Tuesday, April 3, 2012

Seed Subsidy: Waste, Corruption, Monopoly

One of China’s flagship farm programs is a subsidy to encourage farmers to purchase improved seed strains. Officials and news media depict it as a glowing success that has encouraged backward farmers to buy commercial seed that raised yields and standardized products. However, the news media seldom report widespread complaints about the program from farmers, seed merchants and village officials. It seems that in many areas the seed subsidy was hijacked to become a honey pot for local agricultural officials and the seed companies historically associated with the agricultural bureaucracy. Some critics accuse the program of hindering the spread of quality seeds and even raising costs for farmers. The Ministry of Agriculture made adjustments to the program but problems seem to persist in some regions.

An Investors News 《投资者报》 article, “Fine Seed Subsidy Pulled into the Quagmire of Competing Interests,” posted on an agricultural news site in February (although it seems to have been written perhaps in 2009) offers a detailed look at complaints about the seed subsidy program. The article highlights the efforts of a retired Academy of Agricultural Sciences worker who noticed the subsidy program’s problems early on and sent letters to the State Council asking for reforms.

The seed subsidy was launched as a pilot program in 2002 to encourage farmers in Heilongjiang to use soybean seeds with high oil content. The following year it was extended to wheat seeds in Henan. In 2004 it became a part of the national grain subsidy package (along with a direct payment and machinery purchase subsidy) and was offered for rice, wheat, corn and soybeans in various regions. In the program’s initial design the subsidy funds were passed down and distributed to designated seed companies who were then to sell seeds to farmers at a discount. The seed supplier and the seeds were chosen by a bidding process in each locality.

Tong Pingya, the retired agricultural researcher, noticed problems and heard complaints about serous problems with the program shortly after its inception in 2004. He spent a year investigating the complaints and wrote a brief critique of the program for seed industry publications in 2006.

Tong’s 2006 article criticized the practice of handing down the subsidy through the agricultural bureaucracy rather than giving funds directly to farmers. This practice generated waste, corruption, and attempts to monopolize local seed markets.

Tong’s first criticism was that selecting the seeds to be offered limited farmers’ autonomy to choose their own seeds. Seeds are highly regionalized and the varieties chosen were inappropriate for local conditions in some areas.

Tong criticized the program for supporting seed companies rather than farmers. Tong observed that in many regions the bidding process for choosing seed suppliers was rigged to ensure a seed company with historical ties to the county agricultural bureaucracy was chosen. One agricultural bureau director reportedly said, “These are the state’s fine seed subsidy funds; of course they support state-owned seed companies. Two hundred people need salaries to eat!” Tong claimed that 60%-70% of wheat seed subsidy funds go to the seed companies. He said some defunct companies had been temporarily revived to handle the subsidy funds.

Tong criticized the waste and corruption in the agricultural bureaucracy. Handing down funds from province to prefecture to county to township results in “goose plucking,” where each level takes a cut and spends money on trips, inspections, banquets, and hotels and veiled bribes. It was reported that some county agricultural bureaus took 20% of the subsidy funds as administrative “service charges.” Others demand a 200,000-yuan fee or a share of seed company profits. In one county, the provincial “research office” demanded .06 yuan for each kilogram of seed plus two Volkswagen cars, 10 computers and a “European trip” (“欧洲游”).

The Investors News article asserts that the seed program became a nest for breeding corrupt officials. The article offers more examples. One seed company representative in Henan said county officials demand “service charges” of .05-to-.10 yuan per kg even though the provincial government had allocated 50,000-to-400,000 yuan to cover the costs of administering the program. In another district of Henan the county agricultural bureau director demanded 1 yuan per kg in 2006 and raised it to 2 yuan the next year. The seed company representative asked, “Is this a bribe?” noting that officials assessed fees but provided no service. Another retired county official in Henan requested 20,000 yuan through an intermediary and asked for .1 yuan for himself in addition to the .06 yuan service charge.

Tong argued that the program degraded the quality of seed since some companies used to program to distribute old seeds they could not otherwise sell. Some seed dealers say that varieties developed in the 1990s that were chosen for the program had degraded over time. In 2008 in southern Henan local seeds were poor and seeds had to be bought from Jiangsu and Shandong. During a 2009 drought in southern Henan, a local official said low wheat production was due more to poor seeds with low germination rates than dry conditions.

