China - Livestock sector study

Report No. 6589-CHA China Livestock Sector Study January 15, 1987 Projects Department East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY _1|11 liti #2} .r7.~r.-4. ', CrE. xt. ~t45: p J*}\riL}bSX f -,... . ; w; P -* i, t.: '. '4' zA ' ' - '/ 7F > _ *..-fi4Sv-' -b er*->j- -'v -d VO S a$*e ,.. ;.u;*,$, ..W. ).rI.dkn* - E *PtWoAwt +\.n0o1ther ofia due Is conens may no oterwise iSg ~ 4UJttI Rank auhoztin t~~~~ -,.,  CURRENCY EQUIVALENTS The Chinese currency is called Renmenbi (RMB). It is denominated in Yuan (Y). Each Yuan is 1 Yuan = 10 jiao - 100 fen Calendar 1985 October 1986 US$1.00 = Y 2.94 US$1.00 -Y 3.69 Y 1.00 e US$0.34 Y 1.00 = US$0.27 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December bl TRANSLITERATION The Pinyin svstem is used in this report. ABBREVIATIONS ABC - Agricultural Bank of China AFS - Australian Friesian-Sahiwal AHB Animal Husbandry Bureau AI - artificial insemination ATM - Agricultural Trade Market BSF - Bureau of State Farms CAIHIT - (Provincial) Corporation for Animal Husbandrv. Industry and Trade CMT - California Mastitis Test CCAHIT - General Corporation for Animal Husbandry, Industry and Trade (Beijing) GIB - Grain Bureau M,AA - Market Administration Agency MAAF - Ministry of Agriculture, Ainimal Husbanidry, and Fisheries MOFERT - Ministry of Foreign Econiomic Relatiois un( Trnade NFIO - National Feed Industry Office NRC U.S. National Research Counici.l RCC - Rural Credit Cooperatives SEC - State Economic Commissior SH - Specialized Household S&MC - Supply and Marketing Cooperatives SPC - State Planning Commission VT - veterinary technician  FOR OFFICIAL USE ONLY PREFACE This report is largely based on the findintgs of a World Bank livestock sector study mission that visited China for three weeks in May-June 1986. The mission consisted of Mr. Thomas Wiens (mission chief and agricultural economist), Mr. Brian Almquist (agroprocessing specialist), Mr, John Blake (poultry specialisl, Mr. Brian Brandenburg (veterinarian), Mr. Justus Damm (pig spec:ilist), Mr. Paul Harrison (agricultural economist), and Ms. Zhong Toi,g (agricultural economist). Overall responsibility for oversight of the study was assigned by MAAF to the Planning Office of the Bureau of Animal Husbandry, and the task of executing the study and coordinating the Study Mission was assigned to staf of the General Corporation for Antimal Husbandry, Industry and Trade (GCAHIT), a corporate subsidiary of MAAF with management responsTbility for state-owned livestock breeding, production and pI.ocessing enterprises. Agricultural Committees of the municipal or provincial governments of Tianjin, Fuzhou, Shandong and Jiangxi served as local hosts to the Mission, and information collection and site visits were arranged by the local Bureaus of Animal Husbandry, with the assistance and cooperation of the local Food Company, Feed Company, and State Statistical Bureaus. Staff of the Chinese Academy of Agricultural Engineering and Systems Analysis also assisted in information collection and processing in Shandong Province, and the Jiangxi Agricultural Development Corporation and the Dongxiang County Government hosted the Mission in Jiang . Province. The tireless help, patience, and valuable insights of numerous individuals in these organizz.tiors were essential to the preparation of this report. The livestock study was sructured in two phases: during the fi st phase, GCAHIr collected information on the markets for livestock products in two municipalities (Tianjin and Fuzhou'), existing and potential sources of supply, ar.d data from household expenditure surveys. This information was reviewed during a brief plannirng mission to Beijing during March 1986. The second phase, which culminated in the study mission, involved collection of detailed survey data on production and processing enterprises representing different scales, forms of organization, and lock.tions of production in Jiangxi and Shandong Provinces as well as Tian'iin and Fuzhou Municipalities. The mission visited these and other unit.s for extended discussions, as well as receiving briefings from the relevant bureaus of the municipalities and provinces. A draft of the mission's repor. was submitted to the Chinese governuent in October 1986, and discussed with the government in November 1.986. This version of t:he report: has been revised ir, light of government comment-s. This, document has a restricted distribution and may be used by recipients only in ,he performance of .heir official duties. Its contents may not otherwise F'e disclosed without World Bank authorization.  CHINA LIVESTOCK SECTOR STUDY TABLE OF CONTENTS EXECUTIVE SUMMARY . .................. iv I. INTRODUCTION ..... .......... ............................. I Study Scope ................ 1 Characteristics of Study Sites .......... ................... 2 Changing Policies and Performance . ........... ............. 6 Organization of the Sector .. . .............................. 10 II. THE MARKET FOR LIVESTOC,K PRODUCTS ....... ................... 16 Organization of the Marketing System .16 Consunier Demand for Livestock Products ..... ................ 24 Issues and lwpli'ratioris .................................... 33 III. FFFD SUPPLY AND PRO'ESSING .......... ..................... 35 Aggregate Feed Supply Situation ............... ...... 35 Systems and Organization of Livea3tock Feeding . . ........... 41 The Feed Milling Indiistry ............... ... .............. 44 IV. LIVESTOCK AND POULTRY BREEDING ............................. 48 Dairy Cattl. 'Breeding - ...... ........ 48 Pig Breedirng . . ................ ........... .. 52 Poultl2 v Breed.ng . .......... .. ............................. 61. V. AN..IAL iLA.AL'.t AiDl VE1,ER.NARX SERVICES ................ 64 The Animal iieLeltl. Delivery Systemr . .................. 64 Disease Sta-us frn Dairy Cattle . ............................ 66 Disease Srittus in Pigs . ........ ......... ........... 71 Disea,e Stalus in Poultry ... . .... ........... ........ 73 Quaranti.Tiu S Fat ion'; and Abat.toirs . ............ I ......... 76 VI. PRODUCTION ALTERNATIVES . . . ........... ................ 80 Pigs ............ ........................................ 80 Dairy Cattle . ............... ............ ........ 83 Poultry ....... - ........................ ................. 84 Locations for lnvvestment ........... ... .................. 86 Viability of Specialized Households ........................ 89 Financial Viability of livestock Investmrents . .............. 90 VII. PRODUCT PROCESSING ....................................... 93 The Dairy Industry ........................ .......... ... 93 The Slaughtering 'nd rv ..................................... 96 Poultry and Eg ............... . ... ............ 99 VTII. ISSUES AND iMPLICATIONS .1.... ............0............. lOl Price Reform .. ......... .............. ................. 101 Organizational Reforin ....... .... .. .. .. 104 Expanded Role. of the Market ....... .. .. ... ... ... ..... 106 Enlarging the Role of Ir,;erregional and ILnt-ernational Trade 107  - iii - Locational Strategy ........................................ 108 Form and Scale of Production Enterprise ..................... 103 Financing Policy ........................................... 109 List of Tables in Text 1.1 Production of Livestock Products, Study Sites .... ..... 5 1.2 Personal Consumption of Livestock Products, Study Sites, 1984 .................................... 5 1.3 Livestock Performance, China, 1978-85 .... ............. 8 2.1 Urban Income Elasticities of Demand, Tianjin and Fuzhou, 1984 .................... Z 6 2.2 Local and Budget Study Projections of Growth Rates of Consumer Demand, Fuzhou and Tianjin, 1984-90 ...... 26 2.3 Changes in Fuzhou and Tianjin Consumption Between 1984 and 1985 ........................................ 28 2.4 Estimated Direct Price Elasticities of Demand, Fuzhou and Tianjin, 1984 ............................. 30 3.1 Human Grain Consumption and Quality Feed Availability by Region, 1984 ...................................... 37 3.2 Composition of Available Feed, oy Region (19034) ....... 39 4.1 Services Per Conception and Dairy Herd Size .... ....... 51 4.2 Average Milk Production by Region and Individual Farms. 53 4.3 Lean Meat Production Per Sow Per Year From Local, Local x Improved, and Improved Crosses .... ........... 56 4.4 Pork Meat Grades and Procurement Prices (Fuzhou) ...... 58 5.1 Livestock Per Veterinarian/Technician .... ............. 65 5.2 Disease Incidence Report of Pig Diseases in Tianjin Municipality, 1984-85 ................................ 73 6.1 Opportunity Cost of Land Occupied as Percentage of Livestock Sales Value ..... .......................... 87 6.2 Summary of Financial Results of Various Livestock Investments ...................... .................. 91 8.1 Urban Expenditure on Dai-y Products by Income Group, Tianjin and Fuzhou, 19f. ........................... 99 Figures in Text Graph 1 Pork Production and Foed Availability, 1952-85 ..... 7 Graph 2 Procurement P-ice Ratio: Pigs to Grain ........... 7 Chart 1 OrganizaLioon of the Livestock Sector.... ....... ... 11 Graph 3 Seasonal Variations in Livestock Supply, Tianjin and Fuzhou, 1984 ................................... 