Emerging issues in China's food trade and distribution system

EXINAME: cover (R)P:-01 This internal working paper is prepared for STAFF USE ONLY. The views expressed are not necessarily those of the World Bank. EMERGING ISSUES IN CHINA'S FOOD TRADE AND DISTRIBUTION SYSTEM AGREP DIVISION WORKING PAPER NO. 91 C.M. Lewis Economics and Policy Divisiop Agriculture and Rural Development Department The World Bank January 1984 'EXTVAME: cover (R)P: 02 CONTENTS Page I. Introduction . .. ................ ...... .................. 1 II. Global Food Trends ............. .... ..................... .. 3 ..Grain Supply, Prices and Trade .......4............... 3 ..Changes in World Grain Market in 1970s ................. 6 ..Soviet Union's Experience - -1,...... 13 ..Developing,Country Experience .......................- 17 III. China--Comparative Trends and International Trade Flows ......... .... ............................... 29 China and Other Country Experience--Similarities........ 29 Unique Aspects to China Trends ......................... 31 International Trade ....... ...... . ........ . 37 IV. China's Current Food Trade, Demand and Distribution Pipeline .................................... 44 Industrial Trade ....... ......................., 44 Food Consumption Patterns ....................... 48 Foreign Investment ................ .................. .. 51 Rural Marketing and Storage ............................. 53 V. Prospective Options , .,.... ,, ....,... ...... ,-....... 56 Global Prospects ........... ........................ 56 China and World Grain Markets ...........*....k......... 62 Future Domestic Food Demand and Distribution ............ 64 Strategic Food Policy Options ......... 70 Tables 1.1 USSR Grain & Livestock Economy: 1972-81 ...................Q. 14 1.2 Food Imports and Production: 1960-61 ..........96.1........ 17 1.3 Feed Use and Meat Production: Selected Middle Income Countries ........... .0.-. . .... ................ 19 1.5 Indirect Indicators of Nutritional Trends .............. 26 3.1 Foodgrain Entering Commercial Distribution Pipeline ..... 33 3.2 Provincial Grain Transfers, 1953, 1965, 1978 ............... 33 3.3 China: Grain Imports Production Cost .................... 40 4.1 China: Import Commitments for Grain Under Existing Agreements .............. .....,. - 45 4.2 China: Indicative Data on Major Import Export Handling Facilities .................................. . . 47 EXTNAME: cover (R)P: 03 Page 5.1 Prices of Major Cereals, 1975-1990 ........... . . 59 Charts 1. Real Export Costs for Wheat and Corn, United States, Selected Years, 1910-1982 ............................ 4 2 Current Capital Costs of Grain Storage, Handling a n d D i s t r i b u t i o n . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 2 3 EXTNAME: china2 (R)P: (cliff) 01 -1- I. INTRODUCTION 1. This paper examines the on-going and prospective adjustments'in China's domestic food distribution and agricultural pipelines as well as related prooduction, agro-industries and distribution capacity which will- affect international trade flows. The first s(ction will describe global trends and developments among centrally planned and developing countries that are relevant to China. The second section presents a brief description of past food distribution and trade trends. The current situation is summarized in the third section. The fourth section will describe the parameters for future food security developments and scenarios for future food consumption, trade and-associated investment requirements. On this basis, the paper will also present some tentative recommendations about possible areas for World Bank assistance. 2. At the outset, it should be understood that there are weaknesses in this paper's approach towards Chinese food security issues. First, it would be better if Chinese food distribution could be defined in more dis- aggregated terms. Consumption by commodity grouping should be discussed as it varies in different sections of the country and under abnormal situations including natural disasters or poor crops. Unfortunately, data limitations preclude such an approach. More generally, data constraints are a serious problem both in terms of information availability and credibility. The latter is particularly important because of the relative dearth of field work or international experience with inter-provincial trade, domestic storage or disaster relief. EXTNAME: china2 (R)P: (cliff) 02 -2- 3. Another problem is the handling of political issues which have been critical elements in determining food policy. Many of the tools developed by economists can be pushed too far when dealing with a decision-making process dominated by political or ideological considerations rather than individual or efficiency preferences. Further, food security might be best analyzed in the context of overall national security_issue-s rather than as part of the essentially economic overview which this paper is providing. 4. Nothwithstanding these caveats, this paper aims to provide some insight into China's policy and investment options (as opposed to predicting actual future outcomes). Une major topic discussed is the extent to which China could influence world prices. It is also possible to indicate trade-offs between different food or strategic objectives. For example, it is clear that Chinese decision-makers concerned about the consequences of long-term dependence on food inportF will also have to consider the consequences of lower food consumption levels and/or the implications of international borrowings to improve internal food distribution infrastructure. And because of the need to focus on policy alternatives, this paper makes an effort to describe the experience of other countries where adjustments in food consumption, agro-industries, distribution and trade are probably of great relevance to Chinese decision-makers. EXTNAME: china2 (R)P: (cliff) 03 -3- II. GLOBAL FOOD TRENDS Grain Suppl.y, rices and Trade 5. It is important to establish a context for analyzing China's food security position by first discussing overall global and related regional trends. Not only does this provide a basis for comparison when looking at China, but perceptions about the international food balance have heavily influenced decisions about domestic food policies by all countries including those which are relatively self-sufficient (like China). In particular, the experiences of the 1972-74 "world food crisis" led many to the conclusion that the global food shortages, dramatic increases in prices and wide-spread famines were imminent. 6. But the dislocations caused by the panic prices of the early 1970s proved to be shortlived with a rapid return to the long term trend of generally increasing per capita food availability. According to available information, total world food production doubled between 1950 and 1980. While population grew by an average annual rate of 1.8%, food supplies were growing by 2.6%. As a result, real food prices appear to have been on a reasonably steady downward trend (see chart 1). While precise measures of price are difficult given changing trade subsidy policies (the proportion of subsidized grain exports were very much higher in the early 1960s than 1980s), wheat export prices are at least 10% lower than twenty years ago with even more substantial declines in coarse grains. Although official rice price quotations are not necessarily accurate indicators of real transaction values-most rice is traded through government channels where credit subsidies and other factors represent significant discounts or EXTNAME: china2 (R)P: (cliff) 04 -4- premiums on the posted price--the general fall in real export values appears to have had its most dramatic impact in the relatively thin and formerly volatile rice market. Export prices for rice are crrently more than 25% below their real level of 20 years ago. Chart 1: REAL EXPORT COSTS FOR WHEAT AND CORN, UNITED STATES, SELECTED YEARS, 1910 - 1982 (1967 US dollars per metric ton) Calendar Years Wheat Corn 1925-1929 103 76 1930-1934 66 68 1935-1939 79 85 1945-1949 122 94 1950-1954 95 80 1955-1959 69 52 1960 65 53 1961 69 52 1962 70 52 1963 69 56 1964 69 57 1965 62 57 1966 62 56 1967 64 54 1968 60 48 1969 57 48 1970 53 52 1971 54 50 1972 54 46 1973 80 63 1974 110 79 1975 95 76 1976 80 64 1977 58 52 1978 61 50 1979 67 50 1980 66 50 1981 61 50 1982 57 39 NOTE: The export prices are export unit values; the price deflator is the US wholesale price index. SOURCE: US Department of Commerce, Statistical Abstract of the United States, various issues. EXTNAME: china2 (R)P: (cliff) 05 -5- 7. Related to this price trend has been a rapid increase in world grain trade which has grown at more than twice the rate of domestic production. As a result, the proportion of total world grain production entering international trade has risen from roughly 5% in the early 1950s to about 15% in the early 1980s. Most of the incremental demand came from developed market economies although by the 1970s, the COMECON and middle income groups of countries had also become major importers (the changing pattern of consumption in these countri6s, which fueled higher import levels, will be discussed in greater detail below). It is also worth emphasizing that the low income countries did not increase their share of the growing grain market. In absolute terms, grain imports by these countries with a per capita GNP below $420 (in 1981) actually declined in both the 1960s and 1970s; increased self-sufficiency in South Asia having more than offset a'deteriorating balance in Sub-Saharan Africa (where production per capita actually fell in the last decade). 8. As global grain output has grown, its year to year variability has changed very little. Using USDA data on global production since the early 1960s, our analysis shows that while the absolute size of the annual global variations has increased so has the production base; the correspond- ing coefficient of variation was smaller in the 1970s than in the 1960s. Further, the global coefficient of variation is smaller than that for most individual countries. This indicates that production shortfalls in any country or group of countries has tended to be offset by good harvest else- where. The bulk of recent production variations at the global level were associated with below trend supplies in either'the US (largely caused by changes in government farm support programs as opposed to the weather) and EXTNAME: china2 (R)P: (cliff) 06 -6- the USSR (where weather was relatively more important).. However, these data do not indicate that national production variability is declining in all individual countries (in some just the reverse appears to have occurred in the 1970s). Changes in World Grain Markets inthe 1970s 9. Centrally planned, industrialized markets and developing countries have all made increasing use of expanding global markets for grain imports to make up for poor local harvests, and to dispose of surpluses. However, reliance on international food markets as a means of stabilizing domestic supplies has seemed paradoxical to many governments, since these markets are so widely perceived as unstable. Yet, in 1973 when export supplies were tight and prices high, even the poorest developing countries in need were able to import as much grain as they could handle and distribute (its availability was not limiting) although at an increased price. This growth in the global grain trade has continued despite greater price instability. The reasons for this range from basic changes in the global monetary system to more mundane technical improvements in grain trading. Some of the more important factors are described below. 10. Changes in Stockholding and Reserves. The changes in the inter- national markets since 1974 have provided a very substantial and effective reserve from which importers may draw. This reserve has three parts. First, are aggregate trade flows: these have doubled in volume from some 120 million tons in 197C-71 to over 260 million tons in 1980-81. Second, are non-governmental stocks,.currently averaging about 80 million tons, which backstop trade flows and are available for delivery within 2-3 months. EXTNAME: china2 (R)P: (cliff) 07 -7- 11. But, the third and most important element in the world's total "buffer stock" is the grain being fed to livestock which has in the past been diverted to make-up for production shortfalls. In the last three years an average of about 620 million tons of grain (including soybeans) were fed to livestock. This is equal to over 60 percent of annual human grain consumption and includes large amounts of wheat (about 80 million tons) and soybeans (about 85 million tons) which are important sources of direct human nutrition. 12. The feedgrain buffer has been tested over the past decade and has provided an effective and surprisingly timely response to production short- falls. For example, when grain prices rose during 1972-74 the feed con- sumption adjustment mechanism proved extremely robust and the drop in USA feed consumption in 1973-74 was as large as the total global production shortfall (about 30 million tons or a drop of about 21 percent in USA feed consumption). A similar adjustment occurred in 1975-76, when the global grain production shortfall was far larger than in 1973-74 (about 65 million tons below trend) but grain prices remained relatively stable. Experience in 1982-83 provides another example of this grain buffer functioning even in the face of ill-timed government interventions. 13. Sources of Supply and Competition. The increase in demand for grain imports has been met by a growing number of suppliers in increasingly competitive markets. Important new production areas have been opened up in Southern Hemisphere developing countries, from which grain arrives in world markets well before the North American harvest, thus reducing the need for global stocks. Annual grain exports from South America--mainly Argentina and Brazil-have risen.from 10 million tons in the early 1960s to about 40 'EXTNAME: china2 (R)P: (cliff) 08 -8- million tons today. Production increases of a similar size have been achieved in the European Community. While the USA has remained the major supplier of grains it doei not exercise monopoly power over the world market.Alternative sources of supply--particularly for rice and wheat where the USA market share is smaller than in other grains--give importers substantial flexibility (the issue of political export embargoes is discussed below). 14. In addition, importing countries are able to deal with an increasing number of major trading companies, including four Japanese firms which handle exports from the USA. Studies by the US General Accounting Office and independent scholars provide evidence that international grain markets are highly competitive, and that returns to capital of the major traders are comparable with those in other industries. In addition exporting country infrastructure for grain handling and transportation has been expanded and far exceeds the needs of the foreseeable future. 15. Better Information. Improved information systems including remote sensing, weather forecasting and ground surveys have permitted major breakthroughs in the ability to monitor upcoming harvests throughout the world. This has enabled the world market to know in advance of exceptional crop shortfalls and possible import requirements. As a consequence, major producing countries such as the USSR can no longer "surprise" the market as they did in 1972. Substantial improvements have also been made in the mechanisms through which the USSR and other centrally planned economies make purchases, and information exchanges between them and suppliers have now been regularized to minimize the risks from unexpected decisions. EXTNAME: china2 (R)P: (cliff) 09 -9- 16. Integration of the Global Market. With improved telecommuni- cations and information gathering, the organized grain markets now provide an almost instantaneous and generally accurate reflection of the changing judgments of buyers and sellers throughout the world. Almost all inter- national trade and the great bulk of marketed production is priced on the basis of changes in a handful of carefully watched markets. Exporters throughout the world sell at roughly the same world market price even when domestic farmers are paid a different price (as they are in the EEC). And government-to-government sales agreements--increasingly important in trade-specify quantity ranges, but not prices. 17. Another important change has been the growing price interdependence between all of the individual commodities entering international markets. This transition has been fostered by a growing willingness by grain consumers, including importing agencies as well as the all-important feed purchasing units in exporting and importing countries alike, to change buying patterns in line with relative price changes. For example, high maize prices in 1983 sparked a rise in the use of wheat as a feed on a global basis; wheat used as a feed hit an all-time high, rising by well over 20% (while maize fed to livestock fell). Another related development has been in the smaller and formerly more volatile markets for speciality" foodgrains such as white maize or rice. In both cases, importing governments have discovered the practicality of substituting relatively cheaper foodgrains for traditional imports. In some cases, traditional consumer preferences have even changed (e.g., white maize is no longer preferred in Mexico or even certain East African countries). And in the small but nonetheless critical rice market, these factors--along with 'EXTNAME: china2 (R)P: (cliff) 10 -10- greatly increased production among both exporters and importers in Asia-- has helped reduce the risks of relying on imports (although rice remains a thin market). 18. Gr h of Futures Trading. The organized grain futures market grew almost twentyfold in the 1970s--the value of total annual transactions now approaches $300 billion--and now provides an immense b-ase for absorbing incremental trading activity that would previously have been disruptive. Even more important, the large volume of trading perraits reliable "hedging", through which trading partners can "lock in" acceptable prices for future cash transactions. This also makes it possible for nongovern- mental decision makers to hold carry-over stocks profitably, reducing the argument for special buffer stocks. Since they reflect current and eipected supply and demand levels, the futures markets give clear signals as to when grain should be released into the market or alternatively held in stock. In late 1980 for example, when prices rose more rapidly than in 1972, only moderate amounts were released from stocks, which in the aggregate remained sufficient to meet subsequent demand. This was in striking contrast to experience in 1972, when government decisions caused excessive liquidation of stocks. 