Caijing magazine reports that Chinese officials are contemplating major "breakthroughs" in grain policies in 2013 to cope with a likely scenario of lower global grain prices vis-a-vis domestic Chinese prices.
China's strategy for encouraging grain production has been to boost subsidies and price supports to give farmers steady net returns. The increase in domestic grain prices didn't affect grain trade too much as long as global prices were also elevated--due to the U.S. drought during 2011 and 2012. However, this year many analysts are anticipating record harvests in several major countries which may drive world prices lower during the second half of 2013, if not earlier. With Chinese prices still on an upward trajectory and world prices falling, imports will be attractively priced for Chinese mills and other consumers of grains, leading to a possible "flood" of imports.
Grain imports already increased sharply during 2012. One top rural policy advisor observed last month that China's grain self-sufficiency rate (including cereals and soybeans) had already fallen to 90 percent in 2012. Another rural policy advisor to the State Council worried that grain imports could surge if farmers lose their enthusiasm for planting grain and world prices fall, potentially opening a complicated "Pandora's box" when corn and other grains begin entering the Chinese market.
The Caijing article notes that China's WTO commitments place a limit on subsidies at 8.5 percent of the value of output. China has already increased subsidies quite a bit, so officials have little room to maneuver. The Ministry of Finance announced that the government had spent 0.80 yuan on financial support for grain, including 0.28 yuan for direct subsidies to farmers for every kilogram of grain produced in China. [At an average grain price of 2.25 yuan/kg, that makes the direct subsidy 12 percent of the gross value of production.]
The idea behind these subsidies, say officials, is to offset rising production costs to encourage farmers to keep spending on inputs. However, the Caijing article says that the subsidies don't make much difference to farmers; they continue using old-fashioned farming techniques. The director of the Ministry of Agriculture's Research Center for Rural Economy ascribes the problem to the "decoupling" of the subsidy for improved seed from the purchase of improved seed [In most places the "seed" subsidy is now given as a cash payment based on area planted without regard to the type of seeds used.]
Since 2008 the government has also been raising minimum prices for rice and wheat by 6-to-10 percent annually. There are also price support ("temporary reserve") programs for corn, soybeans, and rapeseed.
The net return for rice is estimated to be 30-to-40 percent above expenses, wheat 20 percent, corn 10 percent, and rapeseed less than 2 percent. Despite higher subsidies and price supports the Ministry of Finance said that the net return to wheat production fell by 13 percent last year.
Officials are worried that grain production is on a knife-edge. Vice Minister Hui Liangyu wrote in the communist party journal that agriculture is facing "two highs and two constraints"--high costs, high risk, resource constraints and lack of young laborers.
Given their WTO commitments, officials have little space to raise price supports. The Caijing article notes that there is "an urgent need to adjust" policies for grain production and trade. The article reports that officials are speeding up their plans to make major adjustments to the policies. A National Development and Reform Commission official says there will be a major "breakthrough" this year in grain policy.
The Caijing article notes that the strategy of raising price supports every year builds in expectations of ever-higher prices. This encourages farmers to hold grain as long as possible, waiting for a better price. Users have to bid prices higher to pry grain loose from farmers, which encourages them to hold the grain even longer. This encourages the upward spiral in prices.
One of the problems is fiscal. Local governments shoulder a large share of the burden for financing agricultural support, but grain-producing regions have a thin tax base and are not inclined to spend on grain projects. One mechanism under consideration is an intergovernmental revenue system that will transfer funds from grain-consuming regions to producing regions. The funds received by the producing region will be based on the amount of grain sold outside of the region.
A countercyclical payment for soybeans is being considered. This would set a "target price" based on production costs plus a reasonable profit. Farmers would receive a subsidy equal to the difference between the target and the market price if the target exceeds the market price. However, this subsidy faces some difficulties. It hasn't been determined whether the subsidy payment would be based on acreage, volume of output or volume sold. Moreover, there are no good records to verify these quantities. They are considering using satellite imagery to verify acreage.
As if China doesn't have enough objectives for agricultural policies, the article suggests that agricultural pollution--now "very serious"--be considered in reformulating policies.
One expert quoted in the article advised officials to move with caution. Since subsidies can only increase, never decrease, they should be careful of where this is leading. They should not make major changes in one policy without considering the effect of other policies. He warns officials not to be over optimistic.
When China entered the WTO the big worry was how international competition would affect farmers. Officials cut taxes on farmers and gave them small subsidies and everything seemed to be working out OK as long as farmers were locked away in the countryside. Now that rural people are beginning to participate in the general economy by streaming into cities for work, rural land and labor has an opportunity cost that needs to be factored in to production decisions. Costs are soaring and outpacing subsidies. Authorities gave up most of their policy leverage to join WTO and now the chickens are finally coming home to roost.