The low-tariff quotas, which are sanctioned under China’s membership of the World Trade Organization, are allocated to state-owned and private firms in the world’s top grain consumer.

With Chinese grain prices among the highest in the world, these import allocations have become a cash cow for well-connected companies.

Fang Yan, a deputy director of the National Development and Reform Commission’s (NDRC) rural economy department, told Reuters this month there would be changes to the import quota allocation system but declined to elaborate.

But industry sources say proposed changes include bringing in a more transparent tender process for quotas, while Beijing is also looking into awarding quotas only to companies that agree to buy grains from state reserves.

“The system allows officials to trade their power for money. Companies are able to pay bribes to obtain quotas, while mills and other end-users that are in need of cheaper imports are shut out,” said Ma Wenfeng, an analyst at Beijing Orient Agri-business Consultant Co. Ltd.

Experts say the process of obtaining quota allocations is opaque and complex. The NDRC, which issues the quotas, does not publish the names of firms receiving import allowances or volumes.

Ma’s firm, which consults the government, has proposed the current scheme be replaced by a public tender process that allows firms to bid for quotas.

Delays issuing import quotas

Plans to overhaul the quota system have already led to delays in issuing 2015 grains and cotton import quotas, which are typically announced by the end of September each year.

“The process is definitely going to be changed,” said Li Qiang, chief analyst with Shanghai JC Intelligence Co. Ltd., a private consulting firm, adding that a series of corruption scandals surrounding the NDRC underscored the need for change.

The NDRC, the nation’s top economic planner, has been a target of investigations since President Xi Jinping launched an anti-graft campaign in late 2012. The body’s former deputy head Liu Tienan was sacked in September for taking 35.6 million yuan (C$6.6 million) in bribes.

An investigation also found 11 officials in various departments of the NDRC taking huge bribes, China’s Supreme People’s Procuratorate told state media last month.

According to Beijing’s WTO pledge, annual wheat import quotas are capped at 9.6 million tonnes, corn at 7.2 million tonnes, rice at 5.3 million tonnes and cotton at 894,000 tonnes. State-owned companies are given the bulk of the allowances, with the rest distributed amongst private traders.

Imports under the WTO quota have low tariffs of just one per cent, while to protect its farmers China places higher duties on shipments above that fixed volume. In the case of wheat, firms without import quotas could end up paying tariffs as high as 180 per cent.

The gap between the global price of agricultural commodities — with Chinese cotton prices, for example, 40 per cent more expensive than imports — has encouraged a black market where companies sell their quotas for a profit.

Companies with cotton import quotas were selling their allocation to other processing firms for as much as 4,000 yuan (C$742) per tonne, according to a Chinese media report in March, citing the China Federation of Industry and Commerce.

Struggling with huge grain stocks, Beijing is also considering linking the WTO import quotas to purchases from the state reserves, said a manager at an animal feed mill, which was allocated import quotas this year.

The manager said discussions were under way for feed mills to buy 10 tonnes of grains from the state reserve in exchange for a tonne of import allowances.

“That means private feed mills will need to buy a total of 28.8 million tonnes of expensive state corn in exchange for the import quotas. That will help to cut state reserves,” said the manager, who declined to be identified as he was not authorised to speak to the media.

China does not publish its grain reserves, but corn stockpiles over the past two years are estimated by traders to have increased to nearly 100 million tonnes, or more than half of the country’s annual consumption.

— Niu Shuping and Fayen Wong report for Reuters from Beijing.

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Global dairy prices have fallen more than 40 per cent since February, according to the Global Dairy Trade, an auction platform run by New Zealand’s Fonterra Co-operative Group, which controls nearly one-third of the world’s dairy trade.

Fonterra said average prices fell 8.4 per cent to a two-year low at the last two-weekly auction on Tuesday as volumes surged by almost one-third.

Much of the blame for plummeting prices has been linked to a surge in Chinese imports of milk powder in the second half of 2013 following a series of food scandals and supply worries that sparked near-panic buying.

“China purchased very, very strongly in late 2013/early 2014 and bought more than they needed as it turned out,” said Wellington-based Hayley Moynihan, Rabobank’s director of dairy research in Asia.

“Our view is that as a result of the retail price increases in 2013, there has been a slowing of overall demand growth… and it has consequently left the Chinese market with some inventories to get through at the same time as domestic production has improved.”

Milk scandals

Milk powder is a highly sensitive topic in China after a scandal in 2008 when melamine added to baby milk killed at least six children and left thousands ill.

A botulism scare with a Fonterra dairy product, bribery allegations at France’s Danone and record fines for price fixing by milk powder firms contributed to a spike in prices and brief shortage of milk powder in China in mid-2013.

That prompted Beijing to encourage local milk powder companies such as Inner Mongolia Yili Industrial Group and China Mengniu Dairy to ensure stable supplies.

China’s imports of milk and milk powder jumped close to an annual 70 per cent to 830,000 tonnes in the first half of this year, according to customs data.

After steadily rising since March, stocks of milk powder held by China’s large diary companies reached a record high of about 400,000 tonnes in July, said Song Liang, a veteran Beijing-based analyst who has covered the country’s diary sector for over 10 years.

“It will take about three-four months to digest those stocks, after taking into consideration of the new supply that is being added into the market every day,” Song said.

Recovery expected

China’s burgeoning appetite for dairy produce from infant formula through to consumer goods such as yoghurt has encouraged a strong rise in production not just in New Zealand, but also in Europe and the U.S.