22 ANNEXES Annex 1 - Livestock Supply and Demand, Tianjin and Fuzhou: Tables Annex 2 - Income and Price Elasticity Study, Tianjin and Fuzhou Annex 3 - Feed Balance Tables (Provincial, 1984) Annex 4 - Supplement on Dairy Cattle Production Annex 5 - Supplement on Pig Production Annex 6 - Supplement on Poultry Production Annex 7 - Financial Returns to Livestock Investments  - iv - CHINA LIVESTOCK SECTOR STUDY Executive Summary 1. TExhe study considers the most efficient means of satisfying the growing demand for pork, poultry, and dairy products in China's large municipalities. It is not concerned with the broad topic of livestock raising in the pastoral areas and only to'uches on questions of livestock product supply for rural consumers. The major issues hampering the development of the sector which are discussed include difficulties in making the transition from an administered to a market system; price distortions due largely to the scope of consumer ard producer subsidies; insufficient re'iance on interregional and inter- national trade to solve problems of feed and livestock product supply; lack of functional specialization within the industry; and various weaknesses of support services and the sectoral management structure. 2. The main report reviews the recent developments in ChinTa's livestock production, the organization of the sector, the emergence of Agricultural Trade Markets (ATMs) in large cities as a result of 1985 policy reforms, and influences determining future growth of urban demand for livestock products. Each componeot of the industry is examined in detail, including feed supply and processing, livestock and poultry breeding, animal health and veterinary servi2es, alternative production systems, and product processing. The follo.ing summarizes major findings of relevance to Government policy. Enlarg!ng the Scope of the Market 3. The livestock products distribution system in China was characterized in the past by compulsory procurements, adminis-:ered prices, and rationed distribution. However, major reforms in 1985 were designed to facilitate an expanded role for market-oriented production in the sector, that is, for economic activities governed by consideration of profit-and-loss, which is in turn determined by flexible, market-clearing prices. At present market-oriented activi- ties are most important in poultry, beef and mutton supply, where, in pork and dairy product supply, administered prices and administrative management are still dominant. The inflexibility of administered prices can easily lead to dynamic instability in markets where both supply and demand are strongly price-sensitive, and the pig market appears to De such a case, as the disequilibrium in Chine's pig market in 1986 indicates. Rather than dealing with the disequilibrium by imposing additional administrative control, the transitlon in the pig market to more flexible pricing methods shoulJ be speeded up. "Flexi- bility" here implies that each independent accounting uniit within th- distribution system should be encouraged to adjust prices within a wide range so as to maximize profits; which in turn requires that each unit be allowed to retain a significant pro?ortion of profits.  4. At present, the free market, or ATM distribution system is supposed to help equilibriate the livestock market, by providing signals to producers and government alike of supply and demand condi- tions, and by providing an outlet for excess supply or pent-up demand due to deviations of official ;:om equilibrium prices. It would better serve these functions if its scope were enlarged, which depends partly on reduction of subsidies in the state-controlled subsector and parcly on decreasing barriars to trade (discussed below). One major shortcoming of the ATM distribution system, is ics reliance on expen- sive truck transport, and lack of access to cheaper lorg-distance transport modes. This could be alleviated if the Ministry of Railways were to se- up an "outside-Plan" goods traffic program, perhaps con- sisting of two elements: (a) a set proportion of wagons suitable for conveying live animals or frozen/chilled product woul.d he offered for short-notice use by any commercial unit (state or private) at unsubsi- dized freight rates; and (b) the railways or, failing thi.s, commercial units would be encouraged to invest in refrigerated freight wagons or chilled milk tankers, wlich could be leased out. 'ind attached to regu- lar freight trains, Price Rationalization 5. During the process of trarisio.n_l to A nomarket price system, there are some desirable reforms of admlinister&ed prices which have major ramifications extending as far as the prfit,ability of crop production and the level of rural-urban ir.conite differentials; and other adjustments with a relatively minlor impact. The greatest difficulty is associated with eliminatioi% of subsidies in the sector. 6. The main price distortions in the ltvets-ork sector are those associated with the subsidized state procuremernt, processing and dis- tribution system and the supply of feedgrain at subsidized prices to livestock producers. These distortions are as.ociated mainly with pig production (to a lesser extent with eggs and dairy products) and especially with supply to the larger municipalities. Towns at the country level or below appear to have been weaned trots both forms of subsidies. The subsidies bene..it urban consumers, employees of the state distribution system, and suburban farmers (especially Specia- lized Households, or SHs), at the expense of the state budget and commercial feedgrain growers. In the face of these subs'dies, the private or cooperative distribution system, including the urban ATMs, is handicapped in its role in the municipal pork trade. 7. Removal of subsidies on egg and dairy products would be relatively painless. Egg and poultry meat production at present are profitable enough that Ep_ducers could absorb th0 i.oss of feed and distribution subsidies. Urban consumption (f d.:--ir produc.rs i.s small enough that consumers cou' ld easily bear t:he eosts '';f pric:e increases sufficient to compensate dairies and dairv f rrr fo>- loss of subsi- dies. In view of the recent price adiu.t.meo.s fo, i'. which proba- bly eliminate direct subsidies (but nor. rt.iO.ig i.n r(-st locales, it  - vi - appears the Government has reached the same conclusion 8. However, elimination of subsidies to the suburban pig industry is far more problematic. Many marginal producers, particularily SHs depending mainly on purchased feed, would be bankrupted by higher feed costs, even if the market price stabilized at about the came level as the present procurement price. As supply contracted, the relative advantage would shift to the backyard (nonspecialized) producer of local breeds of pigs, whose production process relies mainly on non-purchased feeds and surplus labor. Urban consumers would be forced to pay higher prices at states markets, reflecting full costs of processing. Demand would shift further away from pork sold in state shops to the ATMs, and overall levels of consumption would contract. Improved financial performance for the state distribution system also would require finding other jobs for redundant workers, and shifting tne pensioner burden to the state. 9. Considering the above, the subsidies to the pig industry should be removed gradually, following a strategy with multiple ele- ments, including: (a) reduce the transport constraint on inter- regional live pig or carcass trade; (b) improve the quality of chilled or frozen carcasses made available through that trade; (c) enlarge cold storage facilities to better meet peak seasonal requirements, while finding ways of utilizing these facilities in the off-peak season; (d) phase out the feed subsidy; (e) close down substandard abattoirs, and use other state-run abattoirs to serve the slaughter requirements of the ATM at fees close to marg;nal costs; (f) encourage expansion of ATM pork sales, and correspondingly reduce employment in the state distribution system (or encourage the latter to serve a wholesaling function for the ATMs); and (g) modulate the increases in the relative price of pork according to the rate of increase of consu- mer incomes. 10. This strategy is in direct contrast to the present municipal approach of increasing the extent of local self-sufficiency in pork sutpply. Elements of this strategy require actions by the central government, the provincial governments of supplier provinces, and most of the various bureaus involved in the livestock sector (including the Transpo)t Bureaus). In the absence of the central and local coordina- tion this requires, the municipal governments would have little choice but to pursue self-sufficiency, at considerable cost to the national economy. 