19. New IMF "Safety Net. Agreement reached in the late 1970s helps ensure that any IMF member developing country, including China, will be able to buy food in the event of local crop shortfalls or high import prices. The Compensatory Financing Facility of the International Monetary Fund (IMF) has been expanded to include concessional medium-term credit for above average rise in the bill for needed cereal imports (caused by the higher prices of rising import tonnages). Loans from the Facility are made EXTNAME: china2 (R)P: (cliff) 11 -11- for 5 years (with 2 years' grace) at an interest rate of 7 percent; they are not subject to IMF conditions about the borrower's domestic policies. A country cannot draw more from the Facility more than 100 percent of its IMF quota (which is not static over time), but the maximum is not affected by its drawings on other IMF facilities. 20. Influence of Exchange and Interest Rates. Overall, variations in foreign exchange values over the last ten years have been larger than variations in food commodity prices. As a result, grain traders, have resorted to using the same hedging techniques first developed in the grain futures markets to cover foreign exchange and interest rate risks. In terms of national purchasing power, changes in foreign exchange values have often proved important in determining the relative "affordability" of food imports. For example, the fall in the dollar's trade value helped buffer the rise Ln dollar-denominated grain export prices in the 1972-74 period for countries like Germany and Japan; experience among developed country food importers through 1982 was basically similar. However, in 1983 both the dollar and food export prices appreciated; this was a particular problem for many food importing developing countries. Interest rates have also affected commodity prices by raising the cost of holding stocks. Overall, exchange and interest rates have been more variable than food prices (in nominal dollars) and this variability would have made efforts to stabilize commodity prices through interventions such as buffer stocks almost impossible over the past 10 years. 21. Reliability of Import Access. Much recent policy debate has centered around the issues of whether countries should risk dependence upon foreign suppliers and uncertain international markets for so vitally 'EXTNAME: china2 (R)P: (cliff) 12 -12- important an item as food. Fear that exporters may withhold supplies for political reasons provides a strong impetus for seeking self-sufficiency. However, the last twenty years provides little evidence to justify such a concern. Even the USSR, the world's largest importer and the only country to be subjected to a food trade embargo, has successfully implemented a food security strategy whose viability depends on imports; nutritional wellbeing has been raised, and consumption has been made less variable. The premium incurred because of US export suspensions proved extremely small (less than 5%) and total quantities obtained through higher imports from non-US suppliers appeared to fully compensate for the quantities affected by the embargo (based on USDA data) 22. No developing country has ever been prevented by political action from obtaining needed supplies. In emergencies, food need not be purchased directly from exporting countries; it can be bought in entrepots such as Malta, Rotterdam, or Singapore for only a small premium above the world price. For example, Iran continued to purchase USA grain all through the 1979-80 period when almost all its other commercial, financial, and political ties were cut off. In either tight markets or tense political situations when supplies were needed extremely quickly (within a few months), sources have been found to meet import requirements. Premiums for such rapid delivery have been waived by some of the export boards, including the Australian Wheat Board and the Canadian Wheat Board. For straight commercial purchases made through transhipment facilities in third countries-and therefore free of exporters' political control--the net premium above market prices for food imports has not exceeded 10 percent. In recent years this depoliticization of food trade has even extended to concessional food shipments. EXTNAME: china2 (R)P: (cliff) 13 -13- Soviet Union's E!p 23. An important element in the world food situation was 'he emergence of the Soviet Union as the world's largest importer after 1972. Before this time, the Soviet Union had been on average a substantial net exporter of grains (although substantial imports had been purchased during a poor crop in the middle 1960s). The shift to import dependence for grain is particularly striking given the sxcellent production record for Soviet agriculture in the 1950s and 1960s. During this period agricultural production grew at an average rate of 3.9% (compared to 2.0% in the US). As a result, there were substantial improvements in the Soviet diet; per capita meat consumption doubled between the early 1950s and 1960s. 24. What happened in the 1970s? First, grain production increases were very much smaller (although still larger than increases in the population). But even more important, Soviet officials were determined to continue to improve diets of an increasingly nonrural population (14% of the Soviet work force is in agriculture today compared to over 40% in the late 1950s). To this end, retail prices of meats, and most other foods, have been kept constant since 1962; at the same time procurement prices have been raised to stimulate additional output. By 1981 the difference between procurement and retail prices totalled over $25 billion or 25% of gross agriculture product. 25. Imports played an important role in stabilizing domestic feed utilization even in the face of poor domestic harvests. They helped in keep feed use growing from about 90 million tons annually in the late 1960s to over 120 by the early 1980s. As Table 1 shows, imports rose from about 20 million tons in 1972 (11% of Soviet consumption) to a peak of almost 50 EXTNAME: china2 (R)P: (cliff) 14 -14- million tons in 1981 (about 22% of Soviet consumption and total world trade). The foreign exchange cost of grains rose from about $700 million in 1974 to roughly $6 billion in 1981. Although precise information is not available, it appears that the foreign exchange cost of grain imports represented 40-50% of total hard currency export earnings (i.e., those going to Western countries or paid for in dollars by COMECON importers). 26. Even before import dependence, the Soviet Union was devoting an extremely large proportion of total investment resources into the agriculture sector. Agriculture's share of total investment has risen from about 20% during 1961-65 to about 27% during the Tenth and Eleventh Plans (1976-84). As agriculture accounts for only about 15% of GDP, this level of investment shows the priority attached to improved food production. And if anything these investment figures somewhat understate agriculture's priority which is second only to that given defense. Table 1: USSR GRAIN & LIVESTOCK ECONOMY: 1972-1981 (million metric tons) Grain Compound Feed Meat Production Imports -Feed Use Production Production 1972 168 23 98 28 14 1973 223 11 105 32 13 1974 196 6 107 38 15 1975 140 26 89 42 15 1976 224 11 112 46 14 1977 196 19 122 51 15 1978 237 16 125 56 15 1979 179 31 123 60 15 1980 189 35 122 NA 15 1981 160 46 112 NA 15 Source: USDA TNA.E: china2 (R)P: (cliff) 15 -15- 27. But despite the priority, agriculture's most serious problem is productivity. This is particularly obvious in the livestock and marketing subsectors. Despite the huge level of imports, the Soviet Union has been able to achieve only modest improvements in feed ration quality or meat production. As a result, there has been almost no increase in per capita meat consumption since the early 1970s--despite the fact that Soviet consumers eat far less meat on average than any other of the East Europeans (including the Poles). 28. Critical to recent performance, as well as to the future, has been a failure to increase the amount of livestock production per unit of feed input. In aggregate there does not appear to have been any major improvements in feed conversion ratios since the 1960s even though they are very much lower than those achieved in comparable Western livestock operations and roughly 30-40% below the level currently achieved on model Soviet farms. This level of inefficiency.also applies to the production of feed rations where USDA has estimated that a better ration balance could save an estimated 20 million tons of grain (18% of the total fed to livestock). Further, inefficiencies in mixing feeds as well as feeding practices on large scale state farms reportedly waste 20-25% of total feed. 29. Related to this is the inflexibility and high relative cost of the Soviet marketing system which precludes local adjustments in feed rations or production. Despite agriculture's priority, the internal transport system does not appear to be able to cope with the movement of agricultural inputs, including imported feeds, or products destined for urban consumption. A recent OECD study of the Soviet Union suggested that rural truck transport was the most important single bottleneck in Soviet 'XTNAME: china2 (R)P: (cliff) 16 -16- agriculture. Other studies have indicated that unit marketing margins-including losses, transport, processing, consumer queuing--for the Soviet economy are 50-100% higher than in the United States. Because such costs are generally higher than on-farm costs in the total consumer price of high value foods including baked goods or livestock products, the impact of inefficient marketing is probably even greater than problems at the production level (including low feed conversion rates). 30. In concluding this brief review of Soviet experience, two additional points that might be relevant to an assessment of Chinese options should be made which relate to political and non-agricultural aspects of the issues discussed above. First, it is important to understand that Soviet willingness to rely on imported grain has less to do with agriculture's problems than with those of the economy as a whole. As early as the 1960s it had become clear to Soviet planners that labor productivity was a serious problem. Since then, the importance of finding incentives for workers has increased in line with growing productivity problems in industry and an apparent deterioration in the quality of life (e.g., the Soviet Union is the only country in the world where life expectancy has declined significantly in the last decade). Providing a better diet is viewed as the sine qua non of improved worker incentives and, thereby, productivity. If improved worker productivity involves "interim" import dependence, as it obviously has, then that appears to be considered the lesser of two evils. 31. And it is important to note that the political costs of import dependence have not been demonstrably great. The efforts of two United States administrations to use grain trade as a lever on Soviet foreign 'EXTNAME: china2 (R)P: (cliff) 17 -17- policy have been noteworthy failures. The most recent grain embargo (begun in January 1980 and abandoned almost a year later) appears to have had no impact on either total grain imports, which were at an all time high, or livestock production. In many quarters, including some in the Soviet Union, it is felt that the United States actually suffered more from the "politicization" of grain trading than anyone else. DevelopingCountry Experience 32. The evolution of agriculture, including the role played by imports, in developing countries is somewhat different from the Soviet Union's recent experience. As Table 2 shows, in aggregate or for country groupings (based on economic development) there were no widespread problems with grain production increases; per capita supplies continued to rise at roughly the same rate as in the 1960s. But it is also clear that in the higher income developing countries the growth rate for imported grains accelerated (notwithstanding domestic production) while self-sufficiency actually increased somewhat in low income countries overall. (Sub-Saharan Africa is an exception to this trend which does not show up in the aggregates for low income countries given that 80% of the population in this grouping are South Asian). Table 2: FOOD IMPORTS AND PRODUCTION 1960-61 Average Annual Growth of Cereal (percent) Imports Production 1960-70 1970-8 96U,-70 1T70-80 Middle income oil exporters 5 13 3 3 Middle income oil importers 7 9 4 4 Low income Asia -1 -4 3 3 42- TTQnAa --e-CAT EXTNAME: china2 (R)P: (cliff) 18 -18- 33. The key in the middle income countries was growth in purchasing power, particularly in urban areas. Between 1960 and 1980 middle income country urban populations grew from about 200 million to almost 800 million. At the same time, average per capita income roughly doubled in real terms (from $820 to $1580 in 1980 dollars). Paralleling these trends was a dramatic decline in the relative importance of subsistence agriculture. By the early 1980s probably 90% of middle income food consumption was coming from commercial marketing channels as opposed to subsistence agriculture. As a consequence, consumers were able to shift into dietary patterns quite different from those of earlier generations. Traditional starchy foods became less important and overall direct per capita consumption of grains declined. In their place, processed wheat products became more important. As many tropical countries are not able to meet demand with domestic productions, wheat imports grew and totaled about 50 million tons by the early 1980s (over half of total trade). This level would appear to be providing around half of the total urban consumption of grain in middle income urban areas. 34. Another important trend relating to the "affluence requirements" of middle income consumers was stepped-up demand for livestock products. Although no longer considered a developing country, Japan is an excellent example of how higher incomes fuel demand for meat and, thereby feed. Since 1960, average per capita consumption of meat rose from about 5 kg annually to almost 25 kg by the early 1980s; raw materials imported for feed concentrates grew by about 700% over the same period with total feed consumption reaching 24 million tons by the early 1980s (compared to total domestic grain production of about 13 million tons). And in contrast to EXTNAME: china2 (R)P: (cliff) 19 -19- the Soviet Union, the efficiency of feed conversion was also increased; increased between 1970 and 1980 roughly 20% less feed was needed per incremental unit of beef, veal or pork (gains in other subsectors were less spectacular but nonetheless impressive). Table 3 presents comparable data on feed consumption for selected middle income countries. For middle income countries overall, feed consumption grew at an average annual rate of over 9% in the 1970s reducing about 110 million tons or about 34% of total utilization including imports and domestic supplies. Table 3: FEED USE & MEAT PRODUCTION LECTED MIDDLE INCOME COUNTRIES (million metric tons) Mexico Brazil South Korea Taiwan 1960 1980 1960 1980 1960 1980 1960 1980 Feed use Grain 0.4 5.4 5.3 17.4 0.0 2.4 0.0 3.2 Soya 0.0 1.3 0.0 2.5 0.0 0.4 0.0 0.6 Compound feed produc- tion 0.0 4.3 NA NA 0.0 3.9 0,0 4.6 Animal Production Red meat 0.5 1.5 1.8 3.1 0.0 0.4 0.1 0.6 Poultry 0.1 0.4 0.1 1.3 0.0 0.1 NA NA Milk 3.4 7.2 4.4 10.5 0.0 0.4 NA NA Source: USDA 35. The general experience of developing countries has been that complete food self sufficiency, which is generally accepted as a politically desirable objective, has not been a realistic or even constructive goal for policy. Given the growth in demand associated with EXTNAME: china2 (R)P: (cliff) 20 -20- richer urban populations, most governments have concluded that self sufficiency can be achieved only at unreasonable economic or social cost. And the rationale for such decisions are quite similar to that made about the very much more burdensome level of food imports in the Soviet Union--import dependence being considered a lesser evil than the alternatives. A number of specific country examples illustrate the problems encountered by governments who attempted, generally for a short period, to isolate themselves from international grain markets. - The Republic of Korea was able to become self sufficient in rice by the late 1970s by keeping the procurement price for rice well above the cost of _omparable imports and simultaneously subsidizing fertilizer. The cost of the fertilizer imports, the fiscal burden of the subsidies and urban dissatisfaction with,food prices led the government to abandon this strategy by the early 1980s with the Republic of Korea again becoming a major rice importer. - In-Brazil, government price supports and subsidies helped relatively high-cost and affluent wheat farmers increase output; wheat displaced traditional consumption of cassava in urban diets. Again, the burden of the subsidy--including the negative impact on low income rural areas where cassava production was important-led gradually to a policy shift and a reduced subsidy for wheat where prices were brought in line with world levels (without adverse political or nutritional consequences in 1980-82). 'EXTNAME: china2 (R)P: (cliff) 21 -21- - Mexico attempted to devote increased resources generated by oil exports to a massive effort to eliminate any food import dependence and increase nutritional well-being. This meant subsidizing both consumers and producers. The resulting fiscal expenditures in support of this program were in excess of $5 billion in 1981 alone--fully a third of incremental public sector debt and a major contributing factor to the economic difficulties of 1982. By 1983 the Mexican self-sufficiency program had given away to a less costly and trade oriented food security strategy. 36. An important reason for pragmatism about food self-sufficiency is that fact that grains are not the only foods that individual consumers consider basic. Even in low income countries, the minimum food basket may include items like vegetable oil, sugar, beverages and spices. India became largely self-sufficient in wheat in the late 1970s. At the same time it became the world's largest importer of vegetable oil, and spent more foreign exchange, in real terms, in this way than was ever used for wheat imports. And consumers' ability to substitute among foods has also had food security advantages. As noted in the discussion about the integration of global grain markets, countries have been able to satisfy the nutritional requirements of traditional rice eaters with wheat, for which the international market is larger and more stable. For this reason Indonesia and Sri Lanka have invested heavily in wheat milling capacity which is not completely used in normal years but which enable wheat consumption to be stepped up when rice is not readily available. 