Monday, August 20, 2012

Grain Marketing: Resurgent State Role

According to Chinese Grain Bureau statistics, the government has been the dominant buyer of grain so far this summer. This reflects the big increase in support prices this year, an apparent need to restock reserves, and relatively weak domestic demand this year. It recalls 2008-09, during the last economic slowdown when authorities bought large amounts of major crops, and seems to reflect a subtle U-turn from the privatization of grain marketing in 2004.

The major crops harvested in the summer are winter wheat, early-season rice, and rapeseed. State-owned companies have been the dominant purchasers of each of these crops this year.

As of August 15, state-owned companies accounted for 70 percent of wheat purchased. Wheat purchased under the minimum-price program accounted for 45 percent of wheat purchased so far this year. No wheat was purchased at the minimum price in 2011. This year's total purchase of 22.8 mmt is consistent with earlier reports that authorities wanted to replenish wheat reserves that were down by 20 mmt.

State-owned companies have accounted for 66 percent of early-rice purchases so far this year. Total early rice purchases of 5.1 mmt are up about 20 percent from last year at this time. There was a big policy push to increase early rice production this year.

State-owned companies accounted for 68 percent of rapeseed purchases so far. Most of this rapeseed was bought under the support price program. Sinograin buys the rapeseed, processes it into oil and stores it until it can be sold.

The dominant share of state-owned enterprises, however, seems inconsistent with another common narrative: farmers prefer to sell their grain to private traders who come to their fields and villages to buy. Do the traders resell the grain to state-owned enterprises?

In a related trend reflecting the resurgent role of the state in grain marketing, an article from Ordos in Inner Mongolia praises its practice of awarding subsidies on the basis of the volume of grain sold to government reserves. Farmers get 100 yuan for every 1000 kg of grain sold to state-owned enterprises. In a program that sounds a lot like practices from the 1990s and earlier, local authorities set up a "grain leadership group" composed of people from the Grain Bureau, Agricultural Development Bank, Development and Reform Commission and grain enterprises which formulates grain purchase plans and central, provincial and local reserve targets. (Xinjiang Autonomous Region and a number of prefectures in southeastern China have similar subsidies for marketed grain.)

Subsidizing sales of grain is described by the Ordos article as superior to the subsidies based on land-holdings which have turned into an egalitarian benefit for land-"owners" that fails to achieve the original intent of incentivizing grain production. The grain sale subsidy is described as a good implementation of the State's grain policy that other localities should imitate.

This subsidy would have to be reported to WTO as an "amber box" subsidy. The 100-yuan/mt subsidy is less than 5 percent of the gross value of production, below the 8.5-percent ceiling China committed to. However, adding seed and other "amber box" subsidies would get them close to or above the ceiling.

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