Thursday, September 8, 2011

5-Year Plan: More Subsidies, Higher Prices

On September 2, China's Ministry of Agriculture released the "12th five-year plan for agriculture and the rural economy." Interestingly, the full document seems to have disappeared from the Ministry's web site and doesn't appear to be available anywhere on the Internet. A summary by Chinese investment advisors reveals the general contents, and another article containing comments from a National Development and Reform Commission (NDRC) spokeswoman reveals some insights about the serious challenges the plan is seeking to address.

The plan reiterates the priorities of maintaining grain security and steady increases in rural income that have been broad policy goals since at least the 1990s. To achieve these broad goals, the plan calls for reshaping agricultural industry--speeding up development of "modern agriculture," continuing to "build a socialist countryside. In perhaps a last-gasp effort by the Hu Jintao-Wen Jiabao leadership to cement its legacy, the plan once again calls for creating an "all-round well-off" (xiaokang) society during the plan period.

The plan sets a target of maintaining 95-percent self-sufficiency in grain, but the target for grain production is set at 540 million metric tons, approximately the same as the output in 2010. The plan acknowledges that agriculture must compete with urbanization and industrialization for a limited resource base. The plan sets a target of maintaining the amount of land planted in grain at 1.6 billion mu (107 million hectares).

In light of the loss of land to urbanization, the plan emphasizes that grain yields must rise in order to maintain grain production. It also acknowledges the shortage of water resources. Consequently, a major emphasis of the plan is increasing productive capacity, most prominently through investment in irrigation facilities and equipment. The plan also emphasizes the need to develop and disseminate new plant varieties and mechanize agriculture. Another part of the plan's strategy is to manipulate the mix of crops to maximize yields, concentrate production of each commodity in the most productive regions and improve logistics to promote interregional trade. There is also an emphasis on improving rural financial services to facilitate investment.

Investment alone is not sufficient. Farmers also need strong incentives, so the plan also casts a vision of ever-increasing subsidies and rising agricultural prices in order to encourage farmers to keep producing and increase rural incomes. The NDRC comments describe agricultural prices as "very low." The plan calls for more subsidies, guidance, market control, and a guaranteed pattern of ever-rising farm prices.

The NDRC comments emphasize the challenges, tensions, and pressure China faces in increasing policy support. NDRC says, "The biggest challenge is increased tension in agricultural production, continued conflicts in product structure, regional imbalances, conservation of agricultural resources and pressure to preserve the environment."

The NDRC observes that policies have increased grain production, but increases in grain area took land away from cotton and oilseeds. NDRC notes that cotton area and production in Hebei-Shandong-Henan region have fallen, a trend that "cannot be sustained." NDRC says the country cannot continue its reliance on Xinjiang for increased cotton production [perhaps because it requires massive subsidies to transport across the country to textile mills]. NDRC also cites the decline in soybean production this year due to higher profitability of corn and rice in the northeast. NDRC calls for "grasping" rapeseed production in the Yangtze delta region [it often loses out to wheat], and "stabilizing" rice production in the south [where farmers are frequently abandoning the early rice crop]. The answer, of course, is to subsidize every crop and a continued proliferation of subsidies.

NDRC notes that rice and wheat yields have been increasing, but it complains that corn yields still have a lot of space for increase. NDRC complains that increases in corn production have come entirely from increasing the area planted in corn. The NDRC calls for focusing on ways to increase corn production and "controlling" industrial processing of corn. It calls for raising peanut production through increased inputs and investment.

The plan calls for continued modernization and industrialization of livestock and aquaculture industries. The plan aims for livestock's share of agricultural production value to increase to 36% and aquaculture/fisheries to reach 10%. It calls for increased scale of production. By the end of the 12th five-year plan, at least 38% of dairy farms will hold 100 or more head and 50% of hog operations will slaughter 500 or more hogs annually. The aquaculture plan emphasizes ocean cultivation of fish and shellfish in four main coastal regions.

Most articles about the plan seem to be carried on web sites for Chinese investors, a refection of the emphasis on big companies in the strategy. The five-year plan's strategy includes nurturing a set of large companies with revenue of 1 billion yuan or more (about $150 million). The plan calls for encouraging companies to form large conglomerates through mergers, acquisitions, and restructuring. The summary of the plan that appeared on an investors' news site expected that companies supplying inputs to agriculture, including seed, veterinary pharmaceuticals, suppliers of irrigation equipment, and agricultural machinery would benefit from policy support for the strategy of raising productivity through improved varieties, irrigation, mechanization and an emphasis on "feed safety." The investment advisors speculate that big domestic companies similar to Tyson and Chia Tai may be nurtured.

How does the strategy of ever-rising subsidies and agricultural prices square with China's concern about inflation? Raising grain prices also increases the cost of feed for the "modern" livestock producers that use a higher proportion of grain in feed rations. Increased mechanization and use of chemicals increases the demand for energy-intensive inputs and exposes Chinese agriculture to rising energy prices.

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