China's rotten grains highlight troubled policy

Chinese state television has shone light on the taboo topic of poor quality grains held in bulging government warehouses, in one of the first official acknowledgments that the country's vast agricultural reserves may have badly degraded.

Undercover footage aired by state broadcaster CCTV this weekend, in a report entitled "Rats in the Granary", documented officials at state grain warehouses in northeast China buying old or inferior grain for discounted prices, while filing paperwork to show they were buying new grain at the state-set price and rotating out old stocks. Grain prices are subsidised by the government, which guarantees a minimum price.

Rice stocks documented in the report had sprouted, turned colour or smelled of mildew.

"With this kind of manipulation, quality is hard to ensure. If that's the case, the bill will be borne by all of us," the CCTV report concluded.

The true quality of China's grain reserves holds serious implications for global commodity prices. If the stockpiles include large amounts of unusable grain, China could be forced to increase imports sharply, causing international prices to jump.

However, if the reserves are of good quality, then Beijing's efforts to draw down its stockpiles by dumping them on the market would push prices down.

Grain reserves in China have become swollen thanks to the government's minimum price policy, which was designed to guarantee incomes for farmers and encourage them to grow grains. China is estimated to hold about 60 per cent of the world's cotton stocks and about 40 per cent of its corn stocks.

Plans to alter the price-setting policy face opposition from state-backed groups that have benefited from it, including the Xinjiang Production and Construction Corps, a quasi-military body that controls the lion's share of cotton production along the tense border with Central Asia.

A report from the American Chamber of Commerce earlier this year said that the guaranteed prices had resulted in "huge costs" for Sinograin, which manages China's grain reserves.

Central planners have acknowledged that China has insufficient land and water to produce enough grain for its 1.4bn people. Widespread soil pollution, especially in the country's southern rice basket, has strengthened the case that the country would be better off growing labour-intensive cash crops and importing thirsty grains.

One proposal is to draw down the excessive reserves built up over the past few years while slowly moving away from the Mao-era policy of grain self-sufficiency.

That transition could prove harder if grain stocks turn out to be badly degraded. One media expose last year said a state cotton storehouse had been found stuffed with old mattresses. Other Chinese reporters have witnessed farmers browbeating local storehouses into paying minimum prices for sprouted wheat that commercial processors would not accept.

State auctions of grains and cotton regularly fail to sell, underscoring suspicions that the quality is too poor for commercial use.

China is now experimenting with direct subsidies rather than floor prices for some cotton and soyabean growers, but has maintained the floor price for other crops. In March, Beijing said it would allocate RMB154.6bn ($24.7bn) towards building national stocks of grains, edible oils and other materials, without specifying how the money would be deployed.

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