Last week a task force from the Ministry of Agriculture's economic and market information office offered some policy suggestions to deal with some grim problems that have popped up in China's agricultural sector.
The task force identified a problem with "upside down" domestic and international prices for cotton, sugar, and dairy sectors. "Upside down" apparently means that Chinese prices are far above international prices.
The task force described the cotton and sugar markets as clearly "distorted" because Chinese prices are higher than international prices. They implicitly place the blame on international prices for being too low rather than blaming their price support for keeping Chinese prices artificially high. The task force says that imports are "pressuring" the domestic market and preventing authorities from selling reserves at a favorable price.
The task force offers vague suggestions: that China continue its cotton and sugar reserve stockpiling program and "explore" a new intervention system. The one clue offered is a suggestion to consider letting the reserve price gradually move toward the international price--that's a reversal from last year when they raised the support price for cotton when it was already clearly out of line with international prices. They also suggest increasing subsidies to cotton and sugar farmers to prevent their net returns from falling. This would be hard to do without breaking their WTO commitments. A "decoupled" subsidy would be impossible to do since there are no records of historical cotton or sugar acreage/production.
The task force describes the dairy situation as "grim" and recommends implementing controls on imports and enacting "special safeguards" and "technical barriers to trade" to take pressure off the domestic industry. Profits in dairy farming are declining. They report that average net return per cow was just 1000 yuan ($160), and many farmers in Heilongjiang and Inner Mongolia have been killing off dairy cows and replacement heifers, creating an "irrational" structure in the dairy herd. The task force worries that large numbers of small farmers may quit, threatening "industry security" and posing a risk of market instability. The recent revelation that New Zealand milk was contaminated with a fertilizer additive is very conveniently-timed given the recommendation of imposing "technical barriers". (New Zealand is the leading exporter of dairy products to China).
The task force also worries about the declining returns to planting grain and calls for a large increase in the minimum purchase price for rice. (An increase in the 2013 minimum price for wheat has already been announced.) Wheat returns were down last year for the fourth year in a row. A 10-province survey by the MOA found that net returns to wheat production were 152 yuan per mu (about $60 per acre), down 4 yuan from last year. The task force says that last year's corn was affected by pests and typhoons and production costs increased quite a bit. The good news for corn growers was a substantial increase in the corn price. In Jiangxi fees for production services to rice growers went up 20 percent. In Heilongjiang the rice harvest was disrupted by heavy rains, costs were up, and the price was about the same as the previous year.
The task force urges policymakers to firm up farmers' enthusiasm to produce by continuing market intervention in grain markets, watching out for the "hard to sell" phenomenon, and raising the minimum price for rice.
The final concern expressed by the task force is the wild up-and-down fluctuations in vegetable and fruit price due to imperfections in the marketing system. Prices of cabbage and radishes fell dramatically in the fall when these winter vegetables came on the market all at once and no one wanted to store them. The task force worries that there will be a "cabbage famine" after the peak consumption season at the spring festival (and presumably cabbage prices will soar again). Prices also plunged for some southern vegetables like cauliflower in Yunnan and peppers in Hainan. Prices fluctuated for tangerines and other fruit as well. The task force recommends forming better links between producing and consuming regions, building a set of "national-level" production bases and key farms, and setting up a directory system (perhaps so buyers and producers can find each other).
Surprisingly, there is no mention of soybeans or rapeseed, two sectors that have serious problems. No mention of soaring mutton and beef prices. Pork had a relatively stable year in 2012, so no mention.
As China raises minimum prices the "upside down" price phenomenon will spread to more commodities, especially if the U.S. drought ends and production grain and soybeans bounces back. Look for agricultural support to balloon and watch for a move away from "decoupled" subsidies to bigger payments with stronger incentives and new forms of market intervention like target prices. There may be more games with value added taxes, safeguards and more creative measures to slow down imports to cope with "upside down" prices.