Monday, February 20, 2012

The "Hard to Sell" Problem

The "hard to sell" (卖难) phenomenon has been a topic of discussion in Chinese agriculture since at least the 1980s. "Hard to sell" describes a mismatch between supply and demand or poor agricultural market infrastructure that leaves farmers unable to sell what they produce. The "hard to sell" phenomenon was the basic problem addressed by Xi Jinping's thesis and the problem has been serious enough recently that several paragraphs in this year's "Number 1 Document" were devoted to agricultural marketing improvements.

A recent article posted on a "san nong" (agriculture, rural people and rural areas) web site provides a good analysis of the "hard to sell" problem. The article is written by Chu Guoliang, a faculty member at the communist party school of Xiangtan, a region of Hunan Province. Based on his observations in villages, Chu identifies three types of "hard to sell":
  1. When farmers overproduce by "blind" production planning or "following the crowd," resulting in surplus production that has no market outlet.
  2. Seasonal production that is harvested during a concentrated period, resulting in a supply that far exceeds the demand and plummeting prices.
  3. Regional surpluses when producers lack links with consumers, transportation and storage costs are high, and information is poor.
Chu offers a series of different factors that lead to "hard to sell" problems. 

Chu is critical of the tendency of regional governments to hatch schemes to promote production of particular commodities. Sometimes these schemes are misguided. Local officials convince farmers to produce a particular commodity--to become the "potato capital," or the "garlic capital" for example--without adequately researching the market. Chu says that local officials promote "production bases," "cooperatives" and other schemes that sound good, show "nice pictures," give subsidies and build infrastructure to "artificially induce large numbers of farmers to produce a crop." Production expands beyond the capacity of the market to absorb the supply, the price plummets and farmers have more production but less income. Chu says this problem occurred in Inner Mongolia's potato industry this year. 

Sometimes officials in one region make plans without considering the national supply of a commodity. The article cites an expansion of tomato production in Yunnan Province that came on the market at the same time as tomatoes produced in Beijing greenhouses. The Yunnan tomatoes had a cost advantage over the Beijing tomatoes because they were grown outdoors, not in expensive greenhouses. 

In some cases, Chu asserts that companies trick farmers into "hard to sell" problems. He claims that seed companies hire "experts" to promote particular seeds, plant stories in the news media, and form secret alliances with brokers and buyers to hype products and induce "panic buying" of seeds among farmers. He blames the news media and web sites for blindly reporting stories about how producing certain products can make farmers rich but they seldom report on farms that lost money in such schemes. 

Chu identifies a new class of "commercial farmers." These are rural people who went to work in cities and made some money. They are more attuned to market opportunities than are traditional farmers and see agriculture as a money-making opportunity rather than a means of eating or a lifestyle. Commercial farmers see TV programs on crops that can make them rich, go back to the countryside, rent land and start producing, vegetables, fruit or livestock. Chu says many such farmers returned to the countryside to engage in speculative farming after the 2008 financial crisis hit. He says these farmers are common now and are causing fluctuations in prices in Hainan bananas, Shandong garlic, Jiangsu watermelons and Inner Mongolia potatoes. 

Macroeconomic influences also affect rural markets. The increase in the money supply puts money in peoples' hands with few opportunities for investment. Many people invested their funds in buying up garlic or ginger and renting warehouses to store it. 

Chu asserts that marketing costs are artificially high. Highway tolls, transportation fees, market entrance fees (and land rent?) are set on the basis of common charges in other industries, but he says these are too high for agricultural products, presenting a barrier to distribution. 

While the article cites many failings of government planning and subsidies, the article does not dismiss planning; he says the government needs to plan better. Chu acknowledges the role of the "invisible hand," but he says the government's "visible hand" must play an important role in giving farmers information guidance and coordination. Production plans should be nationwide and coordinated. Instead of just setting up as many producer cooperatives as possible, care should be taken to establish marketing, financing, training, and other plans for the cooperative's business to succeed.

Chu argues that information services need to be better. Farmers need to understand how to interpret and use information. Not just "letting the market know about agricultural products," but also "letting farmers know about the market." He calls for establishing well-known brands of agricultural products and investing in storage and processing infrastructure.

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