11, As an essential part of the "lean pig" policy, there should be an adequate differential in procurement prices according to the leanness of the product. If it is to provide an effective incentive, the differential must exceed the additional costs of lean pig pro- duction, now evaluated at about Y30 per pig. However, it should not exceed the value placed by the market on the leaner product. Invest- ments and policy measures supporting a "lean pig" policy would be premature in those areas where a sufficient consumer premium for lean meat over fat does not yet exist. Market price surveys are required to identify which urban markets offer an adequate premium, as this is  vi.i - a point of controversy in China. In such markets, it is important that (a) state retail outlets should offer cuts similar to those offered in ATMs, with equivalent price differentiation; (b) wholesale carcasses ex-abattoir should be graded by weight and leanness and priced accordingly; and (c) abattoir gradings of animals should be passed back in the form of higher prices to receiving stations and thence to producers. Wholesale carcass grading and pricing should alsc be introduced in inter-provincia' crade, whether at list or negotiated prices, with allowance for storage costs and losses as well as market discounts for frozen pork. 12. The low retail price of fresh milk in urban areas has been central to pricing problems in the dairy sector. This has been justi- fied on the grounds that milk is supplied as a nutritional supplement for infants, the sick, and the aged, rather than a luxury food. In reality, a high proportion of dairy products have been consumed by local residents outside these target groups, and, in addition, foreign residents, tourists, and the bakery and confectionary trade all bene- fited unnecessarily from the same low prices. Also, the low profita- bility of fresh milk production due to price controls has created a strong incentive for dairies to enlarge the proportion of less nutri- tionally valuable products, such as milk powder diluted with sugar or milk chocolate. As the fresh milk rationing scheme lies at the heart of these distortions, consideration should be given to reducing its scope or phasing it out. 13. Judging from the present cost structure in the industry, producer prices for raw milk of about YO.56/kg, and a processing ;.argin of about YO.25/kg for processors of pasteurized milk, shouli allow an adequate rate of return. Recent price adjustments come clos3 to matching these figures. However, the same adjustments also in- creased the price of powdered milk, leaving the relatively high profi.- tability of milk powder production unchanged. This pricing decision should be reconsidered: if the profitability of fresh milk production were increased relative to milk powder, suburban dairies might well be willing to shut down their powdered milk production lines, and rural dairies might find means of tranFporting liquid product to the urban market. It would also be an opportune time to introduce milk grading and pricing according to butterfat content, and for dairies to stan- dardize product at 2.5% butterfat and use excess butterfat to increase production of butter. Enlarging the Role of Interreg. onal and Internetional Trade 14. Feed Supply. China may be marginally short of quality feed for its present livestock population, in that estimated requirements of such feeds.uffs (coarse grains, byproducts, and oilseed meals) slightly exceed putential supply, and not all of potential supply is in fact used for livestock. However, even considering use of rice and ;wheat as feed, and use of coarse grains for human consumption, there remain significant regional imbalances, with the Northeast having a surplus and the West, parts of the Southeast, and the three provin-  - viii - cial-level municipalities in deficit. If nutritive balance is consi- dered, it appears that, compared to a desirable 15%, on average Chi- na's potential feed supply contains about 12% crude protein and, allowing for the underutili7ation of oilseed meals, actual feed use provides as little as 11% protein. Both the potential and actual protein shortages are most serious in hose southern provinces which depend heavily on tubers as feedgrains and rapeseed and cottonseed neals as protein feeds. 15. In areas of the Southeast and West where paddy rice produc- tion is now predominant and feed deficits occur, there are three options to consider: (a) trade rice for feed grains imported from the north or abroad; (b) diversify the cropping system, introducing corn or other feed grains on fields or in areas which are marginal for paddy rice production; or (c) increase use of rice as a livestock feed, with appropriate balancers. The first option is advan,ageous at current domestic or internatiocaal price ratios, but the price ratios would become considerably less favorable if exports of rice were attempted on any scale. The se-.end option may prove feasible and should be pursued in the longer term, but will require a transfer of suitable corn varieties and cultivation techniques to a region with little experience in corn production. It will also require adjustments to the procurement price of corn in the south, which is now about one-half the negotiated price for imports from the Northeast. At least in the interim, increased use of rice as a feed grain appears to be economically justified. However, this does not alleviate the protein feed deficit in the rice producing areas. Relative to either North China production costs or international prices, the southern provinces lack any comparative advantage in the production of oilseed meals valuable as livestock feed, Therefore these areas in the short term should rely on imports of oilseed meals or other protein sources rather than attemptirng self-sufficiency in protein feeds. 16. In according high priority to rapid development of livestock production, the Central Government should attach the corresponding priority to solving the national and regiornal problems of feed supply. It may in fact be economically advantageous to export Norcheastern corn and soybean to the Soviet Union, South Korea, and Japan, rather than processitig the soybean and transporting corn and soymeal to the South; but this advantage is fully offset if the Southeast must import the same amounts of feed from abroad, or if Southeastern feed mills and livestock production are crippled for want of raw materials. The advantage, from a national viewpoint, would derive from a strategy of using non-exportable surpluses of rice and limited amounts of local oilseed meals as feed stocks in the Southeast, and allocating the necessary foreign exchange to import sufficient amounts of appropriate balancer ingredients (such as soymeal or fishmeal) from abroad. As a corollary, the foreign exchange-saving potential of increased production of each type of feedgrain and oilseed meal producable in the Southeast shoul.d be evaluated, ard its farmgate price should be adjusted accordingl.y. Research directed at adapting corn and soybean varieties to the Southeast also deserves priority.  . ix - 17. Lack of high quality fodder, as well as heat stress, are serious limiting factors in dairy production in the Southeast. As longdistance fodder transport is uneconomic, this region should continue to rely more heavily on milk powder imported from other regions or abroad. More generally, the opportunity to exploit the subsidies foreign governments give to their milk producers should be seized to close the gap between domestic supply and demana during the period in which domestic dairy herds are being built up. Production of milk powder by municipal dairies should cease, and cheap imported milk powder should be used (a) for local bakery and confectionary requirements; (b) in recombination with local edible oils, to "stretch" fresh milk supplies and reduce seasonality of supply; and (c) as a substitute for fresh milk in calf feeding. 18. Production Alternatives and Domestic Trade. Lorses and costs associated with fresh product delivery are most significant in the poultry and dairy industries. Consequently, production of eggs, poultry meat, and fresh milk is most rationally sited near the cities. However, the raising of calves or heifers in suburban areas is uneconomic and unnecessary; and that portion of suburban dairy farming should be relocated to areas where roughage and green feeds are relatively abundant. Over the long run, an increasing proportion of urban pork supply should come from rural areas with feed surpluses and low opportunity cost of land. This applies especially to the Southeastern cities, and particularily if these cities cannot rely on supplies of corn and soybean from either the Northeast or abroad. However, this strategy depends on a gradual solution to transport and storage problems, and upgrading the quality of pork supplied in inte,regional trade, through breed and feed improvement programs ainuad at the rural (mainly backyard) producer, along with corresponding price incentives. As a short run measure, tCae efficiency of suburban pig production could be raised by space-saving p.g shed designs, siting of farms in the distant suburbs, and improved feed conversion rates. 19. A major obstacle to further development of inter-regional trade is the present power of local governments to intervene in re- straint of such trade. This power was exercised in 1986, both to restrict flows of feedgrains from northern to southern provinces, and also to prohibit or tax exports of pigs from southern pig-surplus provinces such as Hunan to areas of excess demand, such as Guangdong (which exports its pigs to Hong Kong). Such a chain of derived demand should normally be favored as benefici-il to profits of producers at each link in the chain, but local governments have proven more sensi- tive to the complairts of consumers or state trading organs about increased prices or commodity shortages. Consequently, China should consider a legal prohibition on such local government interventions in interprovincial trade, in the interest of the development of the national economy as a whole,  - x - Form and Scale of Production Enterprise 20. In pig production, there is a clear case for division of function: state- and collectively-owned larger farms should serve mainly as breeding farms for nucleus herds (abandoning fattening operations); SHs should serve as multiplier farms in the breeding system and fatteners for lean varieties; and backyard producers should maintain their present role as suppliers of most market pigs, using local breeds to the extent that they depend on low-quality feeds (or vice versa). Overall, Government's strategy for development of the industry should give increased attention to the backyard producer, in the expectation of achievi.ng major efficiency improvements at relatively low cost through use of improved hybrids and feed balancers. 