over the previous year. Estimated area planted is 29 million Ha, up 2% over 2004/05. Early-season rice production is reportedly down 1.3% to 31.79 MMT from the previous year due to lower yields from flood and typhoon damage in the costal regions. Area is up 1%, however; combined with higher than average yields, late-season rice production is estimated at 150 MMT, a 2% increase over the previous year.
Rice output for 2006/07 is forecast at 184 MMT, up 1% from 2005/06, despite a 6% drop in the retail price for rice. This is a result of the price floor, which has stabilized rice prices and made rice an attractive crop for risk-averse farmers. Rice area in 2006/07 is forecast at 29.2 million Ha, up slightly from the previous year.
The Ethanol Effect
Total grain consumption in 2005/06 by the fuel-ethanol sector is estimated at about 2 MMT, of which about 1.4 MMT is maize. In response to the 10th Five-Year Plan objectives (2001-2005), China built four fuel-ethanol plants for processing grains (maize, wheat, and rice) into ethanol. The total capacity is 1.02 MMT of ethanol annually.
In 2005, total ethanol output reached 700,000 MT. In 2006, all four plants will operate at full capacity and process approximately 3 MMT of grain, of which 2 MMT will be maize. As this trend continues, local prices and demand are expected to have a high upside for maize producers.
Both central and provincial governments have invested heavily to support the fuel-ethanol sector. State media reports that the government offered US $225 per ton as a subsidy for maize-based ethanol in 2005. In 2006, the government reduced the subsidy by an average of US $37.5 per ton for the four plants. The reduced subsidy signals the government’s intention to curb the expansion of the fuel ethanol plants based on grain production, at least until efficiencies are gained that make production more attractive.
There is likely to be limited expansion of grain-based ethanol production. However, during the 11th five-year plan (2006-2009), the National Development and Reform Commission (NDRC) committed to expand fuel-ethanol production. The additional ethanol production capacity will exceed 1 MMT. This program will use alternative feedstock rather than grains, however. The new plants will be located in southern provinces where cassava, cane molasses, sweet potatoes, and sweet sorghum are produced.
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