'EXTNANE: china2 (R)P: (cliff) 22 -22- 37. But even where it is not economic to pursue self-sufficiency in food, governments often have a critical role in preserving a minimum level of domestic food production. Doing so is particularly important in the process of internal economic adjustment. For example, many of the oil exporting countries have had to protect their farm sectors from the consequences of increased revenue from their petroleum sectors. Indonesia, and more recently, Ivory Coast, have used a variety of different interventions to keep the agricultural sector, particularly its employmeat-intensive small farmer component, growing. Nigeria, by contrast, allowed the effect of the oil boom on foreign exchange values and other aspects of the economy to cause artificially low urban food prices, without any effective correction in the countryside where over half the population lives. The results have been to hasten migration into the cities, depress farm output and leave food supplies extremely vulnerable to a fall in oil earnings. 38. Commercial food distribution pipeline, Any program to address food security problems must work through the markets in which households buy food. Because subsistence food production has been declining, the marketable surplus growing, and urban populations rising, the markets linking farmers and consumers have become increasingly important in developing countries. By the early 1980s the'urban population of developing countries reached a billion. To feed this population some 150 million tons of foodgrUins have to be collected annually in the countryside, stored, processed, transported and retailed in cities. In the middle income countries the value added from marketing and processing agricultural commodities often exceeds that of production itself. In the 'EXTNAME: china2 (R)P: (cliff) 23 -23- low income countries, food marketing and distribution systems typically acr.unt for 10 percent of GDP, and for an even greater share of employment opportunities for the poor. Chart 2: CURRENT CAPITAL COSTS OF GRAIN STORAGE, HANDLING AND DISTRIBUTION (1978 US dollars) Average Cost per Ton of Incremental Annual Throughput Procurement Infrastructure Modern port silo facilities with bulk handling (turnover stocks 8 times a year) 30-40 Procurement internally at public markets (including weighing and drying) 10-15 Intermediate Storage and Distribution Systems Flat, bagged, storage (average turnover of 1.5 per year) 45 Handling at storage or transhipping facilities 25 Processing and Consumer Sale Equipment Milling (range for rice, maize and wheat) and distribution to consumer markets 35-55 TOTAL COSTS Total 120-150 Scurce: World Bank. 39. Governments have played a critical role in building the basic infrastructure needed to market local production. An example is the development of foodgrain distribution facilities in Northwest India, which involved the Central and State governments as well as local farmer cooperatives and private traders. Financed largely through levies on grain sales, rural road networks were expanded fivefold and the distance farmers needed to travel to sell their products was halved. Such investments EXTNAME: china2 (R)P: (cliff) 24 -24- proved a precondition to farmers' adoption of new technologies and the subsequent fivefold increase in the production of grain for sale. Brazil made multibillion dollar investments in infrastructure to provide "export corridors" for new crops such as soybeans, the production of which rose twentyfold from 1970 to 1980. 40. Lack of marketing opportunities is a powerful disincentive to farmers. This has been a major problem throughout Sub-Saharan Africa. In these countries, marketing accounts for a greater share of total production costs than in densely populated irrigated farming areas; because producers are more disperse, production is lower and output more variable. As a result, improving marketing systems can be more important and productive than introducing yield-augmented farming systems. 41. The requirements for an efficient food distribution pipeline have included much more than just the physical infrastructure to collect, move, store and process food: to market rural surpluses efficiently requires rapid responses to varied and quickly changing local requirements. Substantial local storage capacity has proved extremely important. Further, centrally administered bureaucracies have often created problems in handling the distribution of food (public and private). For example, when the Indian government agencies responsible were unable to handle the movement of food to all the places where it was needed, the black market took over. In Indonesia, and other countries, official price policies and government investments reduced incentives for local storage of grain (by eliminating the normal seasonal rise in prices which has made stockholding worthwhile). This had the effect of reducing total stockholding capacity in the country and increasing the vulnerability of local villages in the. EXTNAME: china2 (R)P: (cliff) 25 -25- event of poor harvests. As a result, government is now encouraging the re-creation of village level grain stocks. Overall experience and a growing body of academic analysis indicate that traditional intermediaries conduct most food marketing with great efficiency. 42. Coping with Famine. Probably the most dramatic development related to the global food situation is the virtual elimination of famine as a demographically significant event. This has been possible partly because general nutritional well-being has improved which makes the problems of exceptionally poor harvests more manageable. For example the declines in child mortality rates and increases in life expectancy in all groups of countries (see Table 5), indicate that the incidence of life-threatening hunger has declined substantially in the last two decades. Along with more supplies of food, better water supplies and health care have also helped to lengthen lives. Although the statistics show that hunger remains a major problem in developing countries, where infant mortality rate are ten to thirty times higher than in industrialized countries, they also demonstrate that increased levels of food production at the national land global level, higher per capita incomes, and lower food prices have all helped to raise household food consumption and,lowered 'EXTNAME: china2 (R)P: (cliff) 26 -26- food prices the incidence of life-threatening malnutrition. Table 5: INDIRECT INDICATORS OF NUTRITIONAL TRENDS, 1960-80 Child death rates Life Expectancy at Birth (age 1-4,per 1000) (years) 1960 1980 Fall 1960 1980 Rise (percent) (percent) Low-income economies a/ 28 12 57 42 57 36 Africa 38 27 30 39 46 18 Asia b/ 21 11 48 48 58 21 Middle income exporters 27 14 48 46 56 22 Middle income oil importers 19 9 53 54 63 17 Industrial market economies 2 1 50 70 74 6 Non-market industrial 2 1 50 68 71 4 economies a/ Includes China b/ Excludes China Source: United Nations. 43. But chronic nutritional problems and possible starvation in bad years remains a serious problem in many rural areas of low income countries (and even some rural areas of middle income countries such as Northeast Brazil). The problem is principally associated with remaining pockets of subsistence farming and the absence of food distribution infrastructure. The latter factor has in the past proven the most serious constraint to effective relief of rural distress. In some countries it has been easier for hungry people to move to where food can be made physically available than to try and move food into the countryside (e.g. the Sahel during the drought of the early 1970s). But by far the most serious problems have been essentially political. In some countries, central governments have been unwilling to acknowledge the seriousness of local famines in isolated rural areas until it was too late to take corrective steps (e.g. Ethiopia 'EXTNAMB: china2 (R)P: (cliff) 27 -27- in the early 1970s). In more extreme cases, civil unrest and open warfare have made emergency relief impossible and, as in Kampuchea and Ethiopia in the late 1970s, undesirable from a political standpoint (representing a man-made famine which cost well over 500,000 lives). 44. But notwithstanding the remaining problems, all available indicators point to major improvements in the ability of governments to assure that loss of life related to rural disasters are kept to a minimum. Probably the most dramatic example of a successful strategy is India's Famine Codes which developed in the late 19th century. Instructions were written to govern relief operations in the various provinces of India, and varied according to local circumstances. Their basic principle was to deal with famines as breakdowns in rural incomes. The key, therefore, was to provide employment for wages and to permit grain to move from surplus production zones into the distressed areas, where it was sold through normal commercial channels at controlled prices. (In certain less developed areas food was distributed directly as wages.) From the outset government officials emphasized the importance of timely information about crops. The Code explicitly provided for the dissemination of early warning information and for contingency planning to predetermine the location of feeding sites, temporary stocks, and public works. A special management system came into being when famine was declared and gave officials responsible the power to break administrative and logistical bottlenecks, provide tax relief, protect small farmer land tenure (to avoid foreclosures by moneylender), and provide small farmer land tenure (to avoid foreclosures by moneylenders), and provide emergency credit. Despite the very great inequalities in Indian society, the Famine Code has served the jEXTNAME: china2 (R)P: (cliff) 28 -28- country extremely well throughout the 20th century. It was the basis for successful relief operations in Bihar in 1967 and in Maharashtra in 1971. The one major failure in famine relief occurred when war-time emergencies, mis-management and an explicit decision not to invoke the Famine Code resulted in the 1943 Bengal famine, when perhaps 3 million people perished. In other high risk rural areas basically similar programs have shown equal success as in Northwest Brazil (where a 3 year drought, the worst recorded, brought little loss of life) and, more recently, in Ethiopia (which was able to weather potentially serious problems in the 1980s without the massive loss of life experienced in the 1970s). 45. International relief efforts have become a vital backstop to local famine control efforts over the past decades. They have proven most critical in countries where central administrative capacity is not well developed such as those in the Sahel and the Horn of Africa. The contribution of international groups like the World Food Program, UNICEF, OXPAM, Catholic Relief Services, and others has been immense. Annual contributions to these organizations exceed $2 billion. This is the only area in which foreign aid has grown steadily in real terms over the past 25 years. Within only a few months of a request for help, these agencies have been able to establish in-country relief systems. Their main difficulty is not to raise resources but to elicit support from governments of the countries in which they are working. EXTNAME: c3 (R)P: (china) 01 -29- III. CHINA--COMPARATIVE TRENDS AND INTERNATIONAL TRADE FLOWS 46. This paper is principally concerned with analyzing China's future policy options with respect to internal food distribution and international trade. It does not deal extensively with past trends except as they are relevant to understanding the likely parameters influencing future policies. However a brief summary of some salient characteristics of trends since the 1950s are useful in showing the following. First, the similarities between the experience in China and other developing or centrally planned economies will be shown. Second, the most important differences between China's story and that of other countries will be touched upon. Third, the international trade experience will be discussed in some greater detail to provide a better basis for subsequent discussions of China's role in the world grain markets, China and Other Country Experience--Similarities 47. The most obvious and important similarity between China and other developing and centrally planned economies has been food production gains keeping pace with population. As noted earlier, the worldrs largest countries-have without exception proven able to increase grain production at least as rapidly as population growth. Even in the Soviet Union the long term trend in average per capita grain production has been rising. (But in the Soviet Union and middle income countries per capita demand has also risen steeply with the resulting gap met by imports). In poorer countries such as India, per capita consumption has risen more slowly and has not triggered an increase in food import dependence; the Chinese experience appears roughly comparable to that of India in this regard EXTNAME: c3 (R)P: (china) 02 -30- (although aggregate consumption levels are quite different as will be discussed below). 48. Another similarity between China and other developing and centrally planned economies has been the rising cost of subsidizing food consumption in non-agricultural sectors. Up until the recent global recession, increasing government subsidies of basic food items was a feature in countries covering a wide spectrum of income levels (from low income Africa to high income South America) and economic management strategies (from market oriented East Asian countries to centrally planned East European countries). In China total state financial losses on cereal and edible vegetable oil sales d6ubled between 1979 and 1981. Overall government subsidies of urban food consumption reached $10 billion by 1981. This is equivalent to about 25% of total Chinese fiscal resources and perhaps 30% of urban income (very much higher proportions than found in India). 49. A related point to the subsidies issue, is the tendency in most developing countries for governments to maintain policies which exacerbate income differences between urban and rural areas. Although this is a controversial point, evidence indicates that urban-rural income differentials in China are certainly no smaller than the average in low or middle income developing countries. For example, in China average urban per capita consumption was over 12% higher than the rural average in 1978; the difference in vegetable oil consumption was an even more striking 350% (see official sources listed by Lardy (1983, p. 158). The significance of urban-rural income differentials is supported by available anthropometric data on child weight and height which indicate substantial inequality in terms of nutritional well-being. EXTNAME: c3 (R)P: (china) 03 -31- Unique Aspects to China Trends 50. The most striking contrast between China and other developing or centrally planned economies in terms of food is shown by available data on internal grain trade. In almost all countries where agricultural production was rising the proportion of total farm production entering commercial marketing channels also rose. In fact, the growth rate of commercialized farm production--output which was sold by the producer often to pay for necessary yield augmenting inputs--was far higher than for total production growth. As a result, the absolute size and relative proportion of farm production, including grains entering distribution pipelines, has risen. In middle income countries this has led to a current situation where on average perhaps 65-80% of all grain production moves through a distribution pipeline that extends from the farm to relatively distant consumption points (at least beyond the local rural village community and often hundreds of kilometers away). In low income countries this transformation has been equally pronounced but generally began at lower level. For example, data collected for agricultural market development projects in India indicate that commercialized production has been growing at about twice the rate of aggregate production; as a result the proportion of total grain production which enters commercial channels has risen (and now reaches about 60% although the average varies in different regions). In addition, there has emerged over the last ten years, in India, and other large low income countries as well, a substantial long distance domestic trade (in India aboit 8-10% of all domestic grain production is distributed through a pipeline that links farmers and consumers over 1,000 km apart). FXTNAME: c3 (R)P: (china) 04 -32- 51. By any of the available measures of commercialized production, Chinese experience appears to have eschewed the path followed by other developing countries (or centrally planned economies where upwards of 90% of total grain production enters commercial channels). On the basis of available official statistics and other sources, two students of Chinese grain distribution have presented strikingly similar analyses of the trends (see Lardy (1983) and Walker (1984) forthcoming)). Both studies conclude that the proportion of total grain production entering commercial distribution channels is today smaller than it was in the early 1950s. And up until recent policy changes undertaken in the late 1970s the proportion of total grain production entering commercial distribution channels was 30% lower than the levels of the 1950s (and were in fact lower than the levels of the 1920s (see Buck (1930)). Table III.1 shows the total regular procurement of grain by government including sales of gain in periodic rural markets, direct sales by farmers in cities and purchases by other state agencies (including the military, mass organizations, commune and brigade enterprises and state organizations other than grain procurement agencies). 