21. In dairying, there is no "backyard production", because the high costs of investment in animal.s place even the owner of one or two cows into the SH category; and a five-ten cow SH is either ver-y wealthy or deeply in debt. There are both well- and poorly-managed state farms and SHs at present, and it appears that small SH herds, if grouped and managed cooperatively to fncilitate silage use and Al, and given adequate support services, couldi function as well as state farms; but that is based on hypothesis more than observation as SHs usually are geographicaLly scattered (taking advantage of equally scattered natural fodder resources). A mixed system, with state farms taking the lead in promotion of SH dlairy development, would be quite acceptable. However, if the land areia managed by state dairy farms is not to be increased, inevitably a high proportion of the national. dairy herd will be under SHi management by the year 2000, in view of the planned six-fold herd growth. In the short run, improving the utilization of lani and bui ldirigs on existing state farms, and the motivation or expertise of technical. personnel, are the most pressing issues, but in the long-run devel-onient of support services for SH dairying must assune high priority. 22. In egg and poultry production, the superiority of imported breeds and intensive feeding systems argues for a scale of at least a thousand birds, except in semi-scavenging duck production systems, where units of a few hundred birds would be efficient. If sufficient flexibility is allowed for wages and incentive schemes on state or collective poultry farms, large farms would conserve on technical and managerial skills which are scarce in this industry. 23. Production and service enterprises in China have rarely been organized in a hierarchical system of functional specialization which locates functions, according to their criticality or complexity, in enterprises possessing appropriate levels of managerial and technical expertise as well, .s qualities and quantities of equipment. The breeding system for livestock is one area where a pyramidal form of specialization should be introduced, particularly in pig breeding. The organizational structure in feed milling should also be more hierarchical, to include nucleus mills providing pre-mixes and techni- cal services to satellite mill.s; an.d h,creaseed division of labor in  - xi - producing a more varied set of products. Improving Support Services 24. Feed Milling. The feed milling industry needs to address the major t'eeding problems in the sector. In general, these are more critical in China for pigs than for poultry or dairy cattle, as concentrate feeds used by poultry farmers at present are of largely adequate types and qualities, and the limiting factor at present for China's small number of dairy cattle is the supply of bulk fodder rather than concentrate. However, even the better pig farms have purchased rations with deficiencies in energy, protein, microelements and vitamins (especially calcium:phosphorus ratios); nor is there sufficient differentiation of commercial rations either by growth stage of the animal or by variations in availability of home-grown produce. 25. Feed mills in China usually have technically-adequate milling and mixing systems, despite reliance on labor-intensive processes (which is probably cost-minimizing, but does make quality control difficult). However, equipment suitable for the introduction of trace elements and vitamins into the mix, or for pellpting of feed is lacking. The greatest shortcorring is the lack of quality control of the product, including the absence of labelling of composition of the finished product. 26. Even .o meet present market requirements, the feed industry would need to produce something of the order of 10-20 million tons of formulated feeds and 15-25 million tons of balancers to upgrade the grain and bran which may be available at the farm level. In order to expand and at the same time improve technical quality of feeds, a n,imber of measures are recommended, including: (a) upgrading of some existing mills, focussing on monitoring and control systems and pelleting lines; (b) establishmant of a nucleus feed mill in each main consuming area, to manufacture pre-mixes for smaller feed mills; (c) establishment of effective feed quality-control laboratories independent of the feed mills; (d) strengthening the organization of the feed milling industry to achieve uniformity of feed standards and improved supply of ingredients and feed distribution; (e) streng- tthening of research and development; and (d) enforcement of regula- tions to ensure that feeds produced by the milling industry comply with pre-determined standards in terms of nutritional value. The industry should also expand its product mix to include (a) compound feeds (complete rations), (b) concentrate balancers (high protein supplements), (c) pre-mixes for small-scale mills, (d) mineral-mixes for farm use as supplements, and (e) medicated feeds. 27. Breeding. At the presenlt time, the main constraints to rapid genetic improvement in milk production are nutritional factors and, in southern China, climatic factors. In order tc sustain a meaningful genetic improvement program, it is important to improve the quality and quantity of nutrient intakes, through standardization of  - xii - dairy rations, improvements in b:ain and fodder procurement, the storage of fodders by ensilaging during the cold seasons, and the upgrading of fresh and stored feedstuffs by the addition of non- protein nitrogens and micro and macro mineral mixes. 28. A national dairy cattle breeding program, including a performance testing program, has been initiated, but further progress towards central coordinatian and standardization of the program is required, as well as increased attention to selection and retention for appraisal of locally bred bulls, in the interest of future savings in import costs of genetic materials. 29. Dairy cattle production in the south of China is subject to increased seasonal variability and reduced overall productivity due mainly to the heat. The problem can be dealt with either through environmental control (cooling) or thrcagh introduction of more heat resistant breeds. The economics of production using Bos taurus x Bos indicus crosses (such as the Australian Fr,.esian-Sahiwal, or AFS) should be compared with that of production by purebred Holsteins under modified management systems; and economical systerns for environmental control in the south need to be designed and promulgated. In both north and south China, Al services should be improved in order to maintain farmer confidence, wherever conceptions per pregnancy are now unacceptably low. 30. The lean pork policy should provide the impetus for a review of the entire process of genetic improvement in pig performance, especially in the areas of breed characteristics of loci.l and exotic pigs, selection techniques and environmental constraints to genetic upgrading programs. Existing breeding farms should redefine their breeding programs to use a few breeds for a limited variety of crosses. Breeding activities should be focussed on selection, as well as mating and multiplication. Selection by visual, subjective evaluation must be replaced by measured, objective evaluation. This will require the procurement of scales and backfat measuring and other equipment, and liaisons with abattoirs to better evaluate carcass merits of improved pigs. Boar testing should be introduced as a separate, highly important breeding/selection pig station activity. Sow performance, for local, improved and exotic breeds, should be also be clearly evaluated by breeding farms. No commerci.al pig production activities should take place on farms where selection and breeding is carried out. Accurate record keeping systems are needed to evaluate the data collected. 31. The pig breeding system should be organized according to the pyramid design, with a system of multiplier farms, managed by well- trained specialized households, inserted between the existing breeding and commercial farm levels. Some existing breeding farms should be upgraded to a nucleus hierd status, where extensive, strict selection would take place. Standardized, high quality feeds snould be used on nucleus and multiplier .arms. 32. In poultry production, effort.s to experiment with crosses  - xiii - between local and imported strains, and between imported strains of different origins, should be abandoned as uneconomic. Breeding for chickens should concentrate on imported strains, whereas local breeds of duck seem quite adequate for the systems of production now in place. Efforts should be made to attract international breeding companies to establish Parent and Grand Parent stock farms in China so that a continuing flow of superior genetic stock will be ensured. Such ventures should incorporate substantial training packages extending down to the level of commercial production. 