Friday, June 13, 2014

Large vs. Small Farms in China--Costs and Returns

During May 20-21, China's Minister of Agriculture Han Changfu made an inspection tour where he advocated "family farms" in Songjiang, an outlying district of Shanghai. To emphasize the advantage of large-scale "family farms," Minister Han emphasized their net earnings of over 20,000 yuan per year--higher than earnings from working off-farm.

Speaking to a "family farmer" who used to work as a mason, Minister Han said, “You are happy farming [and] enjoy the rural scenery. In a year you can earn 27,000 yuan and the green fields are ‘your masonry.’” Han called for implementing the third plenum of the party’s 18th congress by energetically "pushing forward the healthy, orderly development of family farms."

However, in order to assemble large parcels of land one must rent dozens of smaller parcels from neighboring farmers. As demand for land increases, land rents have been rising, threatening to wipe out the purported profits of the large farms.

A 2012 survey of farms in Jiaozuo--a prefecture of northern Henan--compared the costs and returns of 24 large farms and 360 small-scale peasant farms. The farms grew winter wheat followed by corn. There was a negligible difference in grain yields between the two types of farms. The overall income from farming is roughly the same for the two types of farming--the difference is the way it's distributed.
Source: Henan Statistics Bureau survey

The cost of physical inputs and services per unit of land was nearly the same for large and small farms. Large farms had slightly higher expenses for interest and depreciation. Most of the surplus over these expenses is paid to rural villagers with collective land ownership rights. When small-scale farmers cultivate the land themselves they pay little or no rent, so their net return is the combined return to their management and their land ownership. The "labor cost" mostly reflects the opportunity cost of family labor, so this "cost" is also income to the land-holding family.

The biggest expense for large farms was the land rent of 722 yuan per mu (about $722 per acre) which ate up most of the net return per unit of land for large farms. The large farms pay land rent to village land-holders, thus the rental expense for large farms is an income stream for village land-holders who rent land to them. Large farms typically hire local villagers to do farm labor. Thus the large farms' labor cost is also an income stream to the villagers. The combined land rent and wages per mu that large farms paid to villagers was only slightly less than the net return and labor cost of small farms. Large farms use half as many labor-days per unit of land (3.2 days versus 6.8 days per mu) compared with small farms, so the main result of organizing the land in large farms is lower labor input and more machinery inputs. Ironically, maintaining collective ownership of the land creates a class of mini-landlords who sit at home or work elsewhere while collecting rental payments from large farms.

A June 5 commentary argues that large farms are not a panacea for Chinese agriculture and larger is not always better. The author points out that large-scale farms need complementary investments in irrigation, management, marketing, roads, storage, field-leveling and other infrastructure to make a large farm viable. Moreover, assembling a 1000-mu farm entails consolidating hundreds of plots and appeasing dozens of landlords, also a costly and difficult process. He cites the example of Netease, an internet company that spent years setting up a pig farm, delayed in part by disputes over land. The commentator adds that big farms often need to be paired with related projects. For example, a large pig farm needs an organic fertilizer factory to treat the manure, methane gas and electricity generation.

The large-farm campaign creates another layer of subsidies. Many local and provincial governments give large farms subsidies to offset the land rents that eat up returns and fund costly investments. Rent subsidies, in effect, are a transfer payment to village landholders. Government subsidies for investments mean that only a chosen few "model" farms have needed investments--there isn't enough money to fund investment by the entire industry. Thus, large scale farmers end up concentrating on their fight for government support, says the commentator.

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