In some cases there was outright fraud. In one district of Heilongjiang the “seed supplier” sold stockpiled commercial soybeans to farmers at a discount which were then resold at the market price; farmers pocketed .2-to-.4-yuan per kg. A township official, outraged by the scam, noted that the designated seed company has a “special relationship” with the county agricultural bureau.

The program distributes funds on the basis of farmer reports of area planted to the subsidized crops. So another means of defrauding the program is to have farmers over-report the area they plant. In a region of Henan farmers were given 1 yuan per mu to falsely report area planted in cotton. The seed company stockpiled more subsidized seed than was needed and sold it to another company. One knowledgeable person claimed that Henan reported over 5.9 million of cotton area for the subsidy program in 2008 but only about 2 million mu was actually planted. They claimed some counties reported cotton area that was six times greater than what was actually planted.

Tong and others argue that the government-dominated operation of the program hinders competition and choice in the seed market. He argues that the program threatens to revive the planned economy model in which there is a local monopoly on supplying seed.

A 2010 article in Shandong Agricultural Science reports similar problems with wheat seed subsidies in Weifang, a district of Shandong. The authors’ survey found that most farmers received subsidized seeds but few knew anything about the program. Farmers complained that seeds were sometimes inappropriate for their area, were expensive and of uncertain quality. The article reported complaints about the program’s wasteful administration, the unclear process of choosing designated seed suppliers and use of the program to create a local monopoly by preventing non-local companies from winning the bid.

Mr. Tong wrote a letter to State Council Premier Wen Jiabao in November 2008 that called for giving the subsidy directly to farmers. The following month the Ministry of Agriculture issued documents revising the program and the “No. 1 Document” issued in January 2009 called for improving agricultural subsidy methods. Mr. Tong is quoted as saying, “When I read the no. 1 document I knew my letter had reached the central leaders.”

The Investors News article reports that the government began investigating cases of corruption following receipt of Tong’s letter. It says officials in Henan, Anhui and other localities were fired for skimming subsidy funds.

However, the same article reports that seed merchants and officials remained unhappy. After the central leadership announced an expansion of the subsidy in March 2008, eleven Henan Province seed companies jointly wrote to the provincial government asking for funds to be given directly to farmers. They argued that planned economy methods cannot be used in a market economy; the government should not choose which companies will live and which will die. The seed companies insisted that the government restrict its role to regulating the market, ensuring seed quality and order in the market while letting farmers make their own choice about what seeds to buy.

Reportedly, after receiving the letter Henan officials gave funds directly to farmers. However, county agricultural officials reportedly responded with their own letter. They used the excuse of a highly publicized wheat production target the following year to drum up support for seed subsidies.

In recent years the Ministry of Agriculture has allowed the seed subsidy to be distributed as cash to farmers in many locations. The MOA's recent policy announcement for this year said that the rice, rapeseed, and corn seed subsidies are distributed as cash and wheat, cotton and soybean subsidies can be given either as a discount or cash, whichever is easier for each province. 

Concerns apparently persist. In 2011 someone from Anhui posted a request on a provincial government message board urging Anhui Province officials to distribute the seed subsidy as a cash payment like they do in Henan. The post expressed concern that planting the same wheat varieties over and over in the same varieties could cause ecological damage by spreading disease widely. He said some experts have brought this problem up with agricultural leaders, but they just give the problem lip service "since the government makes a lot of profit from buying wheat seeds in this area." 

The post continues: "Some agricultural officials have their own seed companies; they hoodwink people in this area. There is no suspense in the bidding. After winning the bid they give farmers the worst seed." He says that companies have to pay "tips" to officials if they want their varieties chosen. "Everywhere the seed conpaies can be seen with party secretaries and village directors. If you want to sell seeds you don't go to the market; you go to the officials."

The Anhui Province Agricultural Commission was posted a response which recounted all the great results of the seed subsidy in expanding use of improved seeds and raising productivity. The response insisted the government needed to be involved to screen the seeds properly, prevent chaos in the market and prevent farmers from "choosing blindly."

The response from the ag commission concludes: "Of course some improvements can be made. We are investigating some of the illegal activities reported by the netizen’s post."

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