Wednesday, February 5, 2014

Carving Up Land Rights to Grab Land

China's new leaders have decreed that they will consolidate its patchwork of fragmented subsistence farms by walking a tightrope on land reform. While they say they intend to retain families as the main operators of farms, officials are devising schemes to clear traditional farmers off the land to make way for high-tech agribusiness companies.

Land-trading has been booming over the last five years due to big out-migration and a decree in 2008 that local officials should explore ways of encouraging land-transfer. In November 2013, the Ministry of Agriculture found that 26 percent of China's farmland had been subleased, swapped, or otherwise transferred, up from about 7 percent five years earlier. They say China now has 2.87 million farms of 50 mu (8 acres) or larger. That's much larger than the average land-holding of about 7 mu (1+ acre).

The Ministry of Agriculture is eager to push land-transfer further and facilitate mortgages based on income streams attached to land. However, they don't want to cut the strings tying rural families to their land-holding, so they are going to preserve collective ownership of land. In order to accomplish land-consolidation without privatizing ownership of land, they are expounding on obscure legal theories of land tenure that separate the right of ownership from the right to income from the land.

Land comes with a bundle of rights--ownership, rights to income or products derived from the land, to use it, rights to dispose of it, mortgage it (not to mention the rights to minerals under it or the space over it). The Ministry of Agriculture explains that the rights to land will now be divisible. The right of ownership will remain with the (vaguely defined) village collective. Village families will still have contract rights to their land. The right to operate or earn income from the land is a separate right that can be traded, while the ownership of land cannot. The income stream from a portion of village land can be rented out, pooled with other villagers' shares, or borrowed against. In effect, the income stream from a piece of land is like a security traded on Wall Street.

A Renmin University Professor explains that the contracting rights and operation rights attached to village land had been mostly one-and-the-same since reform and opening (i.e. 1978). But now, he says, villagers will be able to reassign their operation rights to land to other people, and they can get the rights back later if they want to. According to the professor, many villagers were hesitant to rent out their land in the past because they worried they might not get it back. But now--after clarifying their land rights--they will be more willing to rent out their land rights. Villagers will also be able to obtain mortgage loans secured by the stream of income from their operation rights.

The Ministry of Agriculture hopes that this will jolt Chinese agriculture out of its state of torpor. By prying land loose from the languorous clutches of aging peasants and consolidating it into modern high-tech farms they hope to achieve a quantum leap in productivity and ultimately food security. A Ministry of Agriculture official explains that 60-to-80 percent of farmers just produce food for their own consumption, and only a minority produce grain sold to commercial channels. Reform of the land system is a prerequisite to increasing the commercialization of farming, said the official.

Another priority of agricultural officials is to attract capital to invest in agriculture. A "land trust" pilot program about to launch in Suzhou City in northern Anhui Province (not the Suzhou in Jiangsu) is described as an important example of the new strategy. According to a description by Caixin, villagers' land will be converted into shares and the land will be turned into an agricultural development park. Citic Trust, a financial entity, will issue financial trust products with terms of 3 to 24 months to raise investment capital to develop the park and pay villagers for the land. Another company, Diyuan Modern Farming Investment Ltd Co., will manage the park and recruit companies engaged in "modern farming, water resource preservation, biofuels, Internet of things and agriculture-related research" to lease the land. A subsidiary of the German Bayer Group has been recruited to operate in the park, the first time a foreign-invested company has been allowed to rent farmland in China.

The villagers will receive dividends equal to the value of the land's wheat output (500 kg per mu x the government-set minimum price annually). The dividends may escalate if the rent paid by the companies is raised. The Ministry of Agriculture official describes the payment as guaranteeing villagers a basic living allowance. Villagers can also be hired to work in the park.

This arrangement sounds little different from the kind of land-grabs that officials have been undertaking for decades, except that the industrial park will be used for "agriculture." It's common for officials to compensate villagers for seizing their land with the value of grain it produces. Hiring villagers to work as security guards or janitors on the site is also a common part of the arrangement.

There's no indication that the villagers had any say in the deal. Exactly who or what is the "collective" that "owns" the land? This arrangement was surely brokered by county and provincial officials. It's unclear how the villagers would get their land back if greenhouses or biofuel refineries have been built on it.

The rent works out to about RMB 1250 per mu, about 2-to-3 times usual rents for cropland in grain-producing areas. The land will have to be used for high-value non-grain farming or processing in order to make money with a rent that high. "Internet of things" usually means automated greenhouses growing vegetables. Biofuel? Officials often complain that rented land is frequently converted to nongrain crops and it seems that will happen with this project. No contribution to food security likely here.

The types of ventures they mention seem highly speculative. For example, many biofuel projects collapse without big subsidies. What happens if the companies go bankrupt and can't keep paying the rent? It will take at least a year or two to get these companies up and will Citic pay back their investors in 3 to 24 months?

Sounds like the same-old land-grab dressed up like a law professor...and another risky "Great Leap" into the unknown.

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