Thursday, April 18, 2013

China's Counterproductive Sow Subsidy

Chinese agricultural officials have a subsidy for every problem. During 2007, a short supply of pork and soaring prices prompted officials to introduce a subsidy for breedable sows of 50 yuan per head. The next year it was raised to 100 yuan and it has been given each year since then (except 2010).

The idea of the subsidy was to discourage farmers from killing off their sows during periods of low pork prices. This happened during 2006, exacerbating the short supply of pork during 2007 when disease epidemics further decimated the supply of hogs. By paying them a subsidy, officials thought farmers would be willing to keep their sows on hand until prices revived, thus attenuating the boom-bust cycles in production and prices.

The subsidy prompted a different--but predictable--type of response from farmers: they reported nonexistent sows to authorities in order to collect more subsidies. The chart below shows the inventory of sows reported by Jiangsu Province's agriculture bureau monthly from 2005 to 2012. The number suddenly jumped by 22 percent during July 2007--the same month the sow subsidy was announced. A year later the subsidy was doubled to 100 yuan per head and suddenly farmers increased their sow numbers by another 20 percent. Since 2004 there were no other months when sow numbers changed by more than 2.5 percent in one month. The number of sows in August 2008 had increased by 75 percent over the June 2007 number. There was no jump in hog inventories or slaughter corresponding to these massive increases in sows.
Source: dimsums using data from Jiangsu agriculture bureau.

One reporter conducting interviews in Laiwu, Shandong Province, found that some farmers don't like the sow subsidy. A villager Tang, disgruntled by losses of 200-yuan-per-head currently, described the subsidy as an opportunity for some people to take advantage of. Some farmers routinely inflate their sow numbers to get more subsidies: "ten sows become twenty." One village's sow numbers were inflated from 572 to 1,572. Because of the rampant practice of inflating sow numbers, local officials have been ordered to go out and "see pigs, see people, see barns" to verify the numbers. 

Large hog farmers in Laiwu say they don't want the subsidy. They don't want township livestock officials to count their pigs since the officials might have germs on their clothing that would transmit disease. 

The subsidy program, therefore, potentially has a perverse effect. The task of collecting statistics and verifying sow numbers means that livestock officials have to take time away from disease prevention and  other functions that actually support production. Moreover, officials wandering from farm to farm pose a serious threat for spreading disease. 

One article appearing on an industry news site points out that the effects of the sow subsidy are not as advertised. The author says the amount of the subsidy varies from region to region and farmers don't get any subsidy in some places. The author calculates that the 100-yuan-per-sow subsidy amounts to 7 yuan ($1.13) per finished hog if a sow produces 16 piglets that grow to slaughter weight. This doesn't provide a very strong production incentive. 

The article suggests that the subsidy did induce some small-scale producers to expand, causing more fluctuations in price. This seems to contradict the point about weak incentives, but the author then says that the effect of the subsidy has faded over time. 

The article then notes that the subsidy demands that livestock officials expend large amounts of time, human resources and expense in collecting and verifying data for implementation of the sow subsidy. 

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