Tuesday, April 2, 2013

A Contentious Farmland Bubble in China

Competition for farmland in China is heating up, and so are rents. The phenomenon of soaring farmland rents highlights the changing role of farmland, its scarcity, and the disputes that arise when rights are not precisely defined and enforced.

Rural land--long been viewed as a means of feeding the peasant population--is now turning into an income-generating asset. A Securities News article in March 2013 warned that farmers are being swept off the land by agriculture. "It sounds like a joke, but it's true," writes the reporter. Agriculture now attracts urban investors and they're willing to pay high rents for the land. According to the article, farmland rents in Xuchang--a region of Henan Province--rose from 300 yuan per mu annually a few years ago to 1000 yuan per mu now (about $960 per acre). The rent exceeds the net income villagers can generate from planting crops on their land, so more and more are renting it out instead of cultivating the land themselves. The article describes this as "an active choice" but also an "extrusion" of people from the land.

Most villagers have rights to cultivate 3-to-5 mu (about half an acre) of land. To operate a 100-mu (about 16 acres) farm, you have to come up with about 100,000 yuan (about $16,000) for operating expenses. Most people have to borrow from multiple parties to raise this kind of cash. The net return is 30-to-40,000 yuan--not bad for a peasant but less than you can earn growing nongrain crops or working off-farm. Since villagers generally can't raise this kind of cash, they tend to rent out their land, leaving the land concentrated in the hands of a few investors. The article reports that one farm in Xuchang cultivates 10,000 mu (1650 acres) and pays 10 million yuan in rent.

Bigger farms, however, are not necessarily more productive. Many of the investors are not knowledgeable about farming. Villagers observed that the 10,000-mu farm's fields resembled those of the old collective farms of 30 years ago. The article remarked that, "This is making the local government sweat."

One cadre worries that rents are getting out of hand, with some now up to 1200 yuan. He thinks rents should be capped at 1000 yuan. The official worries that risks are being underestimated. Prices tend to fluctuate, especially those for "economic crops" (e.g., vegetables, cotton). Contractors can lose many years of work in a single year when prices fall.

Rising land rents are also generating lots of disputes over land rental contracts. With land rents rising rapidly, many villagers want to adjust long-term contracts they signed. Several articles about land disputes have appeared in the media, apparently to apprise villagers that land rental contracts are binding and can't be changed because they're viewed as unreasonable by one party.

An article from Heilongjiang notes that in 2010 a Mr. Sun signed a four-year contract to rent 127.5 mu to Mr. Tian at 200 yuan per mu. After two years, Mr. Sun refused Tian's payment, demanding a renegotiation since rents had risen to 300-to-400 yuan per mu. They took their dispute to a court which found in favor of Mr. Tian, saying there was no reason to void the land contract.

Another case from Shandong Province was described in the Farmers Daily last week. Two villagers named Shi signed a 12-year contract with the village committee to rent 43 mu of land for a one-time payment of 30,000 yuan, which works out to 58 yuan per mu per year. (In Shandong many villages reserved a large plot of land to contract out to one or two farmers and divided up the rest among the village households.)

By 2011,  most of the villagers were irate over this "totally unreasonable" contract. Many villagers resented the seemingly sweetheart deal the Shi brothers had. Many villagers wanted to get the land for themselves and even physically attacked the Shi brothers. A new village committee tried to rescind the land contract and sign a new one with a Mr. Wang. The dispute was taken to court where many villagers and committee members testified that the contract with the Shi brothers had expired or was fake.

However, the court again found in favor of the Shi brothers, determining that the existing contract was still valid and there were no grounds to change it. The villagers would not accept the decision and demanded a retrial but the court again rejected their complaint. Perhaps we are seeing the advent of "rule of law".

The Farmers Daily followed up the Shandong case with an explanation of how stipulations in the rural land contract law support the court finding, probably as guidance to other officials handling such disputes. The role of land as an economic asset is a major adjustment for villagers and rural officials who have a long history of working things out among themselves based on consensus of what's fair.

Such disputes are common in the Chinese countryside where property rights were long ignored or abused. The vague definitions of boundaries and rights are now becoming a drag on economic exchange and creating a million festering village feuds and disputes.

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