Sunday, September 30, 2012

Pessimistic Outlook for China Agriculture

On September 27, the head of the China Ministry of Agriculture's policy and law office gave a mostly pessimistic overview of China's agricultural situation. The MOA official, Zhang Hongyu, announced that output of grain crops harvested in the summer was up 4.1 million metric tons and predicted another increase in overall grain output this year. But Zhang said that the general outlook for agriculture is not favorable due to uncertainty in the international economy and trends in the domestic economy.

Zhang worried about a growing deficit in agricultural trade. He said China's agricultural trade deficit for 2011 was $34 billion on imports of $95 billion and exports of $61 billion. For the first seven months of 2012 the agricultural trade deficit was already $30 billion, nearly equal to the deficit for last year.

Soybeans, cotton, edible oils and sugar remain the major imported commodities. However, grain imports are already at 6 million metric tons for 2012--about 2 million tons each of corn, wheat, and rice. These imports amounted to just 1 percent of production of these commodities, but Zhang worries about the creeping trend of grain imports.

While rural household income rose during the first half of 2012, the rate of growth was slower than last year. Property income (interest, subsidies, income from land rentals) and remittances from family members grew slower than other types of income, reflecting a slower-growing economy.

Zhang worried about declining agricultural prices. As his chief example, he observes that this summer was the first time in several years the government bought wheat at the support price. Zhang said surveys of farmers found that 20 percent of wheat was sold at the minimum price of 1.02 yuan/500g, while 80 percent was sold at prices of .8, .9 or 1 yuan.

While he cited these low prices as evidence of downward price pressure, they likely reflect the low quality of this year's wheat and willingness of farmers to sell to itinerant traders at a price below the support price.

Two days after Zhang's speech, the National Development and Reform Commission announced one of the largest-ever increases in the support price for wheat to 1.12 yuan/500g for 2013. The increase of .10 yuan/500g from 2012 matched the largest-ever previous increase in the support price in 2009.  Zhang noted that international prices have been increasing faster than Chinese wheat prices, a trend that authorities probably took into account in deciding on such a big increase. But what happens if international prices reverse course and fall below the the new support price when it takes effect in May 2013?

Zhang was also pessimistic about the prospects for increasing government spending on agriculture. He noted that tax revenue rose during the first half of 2012 at less than half the rate last year. In some coastal provinces tax revenue even fell. Zhang said the slow growth in tax revenues is unfavorable for increasing expenditure on agriculture.

Zhang's main recommendation was to encourage larger-scale farming. His recommendation was to separate the rights to use farmland from the ownership rights and promote mechanisms for trading the use rights. According to Zhang, increasing the size of farms will reduce per-unit costs, encourage technology adoption and promote "modern" agriculture. He said 17.9% of land-use rights are traded now, and the share is as high as 85% in parts of southern Jiangsu Province.

Zhang also worried about the preponderance of old people in agriculture. He called for improved services for farmers and higher subsidies to attract young people to farming as a new force in Chinese agriculture.

No comments: