Monday, July 23, 2012

Are Wheat Farmers Impoverished?

The 2012 survey of 600 farms in Henan Province reports that profits from wheat production are rising slowly and complains about rising input prices. Misleading calculations suggest that Chinese farmers are impoverished. However, if the calculations are done correctly one finds that Chinese farmers actually do pretty well since they only spend a few days a year in their wheat fields.

The survey identifies three major cost components: material inputs, services (mainly mechanized ploughing, seeding and harvest), and labor. Most of the cost increase was due to rising prices of fertilizer, seed, and pesticides. Labor costs went down slightly and service costs went up slightly--basically offsetting each other.

The cost of material inputs was 226 yuan per mu, up 39 yuan from 2011. The price of all inputs was up. Fertilizer accounted for most of the increase in cost, rising 27 yuan this year. Seed costs were up 9 yuan and pesticide was up 2 yuan per mu. The price of seeds at planting time last fall was up 5-to-9 percent and fertilizer was up 11.5%.

Services expenses averaged 134 yuan per mu. Nearly every farm hired someone to plough and harvest their wheat fields and only a few sowed their fields by hand. Ploughing cost an average of 57 yuan per mu, harvest 49 yuan and seeding14 yuan. Irrigation expenses this year fell by half compared with last year when Henan was hit by a serious drought.

Labor costs were 180 yuan per mu, down slightly this year. This represents the cost of just 3.2 days of work. This is mainly an "opportunity cost" since farmers mainly use their own family's labor. Daily wages were up in Henan, but the amount of work done in wheat fields decreased 16% this year. This was partly due to mechanization. Many farmers planted their wheat, then went out to work off-farm and didn't come back until it was time for the harvest. The survey report says many farmers didn't bother with weeding and pesticide application. Some farmers are quietly leaving their fields idle, but it's not clear whether such farmers were included in the survey.

The report doesn't mention land costs. The 2011 report on wheat costs in Henan said land cost averaged 199 yuan per mu.

The average wheat yield was 394 kg per mu, up 4 kg from 2011.

The report calculates the average revenue using the government's minimum price of 2.04 yuan/kg, up from 1.88 yuan/kg in 2011. It doesn't report the price farms actually are getting paid for their wheat. Last month it was reported here that many farms sell their wheat below the minimum price. This year the market price was above the minimum in most areas.

The 600 farms reported an average subsidy of 46 yuan per mu, up from 30 yuan per mu in 2011.

From these numbers we can calculate the impact of the main components of revenue and costs on profits for wheat farms:

Increased price = (2.04 - 1.88 yuan/kg) x 394 kg/mu = 63 yuan
Increased subsidy = 16 yuan
Increased input costs = -39 yuan
Increased machinery costs = -15 yuan
Decreased irrigation costs = +13 yuan

Clearly, most of the contribution to increased profits came from the increase in price. The increase in subsidies offset the increase in machinery cost. Farmers got a break by being spared a drought this year which reduced their irrigation cost.

The average Henan farmer planted 5.1 mu of wheat (1 acre = about 6 mu).

The report erroneously portrays the earnings from wheat as pitifully less than wages from working off-farm.  The report says farmers earned 1600 yuan in profit, but this number deducts the opportunity cost of the farmer's labor. The return to the farmer's labor is the revenue from wheat less the cash costs:
return to farm labor = 2.04 yuan/kg x 394 kg/mu - 226 yuan/mu input cost - 234 yuan/mu service cost
The return to labor from 3.2 days of work is 444 yuan/mu x 5.1 mu = 2,263 yuan.
Earnings from wheat (assuming labor and land are provided by the farmer without cash cost) are higher than the average monthly wage for rural migrant workers of 2,049 yuan.

If a Henan farmer has to rent land, he will have to pay about 200 yuan per mu. That would reduce his earnings by 1,020 yuan for 5.1 mu, cutting his return in half to 1,243 yuan. This takes 16 days of work (3.2 days/mu x 5.1 mu). But this still works out to 78 yuan per day.

By comparison, the off-farm monthly earnings of 2049 yuan works out to 85 yuan per day (assuming 24 days/month worked), so farmers's earnings from farming are slightly lower than the daily off-farm wage.

Consider the return to land, as measured by rent. Last year's Henan wheat report said the average land rent was 199 yuan per mu. If we assume the rent is still 200 yuan/mu, that translates to about $190 per acre. For comparison, land rents for irrigated land in Nebraska were only slightly higher, averaging $200-to-$250. (The Nebraska rents had risen 60% to 90% from 2006 to 2011).

The reported low earnings from wheat farming in China are a reflection of the crowded countryside (and hence small land allocations). The relative returns to factors of production are not that bad.

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