Rabobank estimates global milk exports spiked by an extra seven billion litres, or 25 per cent, in the first six months of 2014 compared with a year earlier.

Roughly half of the extra supply came from Europe, where output improved after the previous brutal winter, and most of the rest came from New Zealand and the U.S., which both saw milk production bounce back after droughts.

For top exporter New Zealand, known as the Saudi Arabia of milk, the fall in dairy prices represents a significant economic hit.

After paying farmers a record milk price last year, Fonterra now expects to cut its payout by 29 per cent for the current season, dealing a US$4 billion blow to the country’s agricultural-based economy.

Analysts and industry sources however expect prices to recover from current levels as Chinese inventories are worked through and weaker prices draw consumers back.

“Current low dairy prices are likely to begin to attract back to market the same buyers who were put off by last year’s high prices,” said New Zealand’s ASB Bank rural economist Nathan Penny.

“All up, we continue to expect dairy prices to stabilize and then recover by the end of 2014. However, predicting the exact timing of any price rebound remains an inexact science.”

— Gyles Beckford and Fayen Wong report for Reuters from Wellington, N.Z. and Shanghai respectively. Additional reporting for Reuters by Colin Packham in Sydney.

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The local government in Shanghai said the Huhuai market for live birds had been shut down and 20,536 birds had been culled after authorities detected the H7N9 virus from samples of pigeons in the market. Other live poultry markets in the city will be closed down from Saturday, it said.

China’s eastern Jiangsu province said two new H7N9 bird flu cases have been confirmed on Friday, bringing the total number of reported infections nationwide to 16.

At least four of the dead are in Shanghai, a city of 23 million people and the showpiece of China’s vibrant economy.

The latest death was of a 64-year-old man in Zhejiang province, state news agency Xinhua said on Friday, adding that none of the 55 people who had close contact with him had shown symptoms of infection.

Shanghai authorities stressed the H7N9 virus remained responsive to the drug Tamiflu and those who were diagnosed early could be cured.

“We currently have enough reserves of Tamiflu to meet with the current outbreak,” Wu Fan, director of the Shanghai Center for Disease Control and Prevention, told a news conference. Tamiflu is made by Roche Holding AG.

Airline shares tumbled in European markets on fears the outbreak could become widespread. The STOXX Europe 600 travel and leisure sector index fell by 3.5 per cent.

In Hong Kong, the overall index closed at a four-month low, led by falls in airline shares over fears of diminished demand for air travel. Air China slumped 9.8 per cent, its worst single-day loss in nearly four years.

In Shanghai, the rising death toll prompted some residents to stay away from markets with live chickens and ducks.

“I’m only getting my groceries at the large supermarkets now because I don’t think it is safe to visit the wet markets anymore,” said 38-year-old Shao Linxia, adding she had also stopped buying poultry since news of the bird flu surfaced.

“We all remember SARS and how quickly it could spread, so we are obviously worried.”

Shadow of SARS

The 2002-03 epidemic of severe acute respiratory syndrome (SARS) started in China and killed about one-10th of the 8,000 it infected.

Still, there were few signs of panic in Shanghai with shops remaining open, and the strain does not appear to be transmitted from human to human.

“We have 14 cases in a large geographical area, we have no sign of any epidemiological linkage between the confirmed cases and we have no sign of sustained human-to-human transmission,” said World Health Organization spokesman Gregory Hartl before the two new cases were confirmed.

“The 400 contacts are being followed up to see if any of them do have the virus, have had it from someone else,” he told a news briefing in Geneva.

But Hong Kong authorities were taking extra precautions.

Additional staff would be deployed at immigration points to make random temperature checks of visitors in addition to the infrared full-body scanners already in place, Ko Wing-man, Hong Kong’s food and health secretary, told reporters.

Vietnam banned imports of Chinese poultry. In Japan, airports have put up posters at entry points warning all passengers from China to seek medical attention if they have flu-like symptoms.

In the United States, the White House said it was monitoring the situation and the Centers for Disease Control and Prevention said it had started work on a vaccine if it was needed. It would take five to six months to begin commercial production.

The U.S. Food and Drug Administration (FDA), which regulates medicines, said it was working closely with international and national health authorities.

With the fear that a SARS-like epidemic could re-emerge, China said it was pulling out the stops to combat the virus.

“(China) will strengthen its leadership in combating the virus… and co-ordinate and deploy the entire nation’s health system to combat the virus,” the Health Ministry said in a statement on its website (www.moh.gov.cn).

WHO centres analyzing samples

The virus has been shared with WHO collaborating centres in Atlanta, Beijing, London, Melbourne and Tokyo, and these groups are analyzing samples to identify the best candidate to be used for the manufacture of vaccine — if it becomes necessary.

Any decision to mass-produce vaccines against H7N9 flu will not be taken lightly, since it will mean sacrificing production of seasonal shots.

That could mean shortages of vaccine against the normal seasonal flu which, while not serious for most people, still costs thousands of lives.

Experts said more needed to done to determine the level of risk from the bird flu strain.

“H7s are viruses that mutate often so it could disappear as a result of mutation or it could become much more aggressive, so it is important to study every one of the viruses that we isolate in humans and in animals,” Alex Thiermann, special advisor to the World Animal Health Organization’s (OIE) director general, told Reuters.

— Fayen Wong and Clare Baldwin write for Reuters from Shanghai and Hong Kong respectively.

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