Monday, January 19, 2015

Urgent! Modernize Chinese Agriculture

Chinese leaders are calling for urgent attention to the transformation of the country's agriculture.

In a January 7 speech on developing agriculture under a "new normal", Minister Han Changfu said the demand to speed up agricultural modernization has become much more urgent as the economy enters the "deep waters" of reform, China enters a new stage of socioeconomic development, and agriculture undergoes profound changes.  Writing in the Communist Party journal Qiushi, Minister Han reveals that General Secretary Xi Jinping himself stressed the importance of accelerating the transformation of agriculture at last December's economic work conference.

Han says that China has made a lot of progress in modernizing agriculture, but it is stuck in a state where "modern" and "traditional" agriculture coexist. With rapid economic development, large numbers of laborers have moved out of agriculture, leaving empty villages and an aging agricultural labor force. Farming has become a largely part-time activity with low productivity. While a form of modernization is in place, the "capillaries" are not developed, Han said. China needs to explore new forms of agricultural businesses and nurture a cadre of professional farmers, Han wrote. Officials will encourage integration of crop and livestock production. More effort will be put into orderly transfer of land to develop new-type farming operations.

While China has made great achievements by increasing grain production 11  years in a row, it has come at a significant price, said Han, as problems of resource degradation and agricultural pollution became more prominent. China needs to pay down "environmental debts," Han said. China will now pursue environmentally-friendly agriculture, with plans to recycle the major pollutants--plastic sheeting, crop straw and stalks, and animal manure. Han promises an "environmental governance battle" at the local level.

The urgency is magnified by pressure from the external environment. Han describes it as "a floor" and "two ceilings." The "floor" is a steadily rising cost structure for agriculture, including rising costs of labor, machinery, and physical inputs. Prices need to rise to maintain profit margins, but Chinese agricultural prices are already substantially higher than international prices. The first "ceiling" is the price of imports that constrains Chinese prices from rising higher to give farmers incentives and increase their incomes. The second "ceiling" is WTO-imposed limits that constrain China's ability to increase domestic subsidies for agriculture. Han warns that China is approaching its limit on "amber box" subsidies imposed by its WTO agreement.

Han explains that China has to transform the model of agricultural development in order to increase farm income and make the sector competitive. It has to switch from reliance on physical inputs to boost output to reliance on science and technology to raise productivity. China is experimenting with plans to boost innovation in seed and other input industries. A seed propagation belt that includes Hainan, Gansu, and Sichuan is being developed. Farm production needs to be concentrated in regions that have comparative advantage. Farms need to be linked up with processing and distribution industries to form industry chains. New types of marketing arrangements will be pushed, including e-commerce and direct marketing from farmers to consumers.

Han emphasizes agricultural safety and quality. Now that Chinese consumers are adequately clothed and fed, Han surmised, they have zero tolerance for food safety problems. Therefore, Han said China must pursue "standardized production" at the farm level and strict supervision of marketing beyond the farm gate to achieve food safety all the way to the consumer's tongue. This year, China will set up 100 "vegetable basket" demonstration counties for supplying vegetables, meat, and fish with an emphasis on food safety supervision.

Han also embraced globalization: China should attract foreign capital, key technologies, expertise and management experience to help develop China's agriculture. China should improve its ability to control imports and exports, allowing imports of commodities that are in short supply and supporting export of Chinese products that have a competitive advantage, said Han.

In a more pithy speech at Tsinghua University in December, rural policy advisor Chen Xiwen also noted the exhortation to speed up agricultural transformation. He called attention to the pressure from imports, noting that China's grain soybean imports for 2014 could surpass 90 million metric tons, and described the surging imports as indicative of more fundamental and complex problems. Chinese agricultural prices were relatively low when China joined WTO, Chen said, but now they are high. While China has a system of tariff rate quotas to limit grain imports, Chen estimating that smuggled rice from Vietnam was probably greater than the volume reported as legal imports in customs statistics. Chen described the trend of rising farm production costs as "grim."

Chen also said that the environment "red light" is on, and China is approaching the "yellow line" on subsidies. Chen implied that there was great pressure to boost subsidies in this year's target price experiments. The target price for cotton was set at 19,800 yuan/mt, but the market price fell to 13,500 yuan/mt...implying a subsidy of 6,300 yuan/mt, or 47 percent of the market price. Outside the Xinjiang pilot area, the subsidy was set at just 2000 yuan/mt, which means that cotton production will concentrate in Xinjiang. Chen also noted that the soybean target price had to be set at a high level because it was essential to prevent any more declines in soybean area. His reason was that high-protein Chinese soybeans are needed for food uses both in China and in exports markets in Japan and South Korea.

Officials have been calling for "modernization" of agriculture for half a century, but they keep recycling the same ideas over and over without addressing the systemic problems. Chen Xiwen seems to share the frustration, exhorting officials not to "just talk about national features, development stages, and do research." Minister Han acknowledges that a build-up of problems has increased the urgency to radically change the development model for the sector, but he doesn't address the need to relax anachronistic "state secrets," constraints on land ownership, barriers to foreign investment and trade, and stove-piping and squelching of criticism that prevents effective governance. China has created a society where lying, bribes, and cheating are the norm (and consumers wonder why they can't trust food merchants).

China has indeed entered the deep end of the pool and needs to get some swimming lessons quick.

The graphic below summarizes the 2014 rural work conference. 

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