52. Another indication of the unique trend in China's food distribution pipeline is the fall-off in inter-provincial trade. In some ways this measure is less useful than that given in Table III.1 given that most of China's provinces are `rger than many countries; inter-provincial trade in China is the equivalent of international trade in some parts of the world. However, it is worth contrasting the experience in China with long distance domestic grain distribution and other large developing countries (such as India, mentioned above). As Table 111.2 shows, the EXTNAME: c3 (R)P: (china) 05 -33- Table III.1: FOODGRAIN ENTERING COMMERCIAL DISTRIBUTION PIPELINE Taxes and Procurement Total Commercialized Resales to Peasants (Millions of tons) M/tons As % of output 1952 27.8 39.0 28.7 NA 1953 41.5 43.0 31.1 9.3 1954 45.1 58.9 30.0 NA 1955 43.0 47.5 31.1 NA 1977 47.2 47.7 20.3 16.3 1978 46.5 50.7 20.1 15.3 1979 53.9 60.1 21.8 NA 1980 49.0 - 50.0 61.3 23.0 NA 1981 54.3 - 55.4 68.5 25.4 NA Source: [Listed by Lardy (1983)] Table 111.2: PROVINCIAL GRAIN TRANSFERS, 1953, 1965 and 1978 1953-57 Average 1965 1978 Number of exporting provinces 19 15 8 a/ Number of importing,provinces 7 b/ 12 18 c/ Volume of provincial exports (million tons) 10.0 5.7 2.5 Volume of provincial imports (million tons) 7.7 8.0 11.6 Provincial trade surplus (+) or deficit (-) +2.3 -2.3 -9.1 a/ Probably Heilungkiang, Kirin, Hunan, Hupei, Anhwei, Kiangai, Chekiang and Kiangsu. b/ Counting Tsinghai which had minimal trade. c/ Probably Liaoning, Inner Mongolia, Kansu, Ningsia, Shensi, Sinkiang, Tsinghai, Tibet, Honan, Shansi, Shantung, Kweichow, Yunnan, Fukien, Kwangtung and the three major cities of Peking, Tientsin and Shanghai. Source: K. Walker (1984, forthcoming) EXTNAME: c3 (R)P: (china) 06 -34- volume of provincial grain exports declined 'om about 10 million tons annually in the period before the Great Leap Forward (1959) to about 6 million tons by the middle of the 1960s (before the Cultural Revolution got underway in 1966). By the late 1970s, inter-provincial trade fell still further to less than 3 million tons, of which 1 million tons was for export, despite impressive gains in official grain production statistics which show per capita consumption about 25% higher than ten years before. At the same time, the number of provinces which generated a grain surplus steadily declined. 53. The rationale for the reduction in domestic food distribution shows another important contrast between China and most other developing or centrally planned economies. Outside China, central governments have generally equated food security with national food self-sufficiency. Thus most developing country governments have, whenever able, put scarce managerial, investment and working capital resources into centrally controlled food buffer stocks which could be used in place of imports when domestic production, or government procurement, fell below minimum consumption requirements (although almost all buffer stocks are actually filled with imported grain that is shipped during the period of shortfall and have proven extremely uneconomic and counter-productive investments, see Lewis (1983)). 54. No such central buffer stocks were created in China and, on the contrary, all the emphasis on food reserves was put on local level storage. This emphasis had a powerful link to strategic thinking about possible requirements in the event of protracted defense in the event of invasion. Further, it was consistent with official ideology about how EXTNAME: c3 (R)P: (china) 07 -35- the rural sector should be organized along socialist lines with local production units, not individual families or traditional village organizations, making allocation decisions (which included stockholding, see Oi (1982)). As a result, China has carried very much smaller stocks in its centrally controlled food distribution pipeline than other countries. India's government stocks of grain, as a percentage of total throughput, were triple those of China even at the lowest level of the early 1970s or middle 1960s. As will be discussed further below, China has basically relied on an import program to make up for the lack of government reserves that in other countries are used to insure consumption in the cities. 55. This emphasis on local stockholding, and the related policy which reduced commercialized flows, led to a number of other anomolous situations in China as compared to other countries. First, local commune or brigade storage capacity was not sufficient to meet the demands placed on it; nor were private stocks generally permitted to make up for the slack. As a result, post-harvest losses in the rural areas of China have been--and remain--very much higher than in most developing countries (see Greeley, (1982), for a summary of post-harvest loss estimates). While there is a deatth of scientific field studies, available evidence--including that pre$ented by Chinese official sources and a recent series of field trials organized by ICI (which is interested in selling a rodenticide)--indicate post-harvest loss levels in the order of 10-15% (as compared to 3-7% in comparable agro-climatic zones of developing countries). While the ideological impetus for wide-spread local storage has receded since its heyday in the middle 1970s, the incentives for efficient local stockholding remain marginal. As a result, losses have, as noted above, remained high EXTNAME: c3 (R)P: (china) 08 -36- (which is consistent with the pattern in Eastern Europe including Romania and Hungary where the World Bank is currently financing grain storage investments). 56. A second consequence of the commitment to local grain self-sufficiency has been to encourage a decline in rural income, and hence food consumption, in areas formerly dependent on casih crop production (where sugar or cotton were sold to pay for grain grown in other provinces). Data is available at the country level to show that in Shantung, a cotton growing area, and Fukien, a cane sugar growing area, reduced inter-provincial trading possibilities resulted in an absolute decline in total agricultural income. As a result, certain countries which had enjoyed above average income and food consumption levels in the 1950s fell below Chinese poverty standards by the late 1970s. And an additional consequence was a fall in production of cash crops on the lands most suited to their cultivation; this helped fuel a rise in cash crop imports such as cotton needed to maintain indigenous processing industries (see below for more detailed discussion). 57. Another contrast to other developing or centrally planned countries which is related to the reduced capacity of the internal food distribution pipeline relates to the incidence of famine and the long run consequences of past agricultural sector dislocations (which were by-products of both restructuring the organization of the rural sector and concurrent political dislocations). Rural famines such as that of 1958-62 where perhaps 20 million lost their lives (Aird, 1982) show the magnitude of the problem which then existed. These events appear similar to the disaster which occurred in the Soviet Union during the early 1930s when as EXTNAME: c3 (R)P: (china) 09 -37- many as ten million died in the course of a "political" famine touched off by a shortfall in government grain procurement (not actual production). And the important thing about such "political" famines are their long-term impact. In the Soviet Union, the rural economy had to be basically reconstructed from scratch with commercial livestock production in many area--formerly the preserve of the richer peasants who were largely exterminated during-the early 1930s--still below levels of fifty years ago. In China, where commercialized agriculture was generally at a lower level to start with, the consequences of a "political" famine were different but probably equally significant both in terms of rural attitudes and structural changes (e.g., the complete disappearance of local peasant-merchants who had continued to operate in spite of official sanctions). Also, the breakdown in the government grain distribution pipeline encouraged the process of developing food security responsibilities to the local levels. International Trade 58. China's international grain trade is an aspect of its overall economic and political development that shows some characteristics that are shared with other developing countries or centrally planned economies. Other aspects, particularly as they reflect the trends in domestic distribution flows, are more unique. 59. Like other developing countries, grain imports were used in China to feed major urban centers and did not reflect a declining trend in grain production. In the early 1960s, during the dislocations noted above, an annual flow of roughly 5 million tons of imported wheat was used to make up for the inability to move official procurement supplies into the EXTNAME: c3 (R)P: (china) 10 -38- metropolitan centers and provinces of Beijing, Tianjin and Shanghai. The introduction of imported wheat into the food distribution and processing pipeline servicing the major coastal cities established a pattern which continued throughout the 1960s and 1970s. Even after production began to recover from the exceptionally low levels of 1960-62, wheat imports were maintained. There were at least two reasons for the continued role of wheat imports. First, the import trade had been organized on a government-to-government basis with long-term commitments (a pattern which had earlier been established for China's rice exports). These agreements were probably seen as a form of "insurance" which guaranteed urban supplies in the event of serious problems (as in 1959-62). Second, nothing was done to increase the level of inter-provincial trade which continued to decline. The wheat import program, organized on a long-term basis probably contributed to this lack of action (or vice versa). The Chinese situation is analogous to that of the India government in the 1960s which used food aid from the US to feed the major urban areas of Calcutta and Bombay in the 1960s and made little effort to improve internal food distribution capacity (with serious transport bottlenecks and economy-wide disruptions resulting when food production increases were used to displace imports in the 1970s). 60. China has also acted as both a buyer and seller of grain. In a sense, China was taking advantage of its ability to arbitrage the price differential between rice and wheat. Chinese government officials have themselves at various times emphasized the favorable ratio between rice and wheat prices. In tba short-run, this ratio appears to be the major determinant of rice export levels above those required for long-term government to government sales agreements (which total about 500,000 tons EXTNAME: c3 (R)P: (china) 11 -39- annually in the early 1980s). This explanation is also borne out by the apparent tendency of the Chinese to stock rice rather than export it when the rice-wheat premium is low (as was the case in 1982). Distribution capacity is also critical to the level of rice exports. Available information indicates that the rice exported is procured nearby the main transport/river corridor leading to Canton--which is the embarkation port of all sales--and is handled through a specialized and largely autonomous distribution network (essential given the specialized nature of quality control and grades in the highly fragmented international rice market). 61. The basic pattern for grain trade established in the 1960s has remained relatively fixed. Grain imports remained linked to the food distribution pipeline servicing the four largest cities where they provided about 40% of the total food consumption in the early 1980s. However, as Table 111.3 shows the size if not structure of the.grain trade changed in the late 1970s in line with other, political and economic policy changes. First, urban incomes were raised substantially and grew between 1978 and 1981 at an annual average real rate of almost 5% (a 30% increase in only five years). This sparked increased demand for high value food; average national red meat consumption rose from about 8kg annually to over 13kg (implying an additional 5 million tons of pork production alone). Second, a major effort was being made to get agriculture noving. Toward this end procurement prices were raised on average more than 40% between 1977 and 1981. EXTNAME: c3 (R)P: (china) 12 -40- Table III.3t CHINA: GRAIN IMPORTS PRODUCTION COST GRAIN TONNAGES (m tons) FOREIGN EXCHANGE (m US$) Grain Coarse Grain Imports Wheat Grain Rice Pro- Grain All & Imports Imports Exports duction Imports Imports Exports 1975-76 (average) 2.7 0.0 1.4 205 679 7,510 9% 1977 6.8 0.0 1.4 283 949 9,980 9% 1978 8.0 1.3 1.4 305 1,485 13,660 11% 1979 -8.9 2.0 1.1 332 2,118 18,100 12% 1980 13.8 0.8 0.6 318 2,736 21,620 13% 1981 13.2 1.4 0.5 325 2,873 21,920 13% 1982 13.0 2.6 0.7 353 2,500- 21,000- 11-13% 1983 12.0 1.5 0.8 N.A 2,700 23,000 Source: USDA 62. These changes sparked a remarkable increase in agricultural production; they also indicate the magnitude of losses incurred under the previous trade and price regime. The increase in cotton production was among the most impressive changes. Along with food, textiles are the most important consumer goods in terms of per capita expenditure. With higher incomes, it was obvious that textile consumption would also grow (by over 30% in less than three years between 1978 and 1981). In the short-run demand outstripped domestic cotton production and for a few years China was the world's most important cotton importer; roughly $1.5 billion was spent on cotton imports in 1981. But by 1983 the cotton import bill had falled to about $300 million because production had risen by about 33% between 1980 and 1982. Most of this increase resulted from higher acreage planted to cotton in the Northern and Northwestern provinces which had, in the period before the constriction of inter-provincial grain trade, been important cotton exporters. EXTNAME: c3 (R)P: (china) 13 -41- 63. Increased inter-provincial grain trade was absolutely essential to the rapid increases in agricultural production of the late 1970s and early 1980s. For one thing, farmers appear to have been unwilling to shift into production of cash crops until they are confident that food shipments would be sufficient to meet their food consumption requirements. It appears to have taken some time for the -government to make its announced guarantees of adequate cereal deliveries for cash crop producing areas credible; this probably accounts for the lag between higher prices and increased cropping production. And satisfying this cereal distribution requirement was by no means an easy task. While small in terms of total Chinese production, the incremental requirements had to be very large relative to inter-provincial flows. 64. This shift in internal grain distribution, along with higher consumption in the cities, was probably the key to the decision to step-up grain imports in 1978-81. Higher imports allowed a diversion of internal surpluses to meeting incremental rural consumption requirements which, judging from indirect evidence, must have increased by 2-6 million tons of cereal-perhaps more than the total inter-provincial distribution of grain in 1977. Some unreliable data about total internal freight movements supports this hypothesis of a dramatic increase in internal grain shipments. Given the inadequacies of China's internal transport system, these incremental grain movements probably had repercussions on other sectors which, for example, depend on coal shipments. 65. Although little is known about this, the experience of India--which had a very much more developed railway system--in the late 1970s is instructive. As noted above, India was able to meet urban grain EXTNAME: c3 (R)P: (china) 14 -42- consumption requirements through increased production by the late 1970s. But the agricultural surpluises were located in districts roughly 1400 km away from consuming centers and as a result average hauls of grain roughly doubled in size. Even more serious, inadequate management capacity in the railroads and food distribution agency resulted in problems releasing railway wagons needed for the shipment of non-grain commodities, particularly coal. -The resulting shortage of coal let to an industrial slow-down and, in some areas, problems in generating power for electrified railway lines. Only by making an extremely large commitment in terms of investments and managerial improvements was this situation gradually corrected over a period of two years. 66. There have been other structural shifts in China's food distribution system which facilitated the increase in commercialized flows. Farmers could legally sell a portion of their own grain production for the first time in 1979. In this first year they marketed almost 5 million tons of grain compared to the total of 12-15 million tons which the government annually makes available in rural areas (implying a very large increase in total commercial transactions in rural areas). Although data has not been available about more recent years, observers indicate that the size of private food marketing has increased substantially. An indication of this is the larger importance of farmer markets servicing urban areas and recent re-organizations of urban marketing activities. 67. The increased reliance on imported grains meant that by 1981 imports were probably providing over half of total urban wheat consumption in China and perhaps half of the total grain entering the governments distribution channels, and as Table 111.3 shows the cost of the imports EXTNAME: c3 (R)P: (china) 15 -43- were not relatively great, The sharp rise in grain imports was part of a more general opening of the Chinese economy to international traa opportunities, including those for incremental exports. As a result, the rise in the proportion of total foreign exchange going for grain imports was less dramatic than it might have been (and far below the level which the Soviet Union has found acceptable). Further, there have been some major improvements in terms of total agricultural trade because of the sharp decline in cotton imports. As a result of that, and increased export of agricultural commodities, the Chinese agriculture trade account became positive in 1982 and 1983 (as it had been throughout the earlier two decades excepting only two years). Clearly, the foreign exchange costs of import dependence were small compared against the advantages of increased domestic agricultural specialization which, in turn, had led to a larger agricultural trade surplus. 