Monday, December 2, 2013

More on Price Support to Subsidy Transition

A November 27,2013 Daily Business News article offered more clues on China's intent to transition from market-distorting price supports to direct subsidies which has been grinding through the rumor mill since last year.

The article included quotes from several of the government's mouthpieces on farm policy who indicated that trial target-price subsidies for cottons and soybeans would begin in 2014 with plans to eliminate "temporary reserve" price supports on an unspecified timetable. The article seemed to suggest that minimum price policies for rice and wheat would continue. Prospects for corn policy were not specified.

The article described the price support policies as having seriously distorted prices and caused confusion in their implementation. Cotton was offered as the clearest example of distorted prices, as domestic cotton prices were described as decoupled from the world market and inflicting losses on textile companies.

A well-known cotton analyst from The Ministry of Agriculture's Research Center for Rural Economy said the cotton temporary reserve policy will no longer be implemented during the 2014/15 market year, “But new policies for 2014/15 are under discussion, including direct subsidies based on yield or production although the amount and method have not yet been set.”

The article dutifully recited the "third plenum's" mantra of giving markets a "decisive role" in setting prices. Li Guoxiang of the Chinese Academy of Social Sciences said cotton's price formation mechanism would be gradually be marketized after trial reforms for cotton and soybeans with farmers receiving a target price subsidy instead.

Li also said wheat and rice, as staple food grains, would still have minimum price policies.

Similar views were offered at a "food security summit" in Beijing. Han Jun, of the Development Research Center indicated China would remain close to self-sufficiency in wheat and rice but would import more corn to feed its livestock. Fang Yan, of the National Development and Reform Commission, said China would move toward policies that allow markets to decide prices, replacing temporary reserve procurement prices with direct subsidies and possibly revenue insurance schemes like those being tried out for vegetable growers in Beijing.

The move to market-pricing is efficient from a resource-allocation view. However, the payments required to maintain a "reasonable" profit for farmers experiencing ever-rising costs would balloon.  Keeping minimum prices for rice and wheat but not for other commodities would create cross-commodity price distortions and send consumer prices for rice and wheat higher and higher above other food prices. The result would be Japan-style sky-high rice and flour prices which probably could not be maintained in China's much larger and impossible-to-control food sector.

No comments: