Tuesday, August 12, 2014

Mysterious Target Price Subsidy Experiments

In January 2014, China's central communist leadership's "Number 1 Document" officially announced a plan to launch experimental target price subsidy pilots for soybeans in northeastern provinces and for cotton in Xinjiang "Autonomous" Region. This subsidy will calculate the difference between a "target" price and the market price, then pay farmers a subsidy to make up the difference.

In April 2014 authorities announced the target prices: 19,800 yuan/metric ton for cotton and 4,800 yuan/metric ton for soybeans. However, no other details about have been announced. Which market price will be used to calculate the subsidy? How will the government verify the price and the amount planted/produced/sold by subsidy recipients? How and when will the payments be issued to producers? What happens if buyers prefer to purchase imported commodities?

Today's Economic Observer notes that none of these details have been announced with the harvest of the cotton and soybean crops is a little more than a month away. The article reports on what officials are saying about the mysterious new subsidy experiments.

Typical of Chinese government programs, central authorities sketched out the general terms of the program and told local authorities to figure out how to implement it. China's National Development and Reform Commission, Ministry of Finance, and Ministry of Agriculture set the terms of the pilot programs in April, but later made revisions. Local authorities had to figure out tricky issues like how to determine "the market price" when prices vary from region to region and over the course of the season. Officials were reportedly considering using prices reported on tax invoices to calculate the subsidy, but they worried that this would lead to misreporting of prices to defraud the subsidy program. Another major concern was how to issue the payments in a way that would ensure farmers actually get the money.

Reportedly, local officials are worried that farmers could experience lower incomes with the target price subsidy, and this is the main factor that has delayed finalization of the details. Economic Observer learned that local authorities have set the terms of the target subsidy pilots and they are now waiting for approval from the State Council.

According to Economic Observer, Chinese officials hope that the target price experiments will be successful so they can replace the failed price support programs used for other major crops: rice, wheat, corn, rapeseed, and sugar. Economic Observer says that minimum price and temporary reserve programs have led to large gaps between Chinese and international prices, diverted much of the grain supply into government reserves, and created huge financial burdens. Economic Observer reports that 70 percent of wheat inventories in Henan are now in government reserves, and it is estimated that costs of purchase, storage, interest and subsidies for wheat held in reserves total 400 yuan/metric ton, nearly 20 percent of the purchase price.

Officials hope they can gradually shift from price supports to target price subsidies to eliminate price distortions and aid farmers more efficiently. Interestingly, officials said almost exactly the same thing ten years ago when they set up the current system of decoupled subsidy payments and minimum prices.

What if target price experiments don't work? Professor Li Guoxiang of the Chinese Academy of Social Sciences has taken part in many meetings to discuss the target price subsidy program. Economic Observer quotes him as saying the new subsidy is a major systemic transition, but "there is a lot of risk behind it."

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