68. A final important consideration in the decisions which affected food trade patterns was the improvement in political relations between China and the United States. The US share of China's total agriculture imports was virtually nil before 1978. After that it grew rapidly with the limited capacity of the existing inter-provincial network and the growing demands being placed upon it. This was clearly a major contribution given signing in early 1980 of a four year agreement which committed the Chinese to minimum grain purchases in the US of roughly five million tons of wheat and one million tons of corn. In addition, exports from the US of industrial soybeans and products began. An explicitly political connection has characterized all of China's foreign trade arrangements since the 1950s and it appears that food trade was no different (as will be discussed more fully in the next section). EXTNAME: c4 (R)P: (china) 01 -44- IV. CHINA'S CURRENT FOOD TRADE, DEMAND AND DISTRIBUTION POSITION 69. Chinese authorities are presently beginning to prepare a five year plan which will have a basic role in guiding future food distribution trade policies and related investment programs. The next section will focus on the consumption and production targets likely to be considered and their implications.- But before turning to the future, this section will outline a number of the key factors which are likely to be considered in the context or the current planning exercise as well as some of the bottlenecks which are likely to remain important including the mechanics of purchasing and handling imported grain; food demand patterns; and foreign investment in food sectors, and domestic food distribution capacity. International Trading 70. The Chinese national food trading agency, CEROIL, is among the most astute grain buying operations--public or private--in the world. The size of China's import program brings various advantages including the willingness of commercial exporters, including the multinational grain companies as well as national grain export boards, to make almost unlimited information and training available. While government to government sales agreements cover all of China's grain imports (see Table IV.1 for their current status) the pricing of actual import transactions remains discretionary. And it is in this area that the Chinese have demonstrated unique capabilities to take advantage of changing market conditions to obtain the lowest possible price. In contrast to other government buying agencies, CEROIL is prepared to both buy and sell quantities which gives a needed flexibility (in contrast to other agencies, including the Soviet J EXTNAME: c4 (R)P: (china) 02 -45- Union's, which never trade their own forward purchases). Unlike other government grain trading monopoly, CEROIL also operates in the major grain futures exchanges on an ongoing, successful and generally indirect basis. Overall, CEROIL's purchasing capabilities compare favorably with those of the grain multinational companies themselves and has brought substantial savings in terms of overall foreign exchange (average annual price savings of from 5-15% as compared to less efficient importing agencies whose performance has been analyzed by the World Bank). Table IV. 1: CHINA - IMPORT COMMITMENTS FOR GRAIN UNDER EXISTING AGREEMENTS Supplying Date Duration Quantities and Country Announced Years From Specification Argentina 9/80 4 1/1/81 0.7-0.9 m tons of wheat; and 0.3-0.6 m tons of maize (corn) and soy,beans annually Australia 11/81 3 1/1/82 1.5-2.5 m tons of wheat a year Canada 5/82 3 1/8/82 3.5-4.2 m tons of wheat annually EEC a/ 9/80 3 1/8/80 0.5-0.7 m tons of wheat (France) annually Thailand 5/82 1 1/10/82 0.15 m tons of maize. (corn) United States 10/80 4 1/1/81 minimum 6 m tons, maximum 9 i tons of wheat and maize (corn) annually a/ This agreement expired at the end of July 1983. 71. But the advantages in terms of excellent price performance are more than offset by the terrible state of import handling infrastructure. EXTNAME: c4 (R)P: (china) 03 -46- While data provided by various sources does not provide a completely consistent picture-there are significant differences between transport data provided by the World Bank and that coming from commercial sources--Table IV.2 gives a rough idea of existing capacity at the ports. Without a major improvements, it is difficult to envision these largely antiquated facilities handling more than 16-18 million tons of grain imports a year. This assumes that improvements underway at Dalien, Zhanjiang and Qingdao--all centers for areas where non-grain agricultural output has been growing rapidly--are completed. The table indicates that most of the unloading is not by continuous flow equipment and that none of the ports can handle the largest bulk grain carriers (whose unit price per ton of grain shipped from North America is $4-6 below those for the smaller vessels which the Chinese ports can handle). Some idea of the problem is given by the estimates of demurrage paid--about $100 million in 1982 even though only 20% of total grain imports were being carried on non-Chinese bottoms (no demurrage is paid to ships owned by the Chinese shipping company COSCO). 72. And the most serious logistical constraints appear to be inland from the actual unloading or transshipment facilities, the greatest congestion problems being in evacuating grain that has been unloaded. For this reason, COSCO ships are used as floating grain storage facilities with almost I million tons of grain held this way at any given time (equivalent to total stocks held in government warehouses in the urban areas). And more important, the problems with inland congestion appear to have worsened in 1983 even though total grain imports were smaller than in 1982. It is not that the transport network is unable to handle the grain imports; EXTNAME: c4 (R)P: (china) 04 -47- rather, it can handle them only by not handling other essential commodities (including coal). Table IV.2: CHINA - INDICATIVE DATA ON MAJOR IMPORT EXPORT HANDLING FACILITIES Storage Capacity Maxiaun 1981 Effective Turnaround Waiting time Wara- Vessel Size Thr hut Transfer Rate at Berth at Anchorage Silos houses (dt) (mil.eic tons) (metric tons/day) (days) (days) (metric tons) Zhanjiang 30,000 .8 7,000 (Grabs) 4 7 - 20,000 Ruangpu 25,000 .8 " 8,000 (Sockers) 3 7 28,000 10,000 (Guangzhou) Shanghai 30,000 1.1 5,000 (Suckers) 6 15-30 40,000 30,000 .8 4,000 (Ship's gear) 5 15-30 - - Luhuashan Anchorage 80,000 .6 4,000 (Grabs) 10 3 - - Quingdao 30,000 1.0 4,500 (Grabs) 7 7 - 5,000 20,000 .5 3,000 (Grabs) 7 7 - 9,000 Tianjin (Xingang) 25,000 2.5 8,000 (Grabs) 3 15-30 - - Quinhuangdao 34,000 1.7 6,000 (Grabs) 7 15 - - Dalian 35,000 3.0 4,500 (Grabs) 7 15-30 - 20,000 30,000 .2 10,000 (Conveyors) 2 0 32,000 - Source* The China Business Review - January-February 1983. 73. In sum, while China's trading organization has taken advantage of its ability to perform well in terms of import prices for grains, physical handling and logistics are serious problems. Even more important, these constraints limit any future expansion in total import levels which could be handled efficiently (obviously if the cost of handling is no object, port throughput could be raised substantially above existing "maximum" capacities.) EXTNAME: c4 (R)P: (china) 05 -48- Food Consumption Patterns 74. The pattern and composition of food consumption in China is, like so many other aspects of its food situation, unique among developing countries with comparable levels of average per capita income. According to work done by the World Bank on the basis of official statistics, per capita consumption of grain is on average close to the maximum which can be consumed. Further,-per capita grain consumption is very much higher than that of other countries with comparable income levels. 75. It is extremely important to understand, and often not sufficiently emphasized in the work of agencies including the World Bank, that official data about food consumption in China is subject to large margins of error. And this sort of caveat is not any different from that applying in most developing countries (where despite data weaknesses very sophisticated statistical techniques are applied to indicate trends that are very much smaller than the margins of error inherent in the data being used). As noted in the previous chapter, there is a good deal of evidence that rural malnutrition and chronic poverty remain serious problems. There is equally impressive if essentially anecdotal evidence to support those who contend that famines, now sparked by natural disasters rather than political disturbances, remain major sources of mortality. Further, there is good evidence that wastage in the post-harvest system is very much larger than the coefficients used to transform production estimates, themselves subject to question, into per capita consumption estimates. For example, at a national level per capita consumption of finegrains could be over-stated by as much s 10% (if admittedly crude post-harvest estimates were to prove reasonably good "order of magnitude" guesses). However, even EXTNAME: c4 (R)P: (china) 06 -49- given all these caveats the key point remains that at least in urban areas and in many grain producing rural areas as well (which is where most of China's population lives), even the most conservative estimated levels of per capita grain consumption are vell above the norm for other countries with comparable levels of income per capita (see Piazza, 1984). 76. Whatever the reason for this relatively high level of consumption, it has-implications for future government policy changes. For one thing, it means that there exists a not insignificant "cushion" in terms of consumers being able to make marginal adjustments that might reduce direct human grain consumption somewhat; given the massive level of fiscal subsidies going to support current consumption linked to the government distribution and ration system this might prove to be a particularly important point. However, it also implies a substantial latent demand for foods other than grain. This includes vegetable oils (where per capita consumption appears to be extremely low relative even to other low income countries), fresh fruits or vegetables and meat. Therefore, the current high level of grain consumption helps focus the future policy agenda on commodities other than grain. 77. This is not to say that there is necessarily a currently high level of unmet demand for meat (or other commodities). For example, in 1979-80 when pork procurement and retail prices were both raised by about 30%, the supply response over-shot demand. More important than the demand elasticity for pork, however, is the fact that Chinese policy is going to have increasingly to deal with price relationships- which determine the allocation of agricultural resources that can be used for alternative types of food;' incentives will have to be seen in terms of their multiple impact EXTNAME: c4 (R)P: (china) 07 -50- on grain production, grain use as feed or alternative cropping of high value crops such as vegetables. 78. In terms of the grain-livestock ratio, which could prove the most important variable if per capita consumption of meat is to be increased, future developments are going to be constrained by the current production technologies for meat. According to data available, the total amount of meat consumption rose by almost 50% between 1978 and 1981. Even allowing for significant margins of error, this represents a staggering increase in absolute ivestock numbers, particularly given the relatively low reproduction rates for traditional Chinese swine production. The only possible explanation given the difficulty in reconciling the numbers is that large under-utilized capacity must have existed. All of which implies that much of the increased supply of meat must be coming from small-scale producers living either in or near urban areas. However, traditional breeds of swine (the dominant meat product in China) have been developed as scavengers and are extremely inefficient convertors of incremental feed to meet. This would suggest a growing productivity problem if one assunes, as I would, that there exists little scope for expanding scavenger based output. In other words, the traditional production technologies may have reached their absolute limit ( this observation was confirmed by various commercial sources involved in the feed and swine breeding business in China). 79. Another possibility arising krom current consumption patterns is the introduction of "convenience foods" into traditional rice eating areas. The idea is that the amount of time taken in food preparation could be more productively used. As a result, pilot programs are underway to EXTNAME: c4 (R)P: (china) 08 -51- test the acceptability of wheat products in South China where rice has formerly been the staple. Also, prepared foods such as instant rice and noodles have been test marketed in urban area in both North and South China. The results from thee experiments-which have been funded by overseas Chinese investors and multinational agri-business firms--have shown a ready willingness to among Chinese consumers to diversify food consumption. In fact, it appears that most of the instant rice sold in South China was eventually consumed on-farm (having entered a quasi-legal but nonetheless robust informal marketing network. 80. Nor are infrastructure problems limited to grain import handling. Much of China's agro-industrial capacity used for processing imports is out of date and unsuited for current requirements. For example, almost all of the 2000 flour mills presently operating in China are based on turn of the century technologies and fail to achieve the economies of scale which are now possible given that the flow of grain is very much more concentrated (from imports rather than domestic production). Vegetable oil production suffers from similar constraints. The inadequacies of current facilities are recognized as a major impediment to the official goals of improved diets and agro-industrial investments are an accepted priority in almost all urban areas. Foreign Investment 81. The need for new production technologies and agro-industrial capacity point to an expanding role for foreign investors in China and current ventures in this area have fallen into three different categories. First are technology transfer deals. An example is the 1979 sale of John Deere tractors and combines for use in North China. But the twist in such EXTNAME: c4 (R)P: (china) 09 -52- deals has been the Chinese government's unwillingness to accept commercial interest rates while requiring long-term financing. As a result, most deals have been financed through counter-trade where the technology import is priced in terms of export commodities which are delivered to the outfit providing the finance (e.g., John Deere was paid in soybean exports for its tractors). Second there are projects in the agro-industrial area undertaken by overseas Chinese investors. These deals are predicated on the ability of local governments to commit up to $5 million in foreign exchange without central government approval (and extended family ties which have survived the viccisitudes of recent political history). Third are direct investments with some sort of quasi equity component undertaken by multinational agri-business firms. 82. Despite a relatively large number of deals being discussed, relatively few investments in the agro-industrial area have actually been undertaken. Part of the problem has been uncertain administrative procedures (which may now be in the process of modification if not improvement). But it is the view of most successful "China traders" that scope for investments is going to remain constrained. The most attractive opportunities are likely to be in small projects where central authority approval is not necessary and in projects which generate their pay-back in easily marketed export products. 83. Further, commercial sources do not see any weakening in official Chinese attitudes toward accepting commercial interest rate financing which reLnforces the attractiveness of potential counter-trade investment packages. However, there remains substantial interest among the largest agri-business multinationals, particularly the Japanese trading houses, to EXTNAME: c4 (R)P: (china) 10 -53- consider investment projects in agricultural packaging, processing, storage and distribution provided such investments were undertaken within the context of guaranteed ground-rules (for government regulations). Further, even large-scale direct investments including technical assistance, equity and technology transfer would be attractive if they were organized around sympathetic and relatively efficient provincial governments (as opposed to national authorities). Rural Marketing and Storage 84. Central to all the recent changes in China's food economy has been the liberalization of rural marketing. As emphasized above, the increase in inter-provincial grain transfers (which increased imports helped facilitate) was the essential underpinning of increased output of non-food crops. Similarly, private sales of relatively high value commodities such as fresh vegetables, meat and even high grade rice have probably returned to the aggregate levels of the late 1950s (before grain self sufficiency became the watchword). And the consequences of this recent and largely unquantified jump in commercial marketing do not appear to include any increase in price variability (either inter or intra seasonal). Perhaps even more impressive has been the ability of the informal commercial networks, which have been largely dormant for over twenty years, to re-emerge and successfully handle problems of contract enforcement, grading and credit (all of which must exist in any market even when unnoticed by outside observers). 85. But it is also clear that there are problems with the greater de-centralization and commercialization of the food distribution system. Specifically, political considerations are looming large in agricultural EXTNAME: c4 (R)P: (china) 11 -54- marketing. Unlike any other country, except the Soviet Union, China's urban food retail system is largely operated by centrally controlled government agencies. As a result, liberalized rural marketing arrangements must be running into bottlenecks that,result from a continuation of relatively more rigid food retail patterns in the major cities. It appears that local governments in some of the largest cities are in the forefront of experiments in urban marketing but that such efforts could prove controversial. 86. Along these lines, the willingness of the central government to further increase uncontrolled marketing of rural surpluses and inter-provincial trade is open to question. In 1982 the national State Council fixed the total level of inter-provincial trade through 1985 at a level allowing for no increase. While this decision was subsequently reversed, it indicates the sensitivity of government decision makers. At this time, emergency relief responsibilities were to be made a largely local affair with a call for larger local grain reserves (a politically attractive proposition which has in the past encouraged the high post harvest losses discussed above). This action could reflect binding distribution capacity constraints but political concerns were probably also a factor. 