33. Animal Health. Clinical mastitis is the most commoily observed health problem on Cliinese dairy farms, and the prevalence of subclinical forms is unknowrn but probably extremely highi. A nation- wide investigation into the causes, incidence, treatment and control of mastitis is strongly advisable. To bring this problem under con- trol, the most necessary measures include use of udder disinfectants and retraining in milking technique. Milk quality control programs to screen for mastitic milk should be enforced by evaluating bulk samples taken at milk collection *enters and dairy plants and by providing CMT test kits to producers. Dry-cow treatmenlt. should also be instituted. 3,. Supplementing dairy rations with calcium and phosphorus should be considered to ensure that adequate nutrient intakes are met. Bone meal and shell meal should be readily available at teed mills or veterinary centres, and the use of dicalcium phosphate (DCP) as an economical source should be investigated. Further investigations into the nutritional, and possibly infectious, causes of infertility in dairy cattle are needed andi shouild be coordinated with those related to Al failures. 35. In pig production, piglet mortality to weaning represents a serious production loss and investigations into the control of newborn pig diseases, especially into coilbaciUllosis, shouild take priority. Improvements ir. the newborn pig's envircnment, such as bedding, the use of farrowing crates, and night heaving should be considered. Major efforts towards the improvement of pig performance should focus on pig nutrition. Calcium ard phosphorus related skeletal weakness and lameness was observed, and requires correction, Similarly, multi- vitamin supplements in feed need to be introduced. Pig disease inci- dence, except for swine fever in area- where vaccination programs have yet to take hold, is not a constraint to better production. 36. Poultry production improvement at present is mainly dependent on feed quality and management factors; the latter are in need of considerable improvement on small poultry farms, where housing and lack of flock isolation are identified as constraints to better performance. Vaccination programs in breeder flocks, although standardized, need to be followed more laithfully. A compulsory Pullorum testing program shouldl De instituted, and Pullorum test kits made widely available. An Avian Enicephal'itis vaccination program for breeding farms shou.ild be int:roduc:iA,I rLat:rher than relying solely on immunization in couintry of origln.  - xiv - 37. Veterinary Se.vices. There is a strong need for additional and upgraded courses for university and technical school trained veterinarians, meat inspectors, livestock market inspectors, laboratory personnel, AI technicians and other service personnel. The emphasis of this training should be on the preventive, or cause-and- effect approach to recognition and contrel of production disease, as opposed to the prevailing symptomatic approach to infectious disease diagnosis and treatment (which should not, of course, be ignored). In addition, there is a particular shortage of service personnel in the animal nutrition and breeding sciences areas, which should be remedied through training programs. 38. Quarantine Stations. Health care and feeding of imported stock in quarantine should become the responsibility of the quarantine station, rather than the importing party. The station should charge the importing party for the costs of these services, and take respon- sibility for procurement of animal feeds and other supplies. 39. Meat Inspection. Meat inspection standards should be raised to where e meaningful screening and condemnation system exists. Accurate. ubjective diagnosis and recognition of carcass conditions without the pressure to pass quest-onable carcasses, should replace the present system. Inspectors should not be abattoir employees but should work independently of the abattoir, on behalf of a government agency, Abattoir hygiene measures need to be universally improved. The use of high pressure hot water supplies and suitable disinfectants should be introduced where necessary. Because typical abattoirs and dairy processing plants in China presently provide fertile breeding ground, for pathogens, there is a considerable need for better plant layouts, higher standards of materials, upgraded drainage, wall and floor surfasces, and lighting. In smaller abattoirs, meat contact surfaces should use stainless steel or tile rather than permeable wood. 40. Processing. The cost of fresh milk production in China is moderately high by world standards, but China also has access to cheap or subsidized powdered mi'k and butter oil products. The policy for domestically produced milk should be to satisfy demands for liquid milk as cheaply and as simply as possible. Because of excess demand for liquid milk, seasonality of supply should be ironed out in the simplest manner possible, includiig the use of recombined product to supplement winter shortfalls, proeuction of ice-creams, yoghurts or flavoured milk to dispose of summer surpluses, and introduction of seasonal variations into the pricing system. There is no economic justification for the high proportion of dried milk being presently manufactured in China. Consequently, future policy should be to phase this out. 41. The marketing system for pork in eastern China is geared to butchers buying half-carcasses of meat, boning them out and selling them in small pieces to individuals. There is a strong domestic preference for freshly killed meat, and chilled meat is preferred to frozen. Neither these preferences nor the system of rnarketing are  - xv - likely to change rapidly, therefore a processing system geared to providing fresh half-carcasses and without major investment in cutting facilities is appropriate. However, some freezing capacity and cold- storage will continue to be required, both to facilitate tnter- regional transfers of pig meat and to iron out seasonal variations in supply. Carcasses prepared for freezing should not be skinned, and fraezing and cold-storage technology should be upgraded to reduce shrinkage and retain quality. The growing consumer preference in at least some areas of the cour_ry for lean as opposed to fat pig meat, which is reflected in the prices paid by the consumer to the retailer but not yet in the prices paid to the wholesaler or producer, calls for grading of half carcasses by weight and leanness at the abattoir, as we'.l as appropriate modifications to the pricing system. 42. Poultry are largely sold live and it is expected that this will continue. Howev3r, processes and chilled or frozen poultry are likely to be accepted by the catering trade and especially in association with the production of broilers or meat ducks. Frozen poultry would be helpful in ironing out peaks and troughs in production and facilitating inter-regional transport of poultry meat, which cannot now take place. Similar conclusions apply to eggs, where there is promise for development of small-scale service operations for sorting, grading, packaging, and distribution which could be extended to seasonal drying, freezing or egg preservation. 43. Financing E'olicy. Financing terms are important to the viabi.ity of the SH sector, where only a small proportion of investments in housing and stock can be owner-financed. The major source of finance has been lending from the Agricultural Bank of China (ABC) or Rural Credit Cooperatives and there has been a strong tendency to use medium-term (3-5 year) loans to finance 80-90% of tocal investment costs. The use of such short maturities and low proportions of owner equity has allowed the SH sector to develop rapid3,, withi minimal interest burden, but timely repayment of prinzipal will prove difficult, particularly as either increased sup- ply or reduced subsidization lead to declining profit margins in the sector. 44. Future financing should move to longer maturities and a higher proportion of owner-equity, to protect both the owners and financial system against price risks. For long-term lending, the present ABC interest rate structure provides for rates approaching 9- 10% (although few loans are now extended at these rates). The higher equity proportions and interest rates may discourage growth of SH production in some components of the industry, but they will also help to stabilize supply by discouraging entry of producers who lack the resources to withstand periodically unfavorable market conditions. Institutional Reforms 45. Higher-level governmenral organs in China tend to be identified with a coordinat:inF function or an administrative function,  - xvi - and occasionally both. The functional components of the livestock sector, including input supply, production, procurement, transport, processing, storage, and final distribution typically are administered by several different systems, and coordination is carried out at such a high level that it is inevitably weak. The coordinating bodies in the subsector are mainly comatissions responsible for policy making and planning (such as the SEC and SPC at the central government level, or t-heir counterparts at the provincial or municipal level). As coordinating bodies lack the direct administrative authority and the staff necessary for program or project execution, programs or projects which cut across either functionai components of the sector or separate administrative systems are difficult to implement. 