Corn: Get Big or Get Out

An analysis of this year's corn cost of production survey results in Jilin Province grapples with the basic economics of small-scale grain production in China.

The analysis is based on the provincial statistical bureau survey team's data collected from 200 farm households in four districts of Jilin Province. The analysis focuses on the importance of net returns for preserving incentives to produce corn. The report says that returns from growing corn have been relatively stable over the last several years despite rising production costs. This is possible because Chinese corn prices have been rising. The corn price rose 20% this year in Jilin.

The analyst worries, however, that the incentives to plant corn are weak in comparison with off-farm work or planting higher-return crops. He says farmers who rely on planting grain are caught in a "low-level trap."

Therefore, the analyst emphasizes the critical importance of the price-support policy which, he says, has built in expectations of rising prices. With costs rising 15%-20% per year, how long can Chinese corn prices rise at this rate to keep profits steady?

Production costs are rising steadily. The analyst recognizes the increasing energy-dependency of Chinese agriculture--fertilizer, mechanization, transportation to market are all dependent on energy prices which are rising. Wages are rising rapidly too. The analyst also notes that land rents are increasing. In this environment, farmers (owners of factors of production) want to put resources into other activities.

One path to higher income is better technology. The report says yields in the Jilin survey were 750 kg per mu (except for Kong Family Village where there was a hail storm that reduced yield to 550 kg). That works out to 179 bushels per acre by my calculation. That compares favorably with Midwestern U.S. yields. This report on 2010 yields in Illinois reports averages ranging from 148 bu/acre in the southern part of the state to 174 bu/acre in northern Illinois. If Jilin farmers are already getting yields comparable to those in U.S. corn-growing regions, how much potential is there for growth? Keep in mind the sample probably is not random; it is possible they chose the "best" farmers to participate in the Jilin survey (or they might have chosen the old guys who have nothing better to do than fill in survey forms).

The average Jilin corn price received by farmers, says the article, was 1.72 yuan per kg, which works out to over $6.80 per bushel. The support price for Jilin corn announced in December was higher, at 1.98 yuan per kg. Presumably, the average was mainly for sales earlier in the year.

The average net return for corn, says the article was 700 yuan per mu. By my calculation, that works out to the equivalent of $664 per acre or $3.78 per bu--that's net return. That's not much if you've only got one acre. But if you plant 700 acres, like an Illinois farmer, that works out to nearly $465,000 in net income! In Jilin that $465,000 would be divided among 500 or so farmers.

The dream of farm prices rising faster than nonfarm prices never came true during the 20th century. Historically, farm prices have fallen in comparison with prices of industrial products. This led to low incomes per acre and complaints from U.S. agricultural economists about "the overproduction trap,"  "technology treadmill" and "the farm problem" during the 20th century, similar to the "low-level trap" rhetoric used by the Jilin analyst. The solution for U.S. farmers during the 20th century was to "get big or get out." That would seem to be a clear solution to low incomes for Chinese farmers but it's hard to do this since land markets are undeveloped. No one expects to see 700-acre farms in China, but something a little bigger than 2 acres would help farmers earn decent incomes.

Another report from a Jilin County with the intriguing name of Jing'le (Quiet Happiness) reports that land transfer increases the net returns of farmers. During the first half of 2011, 28,000 mu (about 4610 acres) in the county were sub-leased, rented, swapped, or otherwise transferred to others. According to the report, farmers earned more rent from these transactions than they would have earned by planting crops on the land. The lessors preferred to migrate elsewhere to work instead of farming, turning over their land to others who are more capable farmers. The lessee is more productive and earns more from the land than the lessor would have. The article claims that concentrating land in larger operations increases the utilization of land (less is left idle),  promotes mechanization and improves productivity of land on hills and mountains.