Saturday, March 28, 2015

China's Soaring Land Rents and Subsidies

China's strategy of consolidating farms into fewer, larger operations is running into a problem: soaring land rents are eating up the profits of large-scale farmers. This is prompting demands for high grain prices and more and better farm subsidies.

In Jiangsu's Gaoyou Municipality, officials have been encouraging the scaling-up of farming for a number of years by registering land rights and setting up township exchanges where lessors and lessees can find one another. The number of larger-scale farms has increased, but farmers have found that net earnings did not increase as fast as the scale of their operations.

Mr. Jiang planted 100 mu (16.5 acres) in 2011 and earned 60,000 yuan from planting a winter wheat crop followed by rice in the summer.  In 2013 he doubled the size of his farm business by renting another 100 mu, but his net income was still just over 60,000 yuan. In 2014, he doubled his farm again by renting another 200 mu--now he's up to 400 mu (about 66 acres)--but his net income fell to 48,800 yuan (about $7,870).

Farmer Jiang's gross income went up due to higher