46. A deepening and extension of past organizational reforms in the sector would improve the prospect for coordinated execution of development programs in the livestock sector. The proposed program for development of the feed milling industry should logically be executed by the National Feed Industry Office, whose authority (espe- cially over mills under the Grain Bur3au system) and staffing need to be further strengthened. In dairying, the growing responsibility of state farm veterinarians to service the needs of SH producers suggests that these vets should report to AHB rather than BSF, and that a fee- for-service approach or privatization should replace fixed salary scales. The dairy industry might alternatively be transferred out of the BSF system, with responsibility for production being moved into the system under the General Corporation for Animal Husbandry, Indus- try and Trade (GCAHIT) and, for services, into the AHB system. 47. In the processing and distribution subsectors, the most pressing needs are for better standards of control over animal health and sanitation, notably at abattoirs. The control system should be completely independent of the Food Company/Second Commercia1. Bureau system which administers the processing units. Probably it -hould reside with AHB, yet be separate from administrative offices concet:led mainly with live animal health and receive greater emphasis. 48. In general, all production or service units in each administrative systeu should be given greatly increased freedom to engage in commercial transactions crossing functional and administrative lines (including those between state and private sectors). For some units, price reforms are required before this is feasible, because cross-subsidization withiii vertically integrated systems is currently the norm and its existence would discourage such transactions. For other units, encouragement and an appropriate fee or rate structure are all that is required. Vertically integrated activities (not necessarily involving integrated ownership) can be advantageous, e.g., in the poultry industry. The GCAHIT system should be encouraged to expand its organization and joint venture financing of such activities, in alliance with the private sector. GCAHIT should also engage in joint ventures with international breeding companies in the poultry indu3try to establish Parent and Grandparent stock farms in order to maintain a continuing flow of superior genetic stock.  - xvii - Issues Requiring Further Study 49. Future Supply Requirements. Urban consumer demands for livestock products, as with all other consumer goods, are influenced by changing income and prices, as well as population growth. Per capita incomes in major eastern cities like Tianjin and Fuzhou are expected to grow at annual rates of about six percent in 1984-90. Consumer bi Iget survey data for Tianjin and Fuzhou in 1984 indicate that income elasticities (the percentage increases in demand which would result from a one percent increase in consumer incomes) for livestock products are moderately high. In general, consumer demand for pork and eggs can be expected to grow at rates perhaps 15-25% less than the growth rate of income, whereas growth of demand for poultry meat and dairy products will exceed that of consumer income. 50. However, this assumes unchanged relative prices, and both the effects of the 1985 price adjustments and theoretical considerations indicate that demands for various livestock products are also quite price sensitive. Present local projections of future supply requirements for livestock products do not seem consistent with estimates of relative income and price elasticities for these products. As the 1985 reforms have greatly changed the structure and reduced the level of consumer demand for livestock products, planning projections of supply requirements should be (annually) revised based on new estimates of income elasticities derived from post-1985 consumer budget survey iata. 51. The Backyard Alternative in Pig Raising. At present, Government places considerable emphasis on development of specialized, commercial-scale pig prcduction units. Consequently a growing gap is emerging between production performance levels in this (still tiny) segment of the industry and those of backyard producers, who mainly raise unimproved breeds with poorly-balanced feeds. If national sup- plies of protein sources and supplements, as well as the capacity of t'L. feed milling industry, are regarded as short run limiting factors in growth of pork production, is 1t more efficient to concentrate these supplies to achieve e.'ficient conversion for SH producers, or to spread them more "thinly" as balEncers to improve the diet of the backyard pig? The technical ecom..Lc data required to answer this question seems lacking at present. Therefore an experimental study is recommended which would produce quantitative economic comparisons of the effects of supplying balancers to backyard producers with either local or improved pig breeds, versus supply of the equivalent amounts of feed to SHs in the form of complete commercial rations.  1. INTRODUCTION Study Scope. 1.01 This study considers the most efficient means of satisfying the growing demand for pork, poultry and dairy products in China's large municipalities. It examines such strategic issues as the choices among alternative sources of production, scale and management form of enterprises, and alternative sources of feedstuffs. It also explores major policy issues, includirg the roles of state arid private sectors in the marketing system, pricing and subsidies, and the provision of services to the livestock sector. 1.02 In emphasizing problems of urban supply of the most important livestock products, the study deliberately ignores the broad topic of livestock raising in the pastoral areas and only touches on questions of livestock product supply for rural consumers. As the livestock sector in China is extremely large and diverse, this is partly due to an attempt to obtain greater depth subject to limited time and resources. A broader coverage of issues in tthe Chinese livestock sector was included in Annex 2 (China: Agriculture to t:he Year 2000) of the World Bank economic report, China: LongJTerm Development Issues and Options (1985). In particular, the problems of (mainly ruminant) livestock raising in the pastoral areas differ from those of the "agricultural" areas (where crop cultivation is the primary activity). In broad terms, improvement of livestock raising in the pastoral areas has as crucial prerequisites the privatization of herd management, division of ccllective pasture, and creation of financial incentives for herd reduction and pasture improvement. Policy reforms which may fulfill these prerequisites have been initiated by Government, but time is required for implementation, following which a sector study focussed oni the pastoral areas would be appropriate. 1.03 Within the non-pastoral (or "agricultural") areas, growth in urban incomes is a major factor enlarging the market for livestock products, particularily commodities such as lean pork, broilers, and dairy products which are in short supply and have high income elasticities of demand. Within the rural areas, livestock products at present are mostly self-supplied as sideline activities by private farmers; whereas the volume and higher quality of supply requirements for urban areas demands productioni by more specialized and often larger scale units, with more elaborate support facilities. The greater scale in turn offers ample scope for efficiency improvements through introduction of foreign technology. Consequently, the problem of improving supply to urban markets is an appropriate starting point for World Bank involvement in the livestock sector. The supply problems are most acute for selected eastern cities with either exceptionally large populations or a limited agricultural hinterland. Tianji and Fuzhou municipalities were chosen as study sites because their supply problems are particularily acute, and reflect differences between nort- and south China.  1.04 Despite the focus on large municipalities, problems of production, distribution and service delivery in these municipalities are not dissimilar from those elsewhere in China's agricultural areas, After all, large municipalities in China include within their boundaries cuitivated areas as large as those of small countries or entire provinces in large countries. Nevertheless, because livestock and feed production capabilities within these municipal boundaries cannot conceivably meet urban consumer demand, this study has also examinee possibilities for interregional trade, in particular, the supply of livestock products from more distant agricultural areas to the municipal populations. Two study sites, Shandong and Jiangxi Provinces respectively, were included because they presently serve as suppliers to these two municipalities and the possible expansion of their roles deserved consideratior;. Characteristics of Study S.tes 1.05 Location and Area. Fuzhou Municipality, the capital of Fujian province, is locatecl alo g the southeast coast of China, facing the Straits of Taiwan to the east. Following recent expansion of its boundaries, the municipality currently includes five districts and eight counties, In 1984, Fuzhou's total municipal land area was 1.196 million ha, of which urban districts covered less than 4,500 ha wnile rural areas occupied the remaining 1.192 million ha. About 150,000 ha were cultivated, mainly with grains. Nearly 230,000 ha of grassland and wasteland exists, nearly half in large patches and muchi of it hilly with slopes under 25 degrees. Fuzhou hopes to convert 200,000 ha of this area to pasture for 120,000 head of cattle. 