Thursday, January 3, 2013

China's Subsidy for Foreign Farmers

China's price support program for soybeans actually has become a subsidy for foreign farmers, according to a December 2012 article on a Chinese financial news site.

The article featured an interview with the head of the largest soybean processor in China--Yihai Kerry, a subsidiary of the Singapore company Wilmar. The interview began by discussing the necessity of continuing to expand into new products and innovate in the highly competitive soybean processing industry.

The article then noted the irony of the steady decline in Chinese soybean production in recent years despite the government's attempt to support domestic soybean prices.

According to people in the industry, processors in China don't want to buy domestic soybeans because the price support is higher than the price of imported soybeans. Consequently, many of the China-produced soybeans go into government warehouses instead of into the market. The gap is filled by imported soybeans. The increased demand for imported beans raises the price for farmers in the United States and South America who produce them.

Meanwhile, Chinese soybean production continues to decline and Chinese soybean crushers located in inland provinces shut down or move to coastal locations to get access to cheaper imported beans.

China's imports of soybeans totaled about 41 million metric tons (mmt) during 2008-09, the year the price support was introduced. Since then imports have  soared to an estimated 63 mmt during the current market year. By comparison, China produces about 14-to-15 mmt of soybeans domestically, and just 4-to-5 mmt are processed into vegetable oil. The rest are used to make tofu and other food products or stored in government warehouses.

The ironic result--according to the author of the article--is that the price support intended to help Chinese soybean producers actually benefits farmers overseas.

Exactly the same phenomenon is occurring in China's cotton industry, but on a larger scale and is helping to drive the textile industry out of China.

According to the article, people in the industry recommend that China adopt a deficiency payment form of subsidy in which the government would pay producers the difference between the market price and a government-set target price based on production costs.

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