87. But more recent decisions by central government authorities indicate that, nothwithstanding remaining ideological and political concerns, relatively open marketing of agricultural products is being encouraged. According to regulations issued by the State Council concerning transporting and selling farm products (as of 25 February 1984): (a) the state allows any cooperative units or private individuals EXTNAME: c4 (R)P: (china) 12 -55- to transport and sell agricultural products; (b) there is no limit on transportation across administrative boundaries (including provinces); (c) an individual may transport and sell as much grain and oilseed crops as desired provided tax and purchase quotas to the state have been fulfilled; (d) local production brigades or village committees as well as the local industry and'commerce administrative agency must license any individual who engages in tranport or sale of farm products and should "promote the exchange of materials and goods between town and country" (both year-round and seasonal. licenses are to be available; (e) urban peddlers are permitted to purchase supplies directly in the country-side and buy in bulk from wholesale markets in cities (where farmers and others can deliver the prodcue directly; (f) licensed traders are allowed to borrow from banks to facilitate their business and their rights are to be protected by the state (which must also ensure sanitation and fair dealing). UEXTNAME: c5 (R)P: (china) 01 -56- V. PROSPECTIVE OPTIONS Global Prospects 88. An important consideration in decisions about future adjustments in China's food policy is the reliability and affordability of grain imports. This question is also related to the more general one of international trade overall and its possible benefits, or dangers, to China. As discussed above, perceptions about unfair treatment in one area of trade--textiles--were an important factor in a decision to reduce foodgrain imports (from the United States without increased imports from others). Further, China's large size makes it logical to be concerned that its decisions about trade could influence world prices. Therefore, it is important to describe the general global food supply, trade and price prospects in order to better understand the impact of alternative Chinese trade strategies. 89. At least for the next two decades, the world's supply of food is unlikely to be less adequate or secure than in the past. The annual increases in grain production required to meet projected population growth is 1.6 percent at a global level. This is considerably less than the overall growth of 2.6 percent a year achieved since the end of World War IT. Real aggregate purchasing power in the 1980s is projected by the Bank to increase by about 2 percent per capita in industrialized countries, though at a higher rate in middle income countries and a lower one in low income countries. If historical income and food consumption relationships continue to apply, total demand for grain should grow at no more than 2.6 percent during the 1980s--about the same rate as that of the last three rEXTNAME: c5 (R)P: (china) 02 -57- decades. At a global level, even if per capita income were to grow at 4 percent a year through 1990--which is highly unlikely--the increase in demand for foodgrains would not exceed 3.0 percent a year. The 1960s, a period of comparatively rapid income growth, saw foodgrain production grown by 3.5 percent a year. 90. Supplies The technical capacity to produce the supply required to meet the projected demand for food and feeds in the rest of this century is clearly available: -- The additional land resources that could be used for food production appear sufficient for some time to come. According to the FAO, some 200 million hectares of arable land remain to be exploited. In the US alone, a recent survey by USDA has indicated that some 125 million acres of currently unutilized land have a potential for grain production estimated at 200 million metric tons a year (provided proper-incentives are present). Even greater potential exists in other countries including Argentina, Australia, Brazil, and Canada. -- In land-scarce developing countries there is much room for improving productivity. Bangladesh, for example, with superior climate, soil and a potential for water control, currently achieves less than half the cropping intensity of comparable areas in East Asia. -- Increased concerns have been expressed recently about the lack of new technology in prospect, especially in relation to grain production in Northern America. While there may be no rEXTNAME: c5 (R)P: (china) 03 -58- spectacular innovations pending comparable with, say hybrid maize or the short-strawed wheat, there is a steady increase in the potential of a variety of food crops. The fastest productivity growth recently has been not in grains but in other subsectors, especially livestock and vegetable production, for which demand has been rapidly increasing. Continuous improvements can also be expected in the efficiency with which feeds are used. 91. Trade Since the potential for increased production varies by region, with no relation to population density, international trade in basic foodstuffs can be expected to grow. Trade in grains will probably expand even though handling "bottlenecks" may develop from time to time. However, because of the less favorable economic and monetary conditions facing countries with rapidly growing food imports, such as Mexico or Nigeria, overall trade is not likely to grow as rapidly as in the 1970s. In fact, the International Wheat Council has recently forecast a decline in net Soviet and East European grain imports. Further, it is difficult to imagine the internal distribution system of the Soviet Union successfully handling substantially more imports; future growth will inevitably be based on greater efficiency (thus obviating the need for imports). 92. Price Prospects Barring a political catastrophe that might result in a disruption of trade, market fundamentals suggest there will be no substantial long-lasting upward pressure on food prices over the next two decades. While forecasting future commodity price movements is extremely difficult and subject to substantial margins of error, the most recent World Bank assessment (Table 5.1) concludes that cereal prices, rEXTNAME: c5 (R)P: (china) 04 -59- measured in real terms, will continue to fall in the 1980s, in keeping with long-term historical trends. Table 5.1: PRICES OF MAJOR CEREALS, 1975-90 (1981 US dollars per metric ton) 1975 1990 1990 Range Rice 564 425 387 - 463 Wheat 282 190 171 - 207 Maize 186 142 128 - 155 Source: World Bank (As of 12/83). 93. And these price forecasts are based on extremely bullish forecasts of Soviet and Chinese import demand (projected to exceed 150 million tons in 2,000, with Chinese imports alone of 30 million tons). Judging from the last three years when grain trade declined on a global basis with a pronounced slow-down in import demand by centrally planned economies (especially the Soviet Union but also China), the demand parameters used for these estimates are probably significant over-estimates. Commercial sources are now thinking in terms of basically no growth in the volume of grain traded through the late 1980s with increases thereafter very much lower than those of the 1970s. These forecasts also indicate that the prices of the primary commodities other than fuel exported by developing countries will continue rising more rapidly than those of their nonfuel commodity imports. This should help to alleviate any adverse effects from the slow recovery in real commodity prices for those food importing developing countries that depend on commodity imports. rEXTNAME: c5 (R)P: (china) 05 -60- 94. Food Consumption The global price trends will not be reflected in all developing countries; nor do average increases in per capita income necessarily indicate improvements in the incomes of lower income groups. The prospects for food consumption by these groups depend upon what happens to their purchasing power. In the low income countries, and low income areas of middle income ones, food consumption prospects are not easily summarized. When households who are undernourished and vulnerable acquire more purchasing power, aggregate demand for foods rises. Increases in demand are likely to come largely from farming areas where markets are not well developed add supply increases have been constrained by the lack of demand. The production increases needed to meet this increased demand over a 10 year period would be manageable, at 15-20 percent, and in line with the actual increases achieved in comparably endowed, but less demand-constrained, districts. All of which is to say that in rural areas, the problem of food consumption is inexorably linked to that of food production and that nutritional improvements will be based on higher local output. 95. It is also important to recognize that meeting the needs of those currently suffering from life-threatening malnutrition would not impose any strain on global food supplies. Satisfying currently unmet nutritional requirements is estimated to require only about 5 million extra tons of foodgrains a year on a global basis. This is less than current levels of food aid and about 0.3 percent of global supply. It represents no more than a 5 percent increase in the domestic consumption of any one country. This is not to suggest that the requirement need be met by an internal redistribution of consumption, but rather to emphasize that the problem of inadequate nutrition is not one of inadequate supply potential. rEXTNAME: c5 (R)P: (china) 06 -61- 96. Man-made shocks. Far more serious than potential weather-induced export availability and price problems is the possibility that government policies could, in effect, create a crisis. For example, the 1972-74 disruption of the world grain markets was sparked largely by a series of ill-considered shifts in national agricultural and and economic management policies. The US introduced subsidies that reduced carry-over stocks to artificially low levels (in order to meet a large Soviet order for grain imports) as well as introduced other measures which helped de-stabilize grain markets (where prices were already rising in line with a general trend of rising commodity prices and shifting foreign exchange values). And equally disruptive was the willingness of developed country importers, including the Soviet Union, to insulate domestic feed prices from the real cost of imports. This kept consumption artificially high and made corresponding export supply adjustments more difficult and costly. 97. The likelihood that the 1972-74 situation could re-occur is very much lower than it would be if there had not been a number of structural changes in global grain supply and demand balances. First, the impact of EEC subsidies which kept intra EEC grain consumption adjustment from being made fully in the early 1970s is less important given that the EEC couqtries have now become substantial net importers of grain (as opposed to the largest net importers as they were ten years ago). Second, the Soviet Union's current level of imports are not likely to vary as much as they have in the past. This is partly because of logistical constraints and partly because the Soviet Union is now an on-going buyer of imported grain (and therefore is not able to end purchases when prices shoot up as they did in 1973). And third, there is a danger that developed country 4 rEXTNAME: c5 (R)P: (china) 07 -62- governments could respond to current grain surpluses by reducing subsidies; the result might include an induced "shortage." However, there is no reason to expect that such a situation would prove more than an extremely short-term problem; the land which was taken out of production could be brought back if needed (although it would obviously take a year to do so). 98. The main danger is therefore likely to be associated with unanticipated changes in government farm policies in the EEC, US, or USSR along with exceptionally adverse weather conditions in the US and, unlikely but possible, concurrently poor harvests elsewhere. While the immediate price effects of such shifts are impossible to forecast, there is no reason to expect that they would be greater than those experienced in 1973-74, which were less serious than widely believed. They can also be expected to prove equally shortlived; the feed adjustment mechanism is robust, and there are enough sources of alternative supply to ensure a de facto ceiling on possible price rises. Premiums of 10 percent above market price might be paid in a few cases to obtain supplies immediately, but there seems no reason to expect a dangerous breakdown of the system or dramatic changes in world prices. China and World Grain Markets 99. Could China's future imports raise the world price for grains? Under any plausible scenario it seems extremely unlikely. The range of possible Chinese import levels through 2000 vary, but even assuming that all incremental urban demand for wheat and feedgrains would be met by imports, total 2000 imports would not exceed 45 million tons (these demand parameters will be discussed in more detail below). The price forecasts TEXTNAME: c5 (R)P: (china) 08 -63- presented earlier are premised on wheat and coarse grain trade reaching 423 million tons by 1995 with Chinese imports reaching roughly 40 million tons by 2000. So, the incremental demand from the maximum possible import level would be about 5 million tons or only about 1% of forecasted trade flows--clearly not enough to substantially affect trend price levels (particularly if the Soviet Union's import needs decline as now seems likely. 100. Chinese imports are also not likely to be disruptive in any single year (just as they are not likely to affect the overall average trend). First, all current imports are arranged through long term goverment to government sales agreements which were designed to be stabiilzing in the even of tight markets. Second, even if the Chinese wanted to step up imports in a single year they lack the port and internal distribution or storage infrastructure to do so on a substantial enough basis to de-stabilize prices. Nor it is likely that sufficient investments would be made to allow them to do so (in the foreseeable future). Third, CEROIL demonstrated-in 1983 that it had mastered the use of pricing strategies that afford a large degree of forward price protection. Fourth, China programs its import flows at least a year in advance on the basis of government distribution requirements that are reasonably steady because they are relatively small. An immense increase in internal distribution, such as that of 1978-79, is still small relative to total'world trade and likely to remain that way. 101. Probably price and market problems for China's agricultural exports will become a greater concern in the future than the impact of China's grain import program on world prices. For one thing, the market rEXTNAMF: c5 (R)P: (china) 09 -64- for most of the commodities exported are relatively small, particularly when compared to total Chinese production. In any of a variety of specialized products such as rice the Chinese could already adversely affect prices by merely liquidating current stocks. The export of high grade soybeans for human consumption is another market where demand is not likely to grow; premiums for such soybeans have already begun to show the signs of relative over-supply (in 1983 the premium was less than half that of 1982 despite an absolute rise in the price of soybeans). Future Domestic Food Demand and Distribution 102. Having discussed Chinese agriculture trade from the perspective of the world market, it is now possible to present the domestic side. As noted in the introduction, the aim is not to predict the future but rather to lay out some of the policy and investment alternatives which will, one way or another, be dealt with. The next paragraphs discuss the foreign exchange, incomes, subsidies, livestock industry and internal distribution dimensions to future adjustments in agriculture production and trade. 103. The World Bank has recently forecasted that from 1985 onwards Chinese export earnings would grow by not less than an average annual rate of 5%. Again taking the maximum possible import level estimated above, it is possible that the cost of grain imports could grow more rapidly than overall foreign exchange. In the case of the maximum 2000 import level, the proportion of total export earnings going for grain imports would rise from current levels of 11-13% to about 16-18%. Such an increase in foreign exchange resources might not be considered acceptable given the opportunity cost (in terms of technology purchases foregone, etc.) On the other hand, if imports were playing an essential political or economic role such an increase would not present unmanageable difficulties. TEXTNAME: c5 (R)P: (china) 10 -65- 104. The question of imports is therefore likely to be treated in the context of more general policies, not as a separate decision. The first of these relates to incomes. The official targets are for steady increases in real income and concomitant growth in per capita consumption of products like meat. Public statements talk about a doubling in per capita meat consumption by 2000. However, judging from past Chinese experience--and. that of other countries as well--there is a difference between planning targets that are essentially hortatory and those which are actually intended to be achieved. The question therefore is how seriously increased food consumption targets should be taken. 105. Prospective changes in food consumption including increased consumption of meat products and other high value commodities will reflect concurrent changes in purchasing power. Along with other centrally planned economies, such as the Soviet experience discussed earlier, an important element in policies which encourage higher purchasing power will be perceptions about the links between worker incentives and productivity. In this sense, a more diversified diet with more high value items in it could be seen as a means to the end of higher productivity. However, this Soviet-style approach, which is premised on the notion that the marginal return from higher worker incentives is as high as that from using resources for productive investment, has relatively little relevance in rural grain producing areas where the bulk of China's population live. In cash crop rural areas and urban centers, the situation is more analogous but if current World Baank estimates of real income and food consumption are taken as accurate, then per capita consumption of high value commodities such as meat are already high relative to income. In other words, the rETTNAME: c5 (R)P: (china) 11 -66- demand elasticity for food with respect to increased income may--at least for the immediate future--be very much lower than in other countries. 106. Attempting to understand future demand elasticities also necessitates that future levels of retail food price subsidies be integrated into the overall supply-demand balance. As noted earlier, urban food consumption among groups which benefit from public rationing is very much higher than it would be without subsidies. This may be an important reason for the seemingly incongruous income/food consumption ratios. As a result, reduced subsidy levels might off-set increased incomes. Further, while it might be difficult to reduce an already existing subsidy which is an accepted "entitlement" there is scope--particularly in a planned economy such as China's--for rather dramatic changes. And gradual adjustments are even easier to imagine (particularly if real wages are allowed to rise). By way of illustration, eliminating current levels of subsidy by 2000 would require a roughly 2% annual real increase in income (1985-2000) to keep consumption constant. As available, indicative forecasts of future income growth are very much higher that, Chinese amthorities have the option of simltaneausly adjusting sAsidies dbw=ward, thus freeing up fiscal resources, without sacrificing higher consumption. 107. But the specific commodity composition of "higher food consump- tion" is far 'from clear. While relative prices and technologies will play important roles, there is also.the question of consumr preferences. While dietary patterns appear to have demonstrated a relatively transcultural tendency towards uniformity, the Chinese consumer could prove somewhat less adaptable than, say, Japanese consumers. More importantly, there are going to remain very significant variations between different regions in China. rEXTNAME: c5 (R)P: (china) 12 -67- The distinction between the rice eating South and wheat eating North has already been alluded to as one norm which might be changed over time, with per capita wheat consumption growing in the South. Cooking technologies as well as habit also plays a part. For example, the need for vegetable oil varies depending on the specific type of Chinese cuisine. The point being that national generalizations about changing consumption patterns are not particularly useful. 108. The potentially most significant variation is likely to prove the relatively high level of urban incomes and food consumption (which was discussed above). According to data provided by the Beijing Municipal Statistics Office, per capita meat consumption in the capital is roughly double the national average. And unlike other food consumption data, this figure appears to be derived from actual consumption surveys rather than production estimates (which may include overly optimistic assumptions about waste and other losses). Assuming meat consumption levels of between 20-30 kg per capita implies that current meat consumption levels achieved in countries where per capita income are very much higher (e.g. Korea and Taiwan). Elsewhere in China consumption levels are therefore likely to be very much lower as is overall income and per capita food consumption. The point is two-fold. First, generalizing about China's food consumption patterns is a bit like trying to generalize about all of South America, Sub-Saharan Africa and South Asia combined--and would it be useful to try and put Argentina and Bangladesh into the same category when it comes to future food prospects? Second, future growth of consumption in high-income areas of China will be tempered by the relatively high level of existing consumption. rEXTNAME: c5 (R)P: (china) 13 -68- 109. Nonetheless, the aggregate national data does indicate that over- all Chinese dietary patterns are going to have to become less grain centered--diversification is inevitable given the near saturation level of grain consumption. While it has become fashionable to focus on animal production as the most significant alternative consumption item to grain, I would suggest a somewhat less clear-cut picture in respect of incremental demand. First, the cross elasticity of demand for alternative consumer goods including housing, clothing and various foods has to be considered. There may well be more pent-up demand for commodities other than food (given past distortions and subsidies). Second, demand for high value vegetables grown on a peri-urban basis might well off-set incremental demand for meat products, particularly since the World Bank food balance sheets show no increase in per capita consumption of vegetables over the last five years (when per capita meat consumption rose by over 55%). This pattern is inconsistent with that of other developing countries where income gains initially had a greater impact on vegetables than on meats. For example in Singapore and Hong Kong during a period of rapid income growth from the mid 1960s through mid 1970s per capita consumption of vegetables rose by about 50% (about the same rate as for meat). A similar argument applies to consumption of vegetables oils which, according to Chinese statistics, has increased dramatically in the last five years but remains comparable to levels of low income countries where there is almost no meat consumption whatsoever (however, this distinction might be over- drawn given the possibility that Chinese cooking requires less oil than, for example, South Asian and that meats may be substituting for vegetable oils). TEXTNAME: c5 (R)P: (china) 14 -69- 110. The prospect of greatly increased per capita meat consumption needs to be related to internal distribution capacity and feed tech- nologies. As emphasized earlier, present production of meat is based principally on scavenger feeding by swine varieties that are extremely good convertors of "waste" and, conversely, extremely bad convertors of feeds. Substantial increments of swine, or poultry, production would imply a shift in technologies for at least the additional production required. This raises a number of questions. First, how will the new meat production systems be integrated into the existing organization of farming? If they are to be tied to brigade units, on the basis that they are too capital intensive and large-scale to be left in the hands of individual farmers, management and productivity problems could emerge. This has been a common problem in centrally planned economies where the Bank has been involved in livestock development projects. For example, in Romania expected benefits from improved technologies including confined Zeeding and scientific rations which had raised yields substantially in Western countries failed to materialize. 111. And where is the feed ration going to be coming from for a Western style livestock industry? The bulk of the Chinese population lives relatively far away from the current centers of course grain production. Nor are necessary ingredients for high protein compound feed meals readily accessible in these areas of high population density. The latter is an absolutely essential component of the feed ration needed to sustain an efficient livestock industry. All of which indicates that internal distri- bution pipelines will have to play a critical role in the future (just as their absence played so critical a role in the past). rEXTNAME: c5 (R)P: (china) 15 -70- Strategic Food Policy Options 112. While consumption patterns, incomes policy, production tech- nologies and international trading will all be factors in China's prospective food system, the most important policy variable is likely to be the expansion on internal grain distribution. As discussed throughout the earlier sections of this paper, China's experience is in many ways quite different from that of other countries. Current consumption patterns are unique when compared to other countries of similar income levels. The most striking difference has been the commitment by central authorities to local self sufficiency in grains and commercialized systems of distribution--between--between cities and the countryside, within a province or between provinces--were actively discouraged up until the late 1970s. Accor'ding to official'sources, private sales of grain were about 5 million tons in 1980 and 1981; small in relation to total consumption but a major change from the past when such sales were prohibited. Further, these private sales are large relative to total rural re-sale of grain by public authorities (which totalled only about 12-14 million tons per annum in the early 1980s). And most important of all, the recent decision by the State Council discussed above seems to indicate a willingness to allow greater commercialized marketing and, even more significant, the re-emergence of private traders who are to enjoy the state's protection. rEXTNAME: c5 (R)P: (china) 16 -71- 113. Further expansion of commercialized distribution will require not only official acceptance but will also necessitate investments and institu- tional changes--a point which appears to have been accepted in the recent State Council's declaration. A periodic rural market yard, where farmers have sold their goods for hundreds of years, does not require major investments in storage or processing. Urban centers are somewhat different and do, in fact, entail some investment for stalls and other facilities (organized by municipal authorities). However, if private trade is to grow further, economies of scale will have to begin to be achieved. For example, at present the scale of private sales is limited to the physical amount that an individual can carry (or haul through carts). In this regard, a recent announcement that individuals can own small trucks is a potentially useful move towards relieving the current bottleneck on private farmer distribution of above-quota surpluses--assuming that trucks are actually made available. 114. There are a great many other implications from increased trade in private surpluses. Such distribution channels could do much to meet potential incremental urban demand for animal products or vegetables through peri-urban farm-market links. They could also play a major role in satisfying grain consumption requirements in areas with an advantage in producing cash crops such as sugar or cotton. However, further development of such distribution channels will entail institutional and social changes including the re-emergence of a trader network where decision-making would, albeit on a small scale, by-pass existing rural institutional arrangemcats (which are admittedly already undergoing major reforms). Largely anectodal evidence is available that traditional marketing networks are re-emerging including the "guanxi" system of communal associations and associated rural rEXTNAME: c5 (R)P: (china) 17 -72- exchange. In the past, such groupings provided information needed by farmers and traders about when to sell as well as a mechanism for enforcing contracts and collecting debt (in effect functioning as a quasi cooperative at the village level). 115. Another recent development has been relatively small scale but still significant inter-provincial trade on a barter basis. In such arrangements, one production unit undertakes a long-term supply agreement with corresponding units in other provinces. For example, Chachiang Prefecture, Kwangtung Province, agreed to barter 500 tons of peanuts with grain surplus communes in four counties. Other similar arrangements are recorded for other commodities (and many commercial sources feel this is a potentially important dimension to distribution). At the same time, barter is not going to make up for inadequate transport capacity or current rules which make inter-provincial shipment extremely difficult (e.g. administra- tive impossibility of using rail shipments and ban on re-fueling trucks carrying goods from another province). 116. The basic choice now facing decision makers is how actively should support be given to building up internal food distribution capacity and, concurrently, allowing for specialization in production as opposed to grain self-sufficiency. Much of the recent spurt in agricultural output is probably related to the fact that unused distribution capacity existed for small-scale private sales and inter-provincial trading (as well as unused production potential). More substantial growth, it is clear, would over-strain existing distribution infrastructure and institutional arrangements (including state trading organizations and rural management groups such as the brigades). Therefore, resources would have to be CEXTNAME: c5 (R)P: (china) 18 -73- concentrated on overcoming physical bottlenecks, along with some ideological flexibility, for increased internal food distribution. 117. What are the potential costs of such a decision? In terms of investment, the costs are far from marginal. As noted in an earlier section, experience in other countries indicates that storage and handling investments required to handle an incremental ton of long-distance grain distribution is of the range of $150-200 (current dollars). A World Bank forecast of feed requirements in South China indicates that between 1985 and 2000 roughly an additional 60 million tons could be required, assuming that official Chinese consumption targets are met). This implies an investment in grain storage and handling facilities of roughly $10 billion. Including investment in inter-provincial transport such barges or railway lines and local transport, total investment costs could reach $15-20 billion (inter-provincial transport improvement costs derived from a rough estimate of Indian Railroad experience in meeting the Food Corporation of India's needs for a very much smaller tonnage of being hauled comparable lengths). In fact, commercial sources indicate that almost all dimensions of the inter-provincial transport system are presently over-taxed; even for high priority machinery imports, whose importation was approved at the very highest levels of government being subject to 6-12 month internal delays. 118. Agro-industries is a related area where investment is needed if increased use is to be made of Chinese agricultural production potential. The compound feed industry including processing needed to use oil seeds such as soybeans, cotton seeds or rapseeds requires capital intensive processing. Large scale facilities with the most up to date capabilities TEXTNAME: c5 (R)P: (china) 19 -74- require transport capabilities that are often lacking in China; the lack of adequate downstre,am distribution capacity appears to have plagued existing agro-industrial facilities including the modern fertilizer plants (designed under a long-term agreement with Kellog-Pullman). In terms of investment requirement, perhaps another $5 billion would be required to meet the. compound feed needs of reaching efficient grain-meat conversion levels taking the same rough order of magnitude estimate of incremental demand for feed in South China as a base. 119. Two alternatives exist to making such investments. First, the policy approach of the earlier period where local grain self sufficiency was emphasized could be re-introduced; a similar variation would be to not make the investments or institutional changes needed for additional distribution or agro industrial capacity. This would imply very much lower growth in food production, consumption and productivity. 120. A second alternative would be to rely on imports for feeds, just as wheat is used for flour production in the major Northern cities. The earlier discussion of foreign exchange constraints indicates that, on the basis of current forecasted exports, this would not require an increased proportion of foreign exchange earnings being devoted to food (and feed) imports. However, an additional $2-5 billion or so would be required for port improvements and ancillary handling capacity; such port improvement is probably justified even without an expanded grain import program. Therefore, the foreign exchange outlay of import purchases should probably be compared to the investments implied for increased domestic trade and processing. Assuming these latter to be a total of roughly $10 billion and the corresponding constant dollar cost of feedgrain imports to be about $9 rEXTNAME: c5 (R)P: (china) 20 -75- billion per annum (@150 US$ 1983 per ton, cif) the benefits of increased internal trade are obvious. 121. The key assumption is that domestic production is capable of providing required feeds at world prices (i.e. without subsidies of either production or transportation). A detailed assessment of this question is beyond the scope of this paper but looked at from the standpoint of required average annual growth rates there is no reason to see why, a priori, domestic farming would be unable to meet the need provided regional specialization were allowed. For example, wheat production potential according to those who are familiar with the Chinese situation, probably able to meet prospective demand, replacing imports (see Hanson (1984)). 122. This is not to advocate that a program of national grain self sufficiency should replace the former emphasis on local self sufficiency. Grain imports have some advantages, especially for coastal cities where a reliable import pipeline can reduce the risks of delivery breakdowns which might apply if domestic production were relied on. Also, there is a certain cost advantage because grain stocks can be kept lower than when the flow can be arranged on a continuous forward basis, as with imports, as opposed to being tied to sometimes disappointing domestic harvests. 