Sunday, November 25, 2012

Higher Subsidies for Oilseeds Under Consideration

According to a China Business News report earlier this month, Chinese officials are considering a boost in subsidies for soybeans, rapeseed, and peanuts to stimulate more production and ease upward pressure on cooking oil prices.

The only subsidy for farmers growing oilseeds now is a payment of 10 yuan per mu (about $10 per acre) for using improved strains of seed. Sources told the China Business News reporter that two proposals are under discussion. The first is to raise the seed subsidy to 40 yuan per mu ($39 per acre) for soybeans, rapeseed and peanuts and give the subsidies to farmers nationwide instead of confining them to main production regions. A second proposal is to give farmers a subsidy based on the volume of soybeans they sell to reserve companies. Officials in the Ministries of Agriculture and Finance are reportedly in discussions about how to increase subsidies for oilseed producers.

China's first direct subsidy program was a pilot program for soybean seeds begun in 2002. Seed subsidies were extended to rapeseed in 2008 and to peanuts in 2010. However, the subsidies are much less than those for grain production which include a direct payment of 10-to-20 yuan per mu, a "general input subsidy" of 50-to-100 yuan per mu, and a seed subsidy of 10 or 15 yuan per mu. Some in the industry complain that oilseeds don't get as much policy attention as grains that are traditionally thought of as "staple food." Oilseeds play a key role by supporting China's seemingly insatiable demand for cooking oil and as a raw material for animal feed.

Some officials and industry people fret about China's increasing reliance on imports of vegetable oils and oilseeds. Production has been declining for several years because returns to planting soybeans and rapeseed are less than returns to planting corn, wheat, and rice. One reason for low returns is the lower volume of oilseeds per acre of land. Of course, the price of oilseeds could rise to compensate farmers for their lower yield, but China's liberal import policy for oilseeds tends to put a lid on prices.

Chinese grains are shielded by a wall of tariff rate quotas that only allow imports amounting to about 5 percent of domestic consumption to enter the market at a low tariff of 1 percent (imports over the quota have high tariffs of 74 percent or more). Reserving most of the import quota for state-owned trading companies and using arcane mechanisms to allocate quota to private users further reduces the effective quota. In contrast, trade in oilseeds is uninhibited by quotas and imports of soybeans and rapeseed have been surging. When oilseed prices rise, imports of oilseeds rise. Additionally, a higher domestic oilseed price raises costs for Chinese processors, which makes it cheaper to import vegetable oil. The price competition from imports prevents soybean and rapeseed prices from rising at the same rate as prices of grains. This is the main reason why returns between grains and oilseeds have not equilibrated.

In another measure apparently aimed at stimulating soybean production, on November 15 the Chinese government announced a higher support price of 4.6 yuan per kilogram for soybeans produced in northeastern provinces during 2012. This is 15 percent higher than the 2011 support price, and equal to about $740 per metric ton. By comparison, the U.S. Chicago Board of Trade soybean price is about $522 per metric ton.

The China Business News article reports that there have been calls to raise the tariff on imported oilseeds. It's not clear whether the Chinese government is seriously considering this. There were similar demands in late 2008, but officials decided instead to give processors a temporary subsidy to process domestic soybeans.

It's much easier to blame your problems on foreigners. One Chinese feed industry official blames American farm subsidies for China's surging soybean imports. He claims that the USDA gives American soybean producers ten times as much subsidies as Chinese farmers. This doesn't explain why soybeans from Brazil and Argentina have a similar price advantage over Chinese soybeans and account for more than half of imports. The article also describes a Tianjin company's highly profitable venture that imports palm oil grown on 400,000 hectares of rented plantation land in Southeast Asia, presumably without subsidies.

An official from the Tianjin company warns that raising tariffs or using other protective measures would boost prices higher, possibly causing an inflationary spiral.

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