Friday, November 29, 2013

China Grain Transport Subsidy

China is trying to move grain out of its northeastern provinces by offering companies from other provinces a subsidy to ship it home.

On November 27, the Ministry of Finance, National Development and Reform Commission, National Administration of Grain, and Agricultural Development Bank of China jointly issued regulations on the subsidy program. The subsidy is 140 yuan per metric ton for newly-harvested corn or japonica rice produced in three northeastern provinces--Jilin, Liaoning, and Heilongjiang--during 2013. Companies from any other province can get the subsidy if they buy the grain at the government's support price for the grains and ship back to their province. The subsidy recipients must submit documents showing plans for storing, processing, and selling the grain in their home province. They also have to submit receipts showing their purchase of the grain and payment for transportation. The program runs through May 31, 2014 for rice and June 30 for corn.

The subsidy is in large part a bribe to companies to buy grain made artificially expensive by support prices. Storage space for grain is tight in the northeastern provinces and officials are constantly voicing concerns about farmers being unable to sell their grain. They are unwilling to let prices fall since that would discourage farmers from planting grain and prevent their incomes from rising. Moreover, authorities already have large inventories of grain from last year that is falling in value as market prices fall.

The 140-yuan-per-ton subsidy is equal to about 6.4 percent of the "temporary reserve" support price for corn and 4.7 percent of the minimum purchase price for rice. This is in addition to producer subsidies paid to farmers (probably in the range of 70-to-100 yuan per mu) for the grain which translate to about 175-to-200 yuan per metric ton. Thus, total subsidies could be in the 10-to-12 percent range. It is unclear how much grain will receive this subsidy.

The subsidy discriminates against imported grain. The grain must be produced in northeastern provinces (other regulations recently explicitly forbid selling imported corn at the support price). The implicit intent of the program is to move northeastern grain to other parts of China, tamping down the inclination to buy much cheaper imported corn and rice.

The subsidy also is a revival of the past. In the 1990s China had a similar grain glut in the northeast and relied on a heavily subsidized state-run grain bureaucracy to market the grain. However, farmers often had their grain refused or were given IOUs. The direct payment to grain producers begun in 2004 was a shift of subsidies from grain bureaus to farmers. It took the funds used to subsidize the grain bureaucracy and divided it up among farmers as a (small) direct payment.

This new northeast grain transport subsidy appears to add a new subsidy for the vestigial grain bureaucracy that still exists to manage grain reserves. Although the  subsidy is available to all companies, the document implies that provincial grain bureaus acting at the behest of provincial officials are the main targets of the subsidy. Recipients of the subsidy must be approved by their provincial grain administration and other departments. Each province can designate one local enterprise to participate, plus an unlimited number of other enterprises who apply on their own. Scale requirements will rule out small trading companies; the recipient has to transport at least 5000 metric tons of grain to its province.

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