Chinese officials see subsidies as the magic cure for all problems in agriculture. Virtually all reports by government analysts conclude with a section that usually recommends more or better subsidies. Another common theme in news media and government reports is that subsidies give American farmers their advantage, so Chinese farmers need to have subsidies too.
China introduced direct farm subsidies and price supports in 2004, and since then they have multiplied in the number of subsidies offered and the amount of money. China's subsidies are now comparable to those of the United States in total spending and dollars per acre.
The subsidies are basically trying to counteract market forces by paying farmers to plant grain crops that produce little income. This is becoming more difficult as the markets for land, labor, and credit improve. Labor markets for rural people are well-established and wages are rising. Even land markets are developing, despite the lack of land ownership and weak property rights. The rental market for farmland is establishing rents for different types of rural land and they are also rising. As farmers learn the opportunity cost of their labor and land, they are less inclined to plant grain.
The government, therefore, has had to offer more and more subsidies and keep raising grain prices to entice farmers to plant grain.
Cost of production survey reports are picking up an interesting theme of rising land costs linked to increasing subsidies and rising grain prices. A detailed treatment of estimating the land component of farm production costs in Jiangsu Province in 2005 noted that the reduction of agricultural taxes and rising grain prices had led to rising land rental rates. The study also reported that land rental rates differed depending on the use of the land. Grain land had rented for 150 yuan three years earlier, but rent had risen to 300 yuan in 2005. Land for flowers or fruit trees commanded higher rent. The report said that 1000 mu had been leased to a Hong Kong company to grow vegetables at 300 yuan per mu. Land with greenhouses rented for 580 yuan.
These rents are the equivalent of $130 to $260 per acre, far higher than the average rent for U.S. cropland, currently about $90 per acre.
Rents are also high in more remote agricultural areas of China. In Nanyang, Henan Province, the average rent for wheat land is reported to be 106 yuan/mu in 2010--about $95 per acre--and up 12% from last year. In Songzi, southwestern Hubei Province, rice land cost is estimated at 90.8 yuan/mu, up 6.8% from the previous year.
Subsidies started out with a payment of 10 yuan per mu in 2004. Since then, they have risen to about 80 yuan per mu for wheat land in Henan.
A number of reports point out that, even with the subsidies, land planted in grain earns much less than if it's planted in vegetables or other crops. In Chibi City there is consternation that many farmers take the subsidy funds, then rent the land to someone else to grow vegetables or leave it abandoned to work off-farm. This phenomenon is common, and there are many suggestions to link subsidy payments to actual production or marketings of grain.
The Chibi report also notes that farmers can earn a comfortable living with a larger scale operation. Most farmers are allocated 3 to 10 mu of land, but the report points out that two people can easily farm 30 mu (less than 5 acres) and get an income of 12,000 to 15,000 yuan. This is hard to do, because land markets are still underdeveloped. The few who do farm 30 mu can't assemble a continguous piece of land and leases may be only year to year, so it's hard to exploit economies of size.