Thursday, January 16, 2014

China's Grain Subsidy No Longer Decoupled

China's Ministry of Finance has allocated funds for this year's grain subsidies and urged local officials to link subsidies to production of grain. In doing so, they have ended the "decoupled" nature of the grain subsidy.

The Ministry of Finance allocated 122.2 billion yuan (US$ 20 billion) for grain subsidies--15.1 billion yuan for the direct payment to grain producers and 107.1 billion yuan for the "general input subsidy."  These totals are unchanged from the last two years. The Ministry urged provincial and local officials to distribute the funds as soon as possible, striving to ensure farmers get the money before spring planting.

The Ministry also instructed local officials to explore mechanisms that couple (挂钩) subsidy payments to production by ensuring that farmers who plant more grain get more subsidies. The objective, said the Ministry, is to motivate farmers to plant grain.

The direct payment was first implemented in 13 major grain-producing provinces in 2004. The subsidy diverted money from indirect subsidies given to government grain bureaus and gave it to farmers. Funds allocated to provincial "grain risk funds"--used to fund procurement by government grain bureaus--were divided by the number of acres or tons of grain produced and paid out to farmers based on their land holding or sales of grain. The payment usually amounted to 10 yuan per mu (about $10 per acre at the current exchange rate).
In 2013, Guidong County held a meeting to discuss verifying 
the land area farmers reported to get grain subsidies. Many officials complain
that the subsidy-distribution process takes an inordinate amount of their time.

The direct payment was "decoupled" in World Trade Organization-speak, which meant it doesn't distort markets and doesn't count against China's WTO-imposed limit on domestic support. In most places, the subsidy was paid to rural households based on the amount of land they contracted from their village collective in the 1990s. Such payments were "decoupled" since they didn't vary with the amount produced. In effect, it was a small entitlement sprinkled over the rural population since nearly every rural household had a land holding (on average about 1 acre). Many criticized the subsidy for functioning as a "land subsidy," not a "grain subsidy." Some households who stopped farming and rented out their land to others still got the subsidy. In some cases, people still got the subsidy even though they built a house or fish pond on the land. Renters got no subsidy. Of course, everyone thought the subsidy was too small.

The disconnect between subsidies and production is becoming more pronounced because land-holdings are increasingly cultivated by renters. Surveys by the Ministry of Agriculture have found that the share of farmland rented, leased or otherwise transferred to be farmed by someone else has risen from about 7-8 percent ten years ago to over 25 percent now.

In 2013, the "number one document" indicated intent to couple subsidies to land planted. In Sichuan's Guangyuan County there were many conflicts over the subsidies and difficulty verifying who planted land because most rental or sublease agreements were verbal. The county encouraged village organizations to choose representatives to sort out land disputes and determine how much subsidy each family is entitled to.

In April 2013, officials were ordered to visit villages to investigate implementation 
of subsidy policies. In Guangyuan County, they were ordered to inform farmers that 
"the more you plant, the more subsidy you get" and sort out land disputes.

China will no longer be able to exempt the direct payment from its WTO subsidy calculation. However, this will have no practical significance since the subsidy is a small percentage of the value of production.

The "general input subsidy" was created in 2006 by taking funds used to subsidize fertilizer companies and paying them out to farmers to compensate them for rising costs of fertilizer, fuel and pesticides. The input subsidy is larger than the direct payment, about 60-to-80 yuan per mu. From the beginning, authorities encouraged local officials to link the input subsidy to area planted in grain. It was not reported to WTO as decoupled but it was reported as non-product-specific. That allowed China to divide the value of the subsidy by the value of all agricultural output, thus making it a tiny percentage that falls well within its limit.

It is difficult to discern whether the subsidies had any impact on grain production. They were paired with high and rising grain prices which probably were the main incentive for production. If prices were allowed to fall, the subsidy payment will have to be quite large and closely linked to production in order to maintain production incentives. Moreover, large subsidies would be an invitation to fraud and abuse. The main effect of subsidies has been for farmers and villages to report land they used to keep hidden when it was subject to taxes.

Officials have promised to replace cotton and soybean price supports with direct subsidies to farmers. These subsidies will be "coupled" and "product-specific." These subsidies will be even harder to implement than the grain subsidies since villages don't have reliable records of cotton and soybean plantings which can change from year to year.

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