The eight straight increases in grain harvest since 2003 continues to get a strong propaganda push in China. But an inquisitive Chinese citizen might ask, "If we're producing so much grain, why do grain prices keep going up?" An essay by an Academy of Social Sciences Researcher posted on many Chinese web sites this week takes on this issue.
The author begins with some startling statistics. From 2004 to 2010, China's grain production rose by a cumulative total of 120 million metric tons (mmt), a remarkable increase of 26.9% in six years. Yet grain prices went up about 80% over that period. The author notes that it looks like grain output will be up again this year, yet this year's grain price is up 10% from 2010.
The author, Li Guoxiang, credits agricultural policy for the steady increase in grain production. He emphasizes the role of the minimum price policy. While the minimum price has generally been less than the market price in most years, the built-in expectations of rising prices encourages farmers to keep planting grain because they will be protected from downside risk in price. Li points to 2008-09 as an example of a period when the government prevented grain prices from falling to preserve farmers' incentives. He observes that China has insulated its grain market from wild swings in world grain prices in recent years.
With a steadily-increasing grain supply, why are prices rising?
The first factor he emphasizes is the rise in production costs. The prices of all inputs and factors of production have risen sharply as industrialization and urbanization increase opportunity costs.
Based on data from the national agricultural product cost and profit survey, Li reports these increases in prices of agricultural inputs during 2003-09:
Seeds: increased from 2.6 to 5.1 yuan/kg, up 95%
Fertilizer: increased from 2.9 to 5.4 yuan/kg, up 88.5%
Wages: increased from 18.8 to 53.7 yuan/day, up 185.6%
Land rent: increased fro 791 to 1719 yuan/hectare, up 117.4%.
During 2010-11, the increase in the fertilizer price slowed, but it didn't stop grain prices from increasing. In surveys, Li Guoxiang found that the wage surpassed 100 yuan, and 200 yuan in some places during the peak labor season. In 2010, land rent of 600 yuan per mu was common, and it went up to 800 yuan in 2011. In some places land rent was more than 1000 yuan.
By comparison, the sale price of grains (rice, wheat and corn average) went up from 1.1 to 1.8 yuan/kg during 2003-09, an increase of 61.9%. Thus, grain prices have not kept up with increasing costs.
Against this rising cost structure, the government has to keep raising grain prices to ensure that farmers can earn a reasonably good profit to prop up their incentives. Professor Li quotes the 2006 no. 1 document: “Adhere to and improve the minimum purchase price policy for key grains; maintain grain prices at a reasonable level.”
Li points out that Chinese citizens have rising living standards. He estimates that grain consumption will increase 30 mmt by 2020 to reach 630 mmt. [These numbers imply a current consumption of 600 mmt, about 50 mmt more than production. The 50 mmt deficit roughly matches soybean imports. Soybeans are considered a "grain."] People are changing their lifestyles "from planting grain to eating it" and "from raising hogs to consuming pork." Along with economic development there will be a change in structure of grains demanded and a demand for greater quality and safety.
Li explains that agricultural price policy involves a delicate balancing act. Prices must rise as consumers bear part of the cost of rising input prices. But agriculture must also increase productivity to mitigate the increased "burden" of food costs born by consumers. Rising agricultural prices should be accompanied by steady increases in agricultural subsidies to give farmers reasonable profits. Finally, agricultural productivity must be increased by promoting "modern agriculture."
Yet two other factors behind price increases cited by Li are the unintended consequences of government policies. One factor Li doesn't dwell on is monetary policy. He observes that the M1 money supply grew 34% in 2009. Excess liquidity in the economy contributes to speculation. Li observes that, with agricultural prices guaranteed to rise, there is a tendency for farmers, processors and traders to hold their commodities in storage instead of selling them. When there is a shortfall of supply in a certain area, speculators rush in to buy up commodities, "artificially exaggerating the tension between market demand and supply," adding upward pressure on grain prices.
Li also fails to mention that the increase in grain prices is magnified in livestock industries. Corn prices are up over 20% from last year, putting upward pressure on pork costs. That means pork prices have to go up too.
In the end, Li complains that slow growth in agricultural productivity is the main culprit. Li sums up by saying that the "sacred mission of agriculture" is to fulfill the peoples' rising demands for quality agricultural products by speeding up agricultural modernization, practicing modern agriculture and raising productivity.