1.06 Tianjin Municipality is situated in the northeast portion of the north China plain, along the Bohai Sea, about 110 km southeast of Beijing. It is one of three centrally-administered municipalities, and is China's third largest city after Shanghai and Beijing (also centrally-administered). Tianjin's total municipal land area covers 1.13 million ha, of which 15,300 ha are in urban districts while the remaining areas are rural. About 625,000 ha were sown to crops, with nearly 80% in grain and 6-7% each in vegetables, oilseeds and cotton. Only some 35,000 ha of reclaimable wasteland is available, much of which is already committed to use in expansion of dairying and aquaculture. 0 1.07 Shandong Province is located between 35-38 N. latitude on the coast in the eastern portion of the north China plain. Its northern border approaches to within 100 km of that of Tianjin Municipality. The western part of the province includes large stretches of the alluvial plain of the Yellow River. About 7 million ha of land are cultivated, or 47% of the total land area of 15.3 million ha. Of a total cropping area of 10.5 million ha, 75% is sown to grain crops (winter wheat, spring and summer corn), 16% to cotton, 6% to peanuts, and the remairnder to other cash crops. The province ranks third in the nation in terms of total sown area and grain  - 3 - production (2nd in corn and tubers, 6th in soybean); it ranks first in production of cotton and oilseeds. 0 1.08 Jiangxi Province lies between 25-30 N. latitude about 300 km inland from the southeast China coast, to the west of Fujian Province. Most of its 16.7 million ha area is mountainous or hilly, leaving only about 2.5 million ha (15%) for crop cultivation. Because of a high extent of multiple cropping, sown area at present is about 5.5 million ha, of which 68% is sown to grain (mainly double-cropped rice), 4% to rapeseed, 2% to soybean, and 19% to green manure crops (mainly overwintering purple vetch). Jiangxi also claims some 3.3 million ha of underutilized upland regarded as suitable for pastue development. However, only 40% of this area has slopes under 20o and, even if fully utilized for, e.g., beef cattle raising, this would probably add only 3-6% to provincial red meat production.L1 1.09 Transportation. Both Tianjin and Fuzhou have relatively convenient access to transportation. Fuzhou is linked to inland and coastal shipping routes through its location along the Min River and proximity to the coast. It has rail and road connections with the remainder of Fujian Province and with other provinces. Tianjin is the major port serving Beijing and the northeast hinterland. Recent installation of container facilities has increased Tianjin's already substantial international shipping trade. Its location at the convergence of five rivers permits significant inland water transport. 1.10 Shandong Province has two major ports linked by rail to the main agricultural production areas in its interior. The area visited by the Mission, in the vicinity of the provincial capital of Jinan in western Shandong, lies on one of two major north-south trunk rail lines, giving direct access to, e.g., the markets in Tianjin or south China. Most surpluses of livestock products or feed grains would, however, move by coastal transport from the eastern production bases to other provinces or abroad. Northern Jiangxi is well-linked by rail with provinces to the north, east, and west; the main pig production areas, including Dongxiang County which was visited by the Mission, have access to these lines and thence, e.g., to the Fuzhou market. Only the mountainous southern part of Jiangxi, where much of the potential pasture land is located, i.3 relatively isolated. lri gene- ral, in all of these municipalities and provinces, a network of paved secondary roads link county seats with eash other and withl major cities, but below this level, the rural road system is far from adequate. 1.11 Population. In 1985, Fuzhou's total municipal population stood at almost five million, of which 667,000 or only 14 percent were residents of the urban core. Tianjin's total population in 1985 was about eight million, of which 4.3 million or 53 percent were within urban boundaries. Tianjitl therefore has a ratio of urban to rural /I Based on a 1.2-2.4 t/ha drv matter yield, about 3.8 t/ha required per beef animal, with 50 kg meat offtake per year, 1 3 million ha of pasture would produce about 20-40,000 t of beef p.a.  - 4 - residents of 1.15:1 compared to Fuzhou's ratio of 1:6.3. Despite urban growth rates in recent years ranging from 2.2-5.4% p.a. and 2.1- 3.1% in Fuzhou and Tianjin respectively, urban planners optimistically expect future annual growth rates to decline to only 0.4-0.6 percent and 1.1 percent respectively. Shandong and Jiangxi have total populations (1984) of 76 million and 34 million, of which 49% and 22% respectively are "urban" (meaning residence under jurisdictiorL of city or town). 1.12 Income Levels. Local statistics suggest that per capita incomes of urban residents in Tianjin slightly exceed those of Fuzhou (Y677 and Y620 respectively). Substantial leaps in urban incomes in various years in 1982-85 were attributable mainly to public sector wage adiustments, and have been at least partially nullified by cost of living increases. Even higher growth rates in incomes of rural residents reflect recent imnprovements in the agricultural policy environment, which have allowed suburban farmers to specialize in high-value crops such as vegetables and receive increasingly favorable prices. In 1984-90, per capita urban incomes in both cities are expected to grow 50-60t, and rural incomes 75-100%. Although exact figures on urban incomes in Shandong and Jiangxi Provinces are unavai- lable, average urban wage levels in thlese provinces fell about 7-17% below those in, e.g.. Tianjin. Per capita net incomes for the farm populat:ion in 1981 were Y408 in Shandong, Y377 in Jiangxi, and Y565 in suburban Ti.anj in, I. 13 Livestock Product:iAon. Shandorng and Jiangxi are both provinces which have surpluses of grain and grain byproducts, and have successfully conve:ted part of these into exportable surpluses of livestock products (Table 1.1). Jiangxi is strong only in pork production, whereas Shandong also produces significant quantities of other red meats, eggr and milk (mainly from goats). Because of the large expanse of rural area incorporated within municipal boundaries, Fuzhou and Tianjin have achieved a partial self-sufficiency in livestocL productior Tianjinl is particularily strong in egg and milk production, but correspondingly weak in pork; whereas Fuzhou's strength in pork and poultry meat is offset by deficiencies in other produzts. These strengths and weaknesses on the whole reflect productivity levels in :he agricultural regions in which these municipalities are situated, rather than characteristics of local policy. For instance, per capita rural consumption levels of red meat and poultry in Tianjin seem very low, but in fact are slightly better than those in neighboring Hebei Province. 1.14 Livestock Consumption. Rulral. producers sell the majority of their production of livestock products to the urban market, which also receives supplies from more distant areas. Consequently urban per capita consumption greatly exceeds both total per capita production and the consumption level of rural residents (Table 1.2). The levels of consumption in Fuzhou and Tianjin slightly exceed the urban norms; also, these coastal cities are bases for fishing fleets and zorisequently aquatic products consumption is far better than  - 5- Table 1.1: Production of Livestock Products, St LySites_ 1985 (kgs per capita) Municipality: Pro-vince: Fuzhou Tian in/ Sliandon~ a~ Meat and poultry 14.3 N/A 16.8 1.8.6 Pork 11.5 6.8 14.5 17.1 Mutton 0.2 0.4 0.7 0. 03/!I Beef 0.1 0.1, 0.6 0.1/b Poultry/rabbit 2.5 N/A 1.2 1.14Lb Eggs 3.8 9.0 9.5 3.1 Milk 3.8 4.9 2.0 0.5 a 1984 figures. Zb Estimates derived part-ly from 1,9b4 datai, Table. 1.'2: Personal Consumption of Livestock I?rodu-cts, Study Si,tes1 *1 84 (kgs per capita) Urban Ur b anr U rb)an1 Ru ral1 Rural. ~~~~China -Fuazhnu T ianj Ln China Tri aI j inT Pork 17.1 13.0 18.5 Beef arid miutton 2.8 3~.' I0 7. Poultry 2.1) 512.) 0.9 0.3 Freshi eggs ,. 7.E 12.8 1.8 3.2 Fish and shrimp .8 3 5i. 1 i .6 1,7 3. average./I Bot-h municipalities hiave at~tewpted to mieet: thie &kmands due. to inicreasing urban populations arid rising per capita incomes with inicreased supplies. During 1982-84, Fuzhou was unsuccessful in in- creasing per capita red meat supply, but did make maijor- improvementsi in supply of poultry, eggs and mnilk, Supply improvements in Tianjin hiave been remarkable for all livestock products except mutton. /1 In fact, the personal. consumption figures, derived from family budget surveys, understate actual uirban consumption (and therefore the excess over rural consumption), as they reflect only direct purchase of livestock products and ignore quantities consumed in restaurants, worker's dining halls, etc.; also certai.n parts of animals which are nonietheless consu.med (e.g.! head, liver, feet), egg products, and, cannied meat are excluded fromn these figures. if, for example, the total amrount of pork supplied to urban, Fuzhou.. is divided by the urban populatio-i, then total direct and indirect cons,unption of pork (at carcass veight) would have been ab3ut 38 kg,/ca,pit-a in 1984, compared to 15 kg//capita direct pork meat- con-surmption as impliled by the coristu- mer survey; and . I. 'K7,/capi-a. of eggs compared, with 76( k/capita.  