123. If internal trade were increased, international grain trade might not grow in size but the commodity composition would undoubtedly change. There could be off-setting production of tradeable farm commodities which could either be exported or which could replace formerly imported quantities (e.g. cotton or sugar). For example, if domestic wheat production were to replace imports it might be possible for Chinese wheat mills to begin importing quantities of higher quality wheat for speciality rEXTNAME: c5 (R)P: (china) 21 -76- purposes (or as part of an improved mix). Similarly on feeds, increased domestic coarse grain production might obviate the need for maize imports but help increase demand for foreign purchases of soybeans (with Chinese production continuing to focus on soybean varieties for human consumption and high vegetable oil content.) And the trade-off between the cost of local production, including distribution capacity investments, should be taken into account in future considerations about grain import requirements. Given the size of China's needs and the great diversity of regional conditions, there is no reason to expect that it would ever be economical to completely disengage the domestic grain distribution pipelines from international markets. But at the same time, the pattern for using international markets-for grain import or exporting agricultural commodities--is not likely to be static as it has been for the last twenty years. The volumes, composition and direction of flows are likely to evolve in line with changing domestic patterns of supply and demand. 124. A more flexible approach towards using international markets is greatly facilitated by the already efficient operations of CEROIL (as noted above). Current trading expertise allows decision-makers a good deal of flexibility in terms of future institutional changes. Unlike almost any developing country, CEROIL could be allowed to operate on a strictly commercial basis. Such independence has been granted other state trading organizations in the petroleum and chemical subsectors (e.g. Sino Chem). In fact, CEROIL could be allowed to develop into an international trading company on the lines of the Japanese sogoshosha or American and European firms (e.g. Cargill or Continental); this would involve expanding the existing global network of staff and involvement in trading unrelated to TEXTNAME: c5 (R)P: (china) 22 -77- China itself (e.g. flows between North America and East Asia). Paralleling such a shift of CEROIL responsibilities would be the devolution of purchasing decisions to local agro-industrial complexes such as wheat mills - (who could operate via CEROIL for pricing strategies and execution of import orders). The logistical requirements of efficient service which minimizes delays and costly stocks for a country of China's size is beyond the capacity of any centralized organization (none of the successful multinational agri-business firms attempt to consolidate all purchasing decisions at headquarters). Already there is a precedent for such a change in the decision to give local authorities control over foreign exchange resources (which would obviously be needed to handle imports of wheat, feeds or other goods). Moving in this direction would bring major efficiency benefits and also improve the quality of processed foods available to consumers. 125. Related to the possibility of devolving purchasing decision-making to agro-industrial complexes is the very much larger and potentially more difficult question of foreign investment. Western technology, including managerial expertise, could make an immense contribution to meeting China's domestic food distribution and processing needs. Existing schemes such as that operated by Continental Grain in Guangdong already indicate that modern, if not necessarily state-of-the-art, technologies are economical in China. In fact, it is difficult to envision successful development of distribution and agro-industrial capacity on the scale required without major flows of foreign technology. Without such imports the consequences of totally indigenous technologies would probably prove quite similar to those of the Soviet Union where huge investments have failed togenerate increased production of high value foods such as animal products. 1EXTNAME: c5 (R)P: (china) 23 -78- 126. Imported technology need not necessarily involve direct foreign investment or capital flows. Even management capacity could be augmented through contracts rather than foreign participation in agro-industries. However, there are also disadvantages to this. First, the premier agri-business firms are not likely to send their best managers or technicians for tours at operations which are not, at least partly, owned by the parent company. Second, the cost of foreign technology purchases and their operation can be greatly reduced by on-site participation of foreign organizations with a vested interest in the success of the project (particularly in terms of operation and maintenance where present Chinese practice is generally weak). Third, current overcapacity in agro-industrial capacity throughout the developed world, including some middle income countries like Brazil, presents Chinese authorities with an opportunity to buy existing plants in North America, South America and Western Europe at a fraction of the cost of constructing new plants of comparable efficiency. 127. Another benefit from increased foreign participation in Chinese agro-industries would come from facilitating agricultural exports. Current forecasts indicate that future growth in world import demand for agricultural commodities will be very much lower than in the past. Further, the key to success in such competitive markets is often a link between production and down-stream utilization; a single multinational agribusiness concern can provide such direct connections between production, shipment and retailing through its own administrative network. The advantage of such ties in terms of quality control and assured delivery often are more important than being the low price supplier. In addition, £EXTNAME: c5 (R)P: (china) 24 -79- Chinese government incentives for investors who generate foreign exchange earnings could be made a part of an overall strategy for attracting transfers of needed technologies and managerial expertise; this would build on past experiences with counter-trade linked imports of technology, (e.g., the Deere tractor import agreement discussed above). 128. Conclusion. The preceding analysis indicates that over the next few years Chinese planners will have a wide range of food policy options. There will be a great many questions about prices and rural organization. But underlying the various policy levers which will be used to achieve different sorts of ends, there will remain three basic policy options for managing the Chinese food system: 129. (A) Local grain self sufficiency. This option has the advantage of permitting continued control by existing rural institutions as opposed to providing free reign to private peasant farmers or other types of social groupings less easily controlled or ideologically reliable. The drain on central resources are also kept to a minimum in terms of investments or handling commercialized transfers of food throughout the country. The costs are relatively clear-cut also: lower levels of food consumption growth in the cities and lower productivity in the country-side (as a result of inability to pursue regional specialization). .130. (B) Large scale grain imports. This approach would be to rely on expanded imports to meet consumption targets for urban areas. The advantages would be reduced investment needs for domestic distribution, simplified institutional arrangements for handling the grain flow and rEXTNAME: c5 (R)P: (china) 25 -80- tighter control by central officials. The costs would come from on-going foreign exchange used to pay for grain imports and domestic production opportunities foregone. 131. (C) Expanded internal food distribution. This approach would provide the investments and policy environment needed for domestic resources to meet prospective demands for increased food consumption; the Provision of feeds for higher levels of meat consumption being particularly important. The advantages would also include the encouragement of more efficient farming, particularly in peri-urban systems directly linked to urban areas, and higher rural incomes. The costs would principally relate to the investment and institutional changes needed to support an expanded distribution pipeline. In particular, there would need to be a loosening of present controls over inter-provincial flows and private sales by farmers. Investment Priorities. 132. This concluding section aims at drawing-out some of the implica- tions of option "C". The emphasis is on Chinese investment priorities and related areas where the World Bank has a comparative advantage in providing required technical and financial assistance. The first priority area is developing a :_oag-term framework for future policy adjustments and invest- ments related to food distribution, processing and international trade. This is particularly important if private initiatives are to be incorp- orated into the overall strategy. Both foreign investors and Chinese farmers will need to have confidence that the "rules" governing their decisions will not change unexpectedly; without such confidence the risks of doing business--either private sales by farmers or investments by multi- national agri-business--will be prohibitively high. rEXTNAME: c5 (R)P: (china) 26 -81- 133. Information and planning. The first priority area where World Bank resources, both financial and technical, could play an extremely useful role is to help improve the existing information system servicing Chinese decision-makers and others involved in the food sector. Informa- tion is so basic to efficient decision-making in either a centrally planned or market oriented economy as to be impossible to isolate. Support could be given to designing more timely and accurate crop reporting systems, including detailed information on distribution and stocks, that would rely on modern data processing, remote sensing and sample surveying techniques (the World Bank has recently completed preparing a similar project in Chile). Parallel systems could be designed to report on consumption patterns. Modern data processing technologies would make the additional information, as well as existing data, readily available to decision-makers for immediate adjustments as well as a basis r longer-term investment decisions. The particular food commodities where additional supp.' . would have the greatest pay-back in terms of consumer demand and satisfaction could be identified (e.g. specific vegetable oil types of vegetables). This is particularly important given the lack of reliable information about current consumption levels, past mistakes in forecasting demand elasticities (e.g. the experience with pork in 1980 discussed above) and the need to introduce an element of flexibility into planning mechanisms. 134. Distribution infrastructure. The next priority area for World Bank collaboration with the Chinese, and other official sources of assistance including export financing, is in the transport sector. Improvement of international port facilities has already been identified as rEXTNAME: c5 (R)P: (china) 27 -82- a priority; such investments should be explicitly linked to the inland transportation systems they are designed to service (a failure to do has led to a uniformly disastrous project experience with port grain elevator construction in World Bank funded projects in Argentina, Turkey, Syria and Korea). Two other related priorty areas can also be identified. First, a substantial amount of total internal trade in agricultural commodities including feeds and wheat could be moved by water on the major river systems or coastal areas (the North-South axis so imp'ortant to agricultural commodity flows). Shipment by barge is extremely efficient in terms of cost ppr ton/mile (particularly when the cost of new rail or road lines are considered) and is ideally suited to Chinese requirements as it does not require centralized management. Second, there is considerable scope for improving local transport through making independent truck services available. Farm to market movements have often proven the weakest link in many countries' food distribution system; in China the problem is probably even more of a constraint than in low income countries (e.g. the Sahelian Zone countries of West Africa have higher per capita truck availability and rural road u)verage per village than in rural China. 135. Agro-industries The ability to increase transport handling capacity is also critical to achieving the economies of scale inherent in modern agro-industrial technologies. Priority investments include: (A) soybean processing which.would permit more efficient utilization of existing production (much of present soybean production is currently used as a fertilizer rather than the far more valuable contribution it could make as a feed); (B) processing cottonseed and rapseed where toxic qualities make use of current output as a feed difficult without the intro- duction of modern milling techniques (that are already widely used.in rEXTNAME: c5 (R)P: (china) 28 -83- developed and middle.income countries); and (C) higher quality wheat milling could facilitate the introduction of convenience foods, particularly important in traditional rice-eating areas of South China (as discussed above). 136. Inland storage. Related to both transport and agro-industries is the need for better storage. The evidence about high post harvest losses appears to warrant further sector work by the World Bank, in conjunction with Chinese technical services concerned, to better isolate the most significant sources of loss in terms of stockholding technologies currently used and available. Investments could then be linked to improved transport and processing and would include components for technical research, extension and local level investments (at the farm level). In addition to stor3e for grain and feeds, there is a huge demand for cold and cool exmtqg 2\3r tperishables including meat and fresh fruits and vegetables. tj one estimate from official Chinese sources, total cold storage La rural China is less than that currently available in North- MasterV tadta alone (whera 0here is a total population of only about 50 Aa,-h cold or zool storage would have to be integrated into the for the food commodities being handled and would e a well if project benefits are to assured (where a !a at aetworks has not been an explicit feature of 2e0.rt n prablezq have been encounterea in past World Bank 9T,eit, 40bmeco' Egypt and India). Scurging firther private sales of foods will Ss nt% and services. The World Bank -4 Je I f rglte market in rural rEXTNAME: c5 (R)P: (china) 29 -84- areas where farmers can conveniently sell their output could be particularly relevant. In addition, there is the need for introducing accepted grading standards and a commercial code for ensuring fair and reliable transactions in rural areas (where the experience of other East Asian countries might be useful). 138. Project approach. There are a number of advantages to meeting the investment priorities noted above through a strategy of phased pilot- projects centered on particularly supportive and efficient local adminis- trative units (rather than nation-wide, regional or provincial level programs). First, China's investment needs are very much larger than the World Bank's available funding resources. To be effective, loans will have to be designed to have a demonstration effect and be easily replicated (even without subsequent World Bank involvement). Second, there is the need for a good deal of "trial and error" testing of alternative agro- industrial technologies and institutional arrangements to determine which are most suited to Chinese institutional and physical requirements. And third, local administrations are likely to be far more supportive of project management decisions the administrators of larger units with more varied concerns and often more politicized priorities (at least this is the common view of commercial sources involved in projects in China). Further, it might be possible to integrate the distribution, transport and covmunication dimensions so important to agro-industrial investments under a single project umbrella provided the project area was small; this could avoid inevitable difficulties in dealing with officials responsible for transport (who, from all accounts, are the least cooperative and least willing to provide necessary information). rEXTNAME: c5 (R)P: (china) 30" -85- 139. Cooperation with foreign investors. Chinese authorities appear to have already recognized that agri-business multinationals could make a valuable contribution in terms o. technologies, management, capital transfer and export development. Technical capabilities are going to be particularly useful not only for processing systems and the introduction of a feed based livestock production technology but also in terms of expertise in logistics management (including transport and inventory management where Chinese expertise is so limited). Further, constraints on World Bank financial resources would argue in favor tapping other sources of funding given the huge demand in China for capital. Therefore, it is advisable that a commitment to joint ventures between the World Bank and agri- business enterprises be made an explicit underpinning of an agro-industrial investment strategy agreed upon between the Bank and China. As a first step, it might be useful for the World Bank--ir cooperation with the relevant Chinese officials--to sponsor an informal seminar on agro- industrial and food distribution priorities in China to be attended by interested commercial concerns from North Amaerica, Western Europe and Japan. Further, the current over-capacity in agro-industrial capacity in developed countries (including Brazil) provides substantial scope for acquiring already proven processing, handling and storage facilities and moving them to China; the cost of additional agro-industrial capacity created in this way would be only a fraction of the cost of constructing completely new facilities (and would involve the transfer of relatively more manpower intensive technologies that are suited to Chinese economic circumstances). rEXTNAME: c5 (R)P: (china) 31 -86- 140. Institutional building and training. A final area for World Bank involvement has already been initiated by the EDI as well as through projects in the research and education sectors. Greater emphasis on increasing understanding of the mechanics of international commodity markets, the experience of other countries in developing food distribution and agro-industries and the economics of marketing could be extremely useful and a back-stop to any dialogue about government policies. Along this line, it might be useful to focus any World Bank recommendations on programs which transfer experience and expertise to China and parallel work on current management weaknesses and service lacunae. Explicit attempts to influence macro food policies including questions brought with ideological issues-including the relative merits of regional specialization and less control over food distribution--could prove at best irrelevant (and possibly counter-productive).