Agricultural Transformation: Tripping Over the Grassroots

A steady stream of reports from the grassroots level indicate that China's transition from small-scale subsistence farming to commercial agriculture is not going well.

Officials from the Ministry of Agriculture's Office of Industry Policy and Law recently made a field trip to a major wheat-producing area of Henan Province and found that the new generation of commercial-scale farms face rising rents and other costs, cash flow difficulties, and don't get subsidies. Local officials say they're strapped for revenues and multiple programs for promoting investment in agriculture are uncoordinated and fail to reach the new-style commercial farm operations.

Local officials in Henan say they are under pressure to maintain grain output and increase the incomes of farmers, but these two objectives conflict, giving them headaches. In Wei County--the province's leading grain-producing county--a number of townships have launched programs to encourage production of horticultural crops that bring high returns to promote income growth. One township in Wei county, ranked as one of the top 100 in Henan, launched a melon-growing strategy in 2009 that reportedly brings net returns ten times higher than returns from grain production. Hundreds of farmers have built new houses and bought cars with melon profits. Surrounding areas took note and are also planting melons. However, melons are taking thousands of acres of land from grain production.

Officials in Wei County made grain production a "political task" and included it as a criterion for township officials' job evaluations. Officials in the county complain that they expend quite a lot of money, manpower, and materials in maintaining grain output, but don't get much financial support for it. They get financial transfers from the central government as a major-grain-producing county and a "poverty county", but their annual financial revenues of 500 million yuan are not enough to cover a year of school teachers' salaries.

The appearance of commercial farm operators in the countryside also threatens grain production since these farms are usually engaged in producing commodities with high net returns. For example, in 2009 a real estate tycoon rented 500 mu of land in Yangjin County to grow organic vegetables with plans to expand it to 5000 mu by 2015. Officials say the displacement of "traditional" subsistence farmers and income-growth programs make it harder to maintain Henan's grain output unless there are "tough measures."

The Ag Ministry's investigation in Henan suggested that the agricultural support system is not set up to serve new-style commercial farm operators. Local officials say there is rapid consolidation of farmland with 20 percent of land rented or transferred now. These commercial-scale farms have to pay rents of 1000 yuan per mu (about $1000 per acre) for land to bid it away from small farmers and nonfarm users. These rents are said to be higher than in more developed coastal provinces. The farm subsidy system is set up to distribute cash to villagers, and those who farm rented land say they generally don't get subsidies from the government. In Wei County, "large" farms and family farms get 50 kg of wheat as aid and a small subsidy for wheat irrigation, pest treatments and free spraying equipment, but they get no direct payment, general input subsidy or seed subsidies. The commercial scale farmers want subsidies, not higher prices. They worry that if grain prices are raised the villagers will want their land back.

These new commercial farms have much higher cash requirements than traditional small-scale farms that pay no rent and use their own labor. One farmer pays 800,000 yuan in rent annually, paying half before the wheat harvest and half after the harvest. They also have big cash outlays for chemicals and hired workers. The local rural credit cooperative--the main rural lender--organizes groups of borrowers who guarantee each other's loans but the credit co-op can only lend out 100,000 yuan at the most, not nearly enough to cover expenses.

Credit cooperatives only make short-term loans for production credit. For fixed asset investments Chinese agriculture relies heavily on government investment "projects" (项目). The Ag Ministry heard complaints that projects administered by different ministries are uncoordinated and waste money.

• The Development and Reform Commission sponsors a 50-million-ton grain production capacity project 
• The Ministry of Finance funds "comprehensive agricultural development" 
• The Ministry of Land Resources has a land remediation program 
• The water ministry has small-scale water management projects 
• Agricultural departments have high-standard field construction projects 

It sounds like a lot of investment is going on, but a county official said these numerous programs are actually not very effective, describing them as "money to add soy sauce that can't buy vinegar" and "sprinkling black pepper." Each program has different specifications, requirements and criteria, and the county has difficulty coordinating them.

These investment programs have not adapted to the changing character of the countryside. They are implemented as village-wide programs coordinated by officials. But most of the villagers now view agriculture as a sideline activity to do in their spare time, so they don't have much interest in the programs, nor in maintaining the infrastructure after it is built. Meanwhile, the new-style commercial farmers who rent land are usually excluded from these investment projects although they are the ones who could benefit most from them.

China has what appears to be a massive crop insurance program, but the Ag Ministry's investigations in Henan found that crop insurance is not functioning well. The maximum indemnity if the wheat crop is a complete loss is 311 yuan per mu, but this doesn't even cover the farmers' expenditure on fertilizer and pesticide. Usually there is only a partial loss, so the payout is much less. Farmers think the potential payout is not worth the premium, so they don't want to buy the insurance. Insurance company personnel have little knowledge of farming, so they are unable to make accurate estimates of risks or losses. They have no good means of distributing funds to farmers scattered over the countryside.

While Beijing routinely reports massive spending on agricultural programs, the Henan investigation reveals the extensive problems at the grassroots that keep Chinese agriculture handcuffed. The institutional peculiarities--insecure property rights, virtually no formal banking system for farmers, reliance on government-led projects, and little vertical or horizontal coordination in government--prevent the sector from transforming itself into a modern industry. Instead, anachronistic arrangements designed for a medieval peasant-farming society are causing atrophy and waste in a country that desperately needs to feed its 21st-century cities.