1.15 Further information on the two municipal study sites is given in the Annex tables. In the discussion which follows, other data ccllected from the study sites will be used mainly to illustrate analysis of general problems in the supply of pork, poultry and dairy products to the urban population. Changing Policies and Performance 1.16 China's livestock sector is dominated by household production units for whom Dig and chicken raising is a sideline which takes full advantage of su:plus resources (labor and crop byproducts). Its contribution to national income is only about 14% of value-added in farm activities, and 11% of net incomes of farmers. Even though China possesses about 5% of the world's cattle and 12% of its sheep, ruminants are mostly raised either on a subsistence basis or as draft animals, and contribute little to total meat production. Of the latter "measured at carcass weight), pigs contribute about 88%, poul- try 8%, and other livestock only about 4% LI. 1.17 Under this traditional system, over the last thirty years meat produztion has been closely determined by availability of feed in the rural areas, includin, mainly grain byproducts and such surpluses of grain above requirements for seed and human consumption as were retained by or resold to tarmers (Graph 1). As long as the grain surplus ;as small, meat production could grow only as fast as bypro- duct availability, i.e., hardly faster than grain production as a whole. But because the income elasticity of direct grain consumption is low, a large proportion of grain surpluses can be used as feed; hence quantities of feed available are highly elastic with respect to increases in grain production beyond a minimum subsistence level. Consequently the several bumper grain harvests since 1978 have been reflected in significantly higher growth rates for meat production than experienced earlier (Table 1.3). 1.18 Although crop byproducts have little use except as animal feed, whether or not grain sulpluses are converted into livestock production would normally be strongly influenced bv relative procure- ment prices of animals and grain, and policies coward private (free market) marketing, as determined by Government. However, following communization in 1958 and continuing through 1984, pig procurements from farm households were compulsory and the Government appears to have made little direct use of the price instrumczlt (Graph 2). Rather, feedgrains retained or distributed at subsidized prices in the rural areas (accounting in 1980 for about 60% of total livestock requirements of feed grains, not including byproduct) were closely tied to deliveries of finished pigs and eggs to the state, as well as /1 For a broader description of livestock performance in 1979-82, see World Bank, China: Long Term Devloprment Issues and Options, Annex 2 (China: A riculture to the Year 20 1), 1985', pp. 72-37,  - 7 - Graph 1. Pork Production and Feed Availability /a (Index: 1952 - 1 -0)- Pork -0- Grain 500 - 400- 300 2000 100 r. -T- X O c o 0, j '0 - I 0 ts 0 L- co 04 coW > Oo 5 Yea,r /6 Pork for current year, feed availability for previous year. Craph 2. Pror-urement PriCe Ratio: Pork to Grcin 1 (Irdex: 1 59 = I 0 P 1201 2 90 - I I rT ! I I I I I 4 o '> tJ; <Iq @ <zY -i r  - 8 - Table 1.3: Livestock Performance, China, 1978-85 1978 1979 1980 1981 1982 1983 1984 1985 'earend inventory (millions) Pigs 203.3 319.7 305.4 293.7 300.8 298.5 306.7 331.4 Cattle 70.7 71.4 71.7 73.3 76.1 78.1 82.1 86.8 Sheep and goats 169.9 183.2 187.3 187.7 181.8 167.0 158.4 155.9 Annual slaughter (millions) Pigs 161.1 187.7 198.6 195.0 200.4 206.6 220.5 238.8 Cattle N/A 3.0 3.3 3.0 3.1 3.5 3.9 N/A Sheep and goats N/A 35.4 42.4 44.8 48.7 49.2 51.8 N/A Slaughter rate (percent) Pigs 55.2 62.3 62.1 63.8 68.3 68.7 73.9 77.9 Cattle N/A 4.2 4.7 4.2 4.2 4.6 4.7 N/A Sheep and goats N/A 20.8 23.2 23.9 26.0 27.1 32.1 N/A Meat per animal (kgs) Pigs 49.0 53.4 59.8 61.0 63.5 63.7 65.6 73.7 Cattle N/A 77.4 80.9 82.4 85.8 90 7 96.4 N/A Sheep and goats N/A 10.7 10.5 10.6 10.7 11.1 11.6 N/A Total meat production ('000 t) Pork 7,890 10,014 11,314 11,884 12,718 13,!6l 14,448 16,547 Beef 310 230 269 249 266 315 373 467 Mutcon 360 380 445 476 524 545 586 593 Subtotal 8,560 10,624 12,054 12,609 13,508 14,021 15,406 17,607 Milk production ('000 t) Total 971 1,307 1,367 1,549 1,959 2,295 2,596 2,894 Cow's milk 883 1,070 1,141 1,291 1,618 1,845 2,186 2,499 /a Updated from F. M. Surls, "China's Agriculture in the Eighties", in Joint Economic Committee, U.S. Congress, eds. China's Economy Looks Toward the Year 2000 (Vol. 1 The Four Modernizations). Washinggton, D.C.: U.S. G.P.O., May 21, 1986, p. 342. draft animal requirements. Relative prices of livestock and grain nevertheless may have influenced feeding techniques: for instance, marginal feed costs can be reduced by finishing pigs to heavier (and fatty) live weights on lower-quality feedstuffs. The trend toward heavier animals has been pronounced in recent years (Table 1.3). 1.19 It is possible that free marke;, rather than official procurement prices, have played a more significant role in determining  9- levels of livestock production, at least at the margin. However, the pig:grain price ratio on the free market, at least in 1984, may have been less favorable than the similar ratio of official procurement prices (rural frec market grain prices were 54% and livestock prices 31% higher than average procurement prices). On the other hand, favorable free market prices have been largely responsible for the doubling of poultry production in 1980-85 (to about 1.9 billion birds and 1.5 million t of meat), as Government control. over poultry raising has been limited (eggs are procured by state organs, but not under a compulsory delivery scheme). 1.20 Excellent grairn harvests in 1982-84, combined with farmer disposal of accumulated stocks of grain (encouraged by high government procurement prices and declining market prices), put the government by 1984 in the position of procuring 30-40 irillion t more grain than urban, industrial, export and strategic reserve requirements justi- fied. Abandonment of the systems of quota grain procurement and tight rationing of feed grain use were matters of necessity as well as opportunity Therefore, in 1985, the government cut back its grain procurements by 26 million tons (and reduced marginal procurement prices), forcing farmers to find alternative ways to dispose of grain surpluses; raised the procurement price of pigs and other livescock products to approximately the level of rural market prices; correspon- dingly increased retail prices in the cities and towns; and ceased to require compulsory deliveries of pigs to state procurement stations. 1.21 The full effects of the 1985 reforms are unclear, but the short-term effects were to (a) stimulate increased livestock produc- tion and slaughtering; (b) cause a constriction of urban demand for livestock products after May 1985; and (c) shift a significant propor- tion of the livestock trade from the state commercial organs to the urban free market and other, more direct links between producer and consumer. The reported effects on livestock production are impres- sive: the year-end stock of pigs rose 8.0% to 331 million (ending six years of stagnation); numbers slaughtered rose 8.4% to 239 million head; and total red meat production rose 14.5% to 16.5 million t. Production of cow's milk reached 2.5 million t (up 14.2%); and egg production rose about 23% (early report). End-of-1985 reporting also initially claimed tremendous increases in supplies to the urban areas. However, final statistics indicate th.1t total sales of pigs rose by only 3%. Sales by state commerce in the second half of 1985 fell 40%; July-December pig procurements normally range from 99-107% of sales, but in 1985 were 1.14% of sales, implying overstocking by the state commercial organs and perhaps significant product losses. Direct marketing by farmers in urban free markets took up part of the slack, increasing irt 1984-85 from 13% to 23% of total sales. The residual forms of distribution - presumably direct procurements by catering and other industries from producers or private wholesalers - increased from 9% of the market to 28%.  - 10 - Organization of the Sector 1.22 The livestock sector, which includes supply of production inputs (feed, breeding stock, and services), livestock production, processing, storage, marketing and distribution, is administered in China by several different agencies. In general, the feed supply is controlled by Grain Bureaus ranging from the Central Government to the county level; Animal Husbandry Bureaus are responsible for production planning and services; Commercial Bureaus are responsible for processing, storage, transportation, and marketing. Responsibility for procurement for domestic consumption rests mainly with the Commercial Bureaus, and, for international trade, with agencies belonging to the Ministry of Foreign Trade and local governments. Interprovincial trade is coordinated by the Central Government (Ministry of Commerce) and negotiated bilaterally between provinces. Chart 1 describes the overall organization of the sector, which is described in greater dstail below, 1.23 Ministry of Agriculture, Animal Husbandry, and Fisheries (MAAF) At the Central Government level, two bureaus under MAAF are involved in livestock production: the Animal Husbandry Bureau (AHB is responsible for project planning, veterinary and quarantine work, technology transfer, personnel training, and varietal improvement for farm households under the collective system. The Bureau of State Farms