Wednesday, March 21, 2012

Subsidies Adapt to Commercial Farming

Beginning in 2004 China began giving small subsidy payments to grain farmers and also began to phase out taxes on farmers. The subsidies were designed to be "decoupled" payments that are not linked to the amount of grain produced. The "decoupled" status allowed them to be excluded from payments that count toward the limit  on farm support imposed on China as a WTO member. However, officials under pressure to boost grain output are frustrated that the subsidies do not induce farmers to plant grain.

The tension over subsidies is highlighted by a recommendation for improving grain subsidies made by the Hunan delegation to the National Peoples' Congress earlier this month. The delegation asserted that the grain subsidy needs "improvement" since the 15-yuan-per-mu subsidy is not nearly enough to offset the increased costs of raising two crops of rice. Farmers lose money growing two rice crops, "no doubt dampening their enthusiasm." (Yesterday's post noted that Hunan is the focus of concern about farmers switching from two crops of rice a year to one crop.)

The Hunan delegation worried that production incentives are weak when the  subsidy is given to the person who holds the contract rights to the land, not to the one who actually grows crops on it. They said the current "general benefit system has some limitations." They suggested that subsidies be based on the principle of "whoever plants gets the benefit." In other words, when land is rented out subsidies should go to the grower, not the land "owner."

The Hunan delegation suggested that land-holders who fail to plant crops on their land "for a long time" [more than just a single season of the year] can be assessed penalties and have their land turned over to large farmers who will plant crops on it. Last year this blog posted articles about the idle land phenomenon and measures officials take to prevent land from being left idle which indicate that these practices are common among local officials (although the practices seem to violate land contracting law). Apparently the Hunan officials are asking for legal or official sanction of these practices. They also asked that conditions be set for subcontracting (renting out) land, clarification of regulations for renting land of different grades, length of rental contracts and conditions for terminating rental subcontracts (i.e. for land-holders to get their land back from renters). These conditions are often ambiguous and rental agreements are often verbal.

They suggested subsidy payments for large grain farms (种粮大户) to help them consolidate idle plots rented from small farmers. The Hunan delegation said large farms are constrained by lack of financing and need help from the government to finance construction of infrastructure and grain-drying equipment. They called for relaxed credit limits and interest subsidies for large grain farmers. The article did not mention the size of "large" grain farms, but some provinces have large grain farm subsidies that have a threshold of 50 or 100 mu (about 9 to 18 acres).

The Hunan delegation complained that grain-producing regions are not adequately rewarded for their contribution to national food security. Farmers and local governments still bear a cost burden that they think should be shared by the rich coastal provinces. They asked that subsidies be doubled for farmers who double-crop rice and they called for higher input subsidies and extending subsidies to rice seedling farms as soon as possible (see yesterday's post). They called for setting up a compensation mechanism that would transfer funds from rich provinces or districts to grain-producing districts in order to cover electricity costs and fund agricultural infrastructure.

The article highlights an emerging social and economic change in rural China. The subsidy system was set up based on the presumption that agriculture is a subsistence activity in which millions of small land holders live off their small plots of land and pass the land down from generation to generation. However, this is becoming outdated as agriculture becomes a commercial profit-making operation and land becomes a capital input that can be consolidated, rented and sold. The subsidy system is becoming outdated and complex as it is forced to adapt to the new reality.

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