During September 4-12, Chinese authorities released a series of six online documents (one, two, three, four, five, six) explaining the concept behind pilot "target price" subsidy programs for cotton and soybeans and providing a few additional details. According to the explanations, the programs are not just a change for these two commodities--they represent a blueprint for a new approach to agricultural support that will reduce government meddling with prices and let the market mechanism have a "decisive role."
The target price will be set by the government once a year. The price is to be announced before crops are planted to give a "clear signal" to guide farmers and the market. The target price is set with reference to production costs to ensure farmers can earn a reasonable return. With costs rising each year, the target price can be expected to rise as well.
This year, the target price of 19,800 yuan/metric ton for cotton was announced April 5. The soybean target price of 4800 yuan/metric ton was announced May 17. If the "market price" is below the target, the government will pay a subsidy to producers based on the difference between the target and market prices.
The "market price" will be the provincial average paid by processors or grain depots during the peak purchasing season (September-November for cotton; October-March for soybeans). The average will be calculated from price monitoring by the National Development and Reform Commission, Ministry of Agriculture, Grain Bureau, and Supply and Marketing Cooperatives. The explanatory materials emphasize that the subsidy will be based on the provincial average price, not the price actually received by the farmer.
The market price will be the price paid by cotton gins, grain depots, and enter-factory price of soybean crushing plants. The price at the farm gate will not be used because there is so much variation due to moisture, foreign matter, etc. Farmers that sell higher-grade crops at a higher price will get the same subsidy as those that sell poor-quality crops at a low price. The explanatory materials emphasize that this feature gives farmers incentive to maximize quality and price of crops they sell.
The cotton price calculation requires assumptions about several other parameters since the target price is for lint after it has been separated from seeds. The explanatory materials supply a formula showing how the market price is calculated using the lint price, seed cotton price, the cottonseed price, the proportion of lint in the seed cotton and an average processing cost.
"Temporary reserve" purchasing--described as a kind of price support policy--used until this year will cease after the introduction of the target price subsidy for cotton and soybeans. Farmers will sell their commodities at market prices. Their support will come in the form of direct payments instead of guaranteed minimum prices.
The explanatory materials say funds will be allocated to each province based on the difference between the target and market price and production statistics from the National Bureau of Statistics. Then provincial authorities will issue payments directly to producers. The distribution method is not specified and presumably will be up to local authorities. The materials say the subsidy payment will be based on area planted, production, or sales.
The materials do not say when farmers will get the subsidy payment. Based on the explanation, the subsidy cannot be calculated until the end of the marketing season when the average price can be calculated. Normally the statistics bureau does not report soybean statistics until a year after the harvest, but let's assume they will become more timely. It sounds like farmers can expect to receive their subsidies perhaps by April, about a year after the crop was planted. And that's assuming central government officials do things a lot faster than usual and light a fire under local officials to expedite the distribution process.
Another potential pitfall is disputes over statistics. Heilongjiang Provincial officials often report quite different soybean area and production statistics than the National Bureau of Statistics. In fact, NBS statistical procedures say they estimate grain and soybean production mainly from sample surveys of household farms, but for state farms and companies they use numbers directly reported by those farms. The state farm system accounts for a large proportion of soybean output and the statistics bureau will base their estimate of Heilongjiang soybean production in large part on numbers supplied by the state farms themselves. It's very likely that Heilongjiang and the state farm system will suddenly "discover" lots of new soybean acreage. Similar conditions prevail in Xinjiang where much of the cotton is produced by the semi-autonomous "production corps" which also reports data directly to NBS. It is rumored that new cotton acreage has already been discovered in Xinjiang.
In contrast to the government's cut-and-dried explanatory materials, another article posted on a cotton website in August reveals that there is considerable trepidation and concern about the new target price subsidies.
Officials in Xinjiang, in particular, are concerned about how farmers will be affected. The "market price" could go down further than anticipated. Officials say the key is who will come to farmers to buy cotton. They fret that the long distance, high transportation cost, and high labor cost of unmechanized farms makes Xinjiang cotton uncompetitive. The explanatory materials mention that the target price system will force cotton warehouses to find a market for cotton they purchase instead of just buying on government orders and collecting subsidies for storage costs.
Heilongjiang is also a far-flung place distant from final markets. A wide range of enter-factory soybean prices are currently quoted there, from 4000 to 4600 yuan per metric ton. The target price of 4800 yuan implies a subsidy from 200 to 800 yuan, depending on which market price is chosen. However, the price of imported soybeans is currently quoted much lower, at 3700 yuan in Tianjin and Shandong and 3680 in Shanghai and Guangdong. Will the market price in Heilongjiang remain at such a high premium? With global soybean prices falling on news of a massive U.S. harvest, Chinese officials are probably worried about falling domestic market prices that will inflate the cost of their "target price" subsidy far beyond what they planned.
At an April conference, a State Council researcher described the target price as a major systemic transition, but he warned that no one knows how it will affect farmers. "Now everyone is unsure, and it's hard to anticipate the risks behind it," the researcher said.
The director of the Ministry of Agriculture's Research Center for Rural Economy raised concerns about the long-term plan for implementing target prices. He warned that China lacks the data needed to implement such a program: "If fundamental work is not carried out well, it could disrupt the market." Moreover, the director raised the question of which commodities will be covered by target prices in the future and which ones excluded.
While the target price policy is described as a market-oriented support method, officials also imply that their hand has been forced by the failure of the current support price methods. They note that minimum prices were raised year after year until they were at a level that exceeded international prices. This distorted the market, created artificially-high demand for imports, and forced officials to stockpile commodities, including 90% of cotton production. The budgetary pressures and untenable distortions have pushed them to accelerate the target price experiments and hope they are successful.