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China New Borun Corp  (BORN)
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    Sector  Consumer Non Cyclical    Industry Alcoholic Beverages
 
 
 

China New Borun's Suppliers Performance

BORN's Supply Chain


 
BORN Costs vs Sales of Suppliers Growth
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China New Borun's Comment on Supply Chain


Starting from November 2009, we entered into framework agreements with local granaries in Heilongjiang Province, as corn prices were generally the lowest in the Northeastern region of China, to engage them to purchase corn for us from local farmers during the harvest season and store them for subsequent delivery to substantially satisfy the corn requirements of our Shouguang facility and Daqing facility during the non-harvest season. Such supply contracts provide us access to corn at prices which we believe have historically been lower than the market price in the off season and times of high price volatility due to crop failures and other factors. Contractual terms under the framework agreements included, among others, basis of purchase price and additional costs, the total quantity of corn we intend to purchase in the coming harvest season, the standard of corn quality, the delivery schedule, and the payment milestones. These terms are to be re-negotiated, updated and agreed before the harvest season, usually around November, every year.

Starting from November 2013, we entered into new purchase arrangements with local granaries. We fully settled the corn price (i.e. purchase cost) before the granaries executed the procurements per our agreed schedule. In prior years, we did not pay for the corn (with the exception of a 10% deposit) until the corn was delivered to our manufacturing facilities, and the granaries retained the risks and rewards of ownership of the corns purchased under the framework agreement until our receipt of such delivery. Due to this change, we initiated a “bill and hold” arrangement with the granaries whereby we take possession of the corn upon purchase and storage of the corn by the granary. Under this new policy, after the corn is collected from the local farmers as planned, both the quantity and quality of corn is inspected and acknowledged by one of our employees assigned to the granaries’ warehouses. The corn is then separately stored and distinguished from other inventory of the granaries, and subject to supervision by our designated employee. Therefore, once the stock-in processes are completed, the granaries neither retain any specific performance obligations nor have the right to sell the collected corn on behalf of us to any third party. As the granaries’ sole obligation is to manage the storage of corn for us, the significant risks and rewards of ownership of the purchased corn are considered to be transferred to us upon our payment to the granaries. In addition, we also bear the risk of loss in the event of a decline in the market value of the collected corn. The custodial risks of the collected corn are properly insured by the granaries and us. Upon the delivery of corn, we pay to the granaries a fixed handling fee of RMB124 ($19) per ton as stipulated in the framework agreement, mainly for the storage of our corn at the granaries’ warehouses.




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