Thursday, July 17, 2008

Wheat Opportunity Cost in Farmers Daily

China has come a long way from the days of Marxism-Leninism. The Farmers Daily newspaper (the title used to be translated Peasants Daily in the old days) brings up the economic concept of “opportunity cost” in a July 16 article discussing declining profits from selling wheat, showing that Adam Smith may be more influential than Mao Zedong in today's Chinese economy.

The journalist notes that fertilizer and diesel prices have raised wheat production costs about 80 yuan per mu (that turns out to be about $80 per acre at the present exchange rate). The government raised the minimum price for the recently-harvested wheat by about 0.05 yuan per jin. With a yield of 800 jin per mu, that works out to an increase of 40 yuan in revenue per mu, so profits are slimmed down, and farmers are wondering whether market conditions might push prices higher in coming months, making it advantageous to sell later. (By the way, wheat and rice are the only major crops that have minimum prices--most prices are determined by market forces).

The Farmers Daily article points out that farmers are less eager to plant grain due to the declining profits. Moreover, the journalist points out, the opportunity cost of farmers’ labor is higher due to the improving nonfarm economy. The opportunity cost is the return that the owner of a factor of production could have earned by employing his resources in the best alternative activity. (In another article this week, Chinese Commerce bureau apparatchiks somehow calculated that there are 130 million “surplus” farmers working in nonfarm jobs—a number about the size of the entire U.S. workforce.) There have been a number of articles and powerpoints lately expressing concern about declining profits from grain vis-a-vis off-farm jobs and warning that Chinese farmers may abandon grain production.

China’s policymakers have sealed off their grain market from high world prices. Keeping China’s grain prices lower than world prices keeps Chinese consumers from getting bent out of shape, but it denies Chinese farmers the benefits (and incentives) of high world grain prices. Thus Chinese farmers are not getting the signal that the world needs more grain. So they are going to the city to work instead. (Here in Nanning, Guangxi Province where I write this, there was a story on last night’s TV news showing workers who came to look for work in the city, couldn’t find any, and are sleeping in the park, with no money to go back home.) China could get short-term stability in grain prices at the cost of longer-term increases.

Market prices are a powerful mechanism for allocating resources. At least some journalists in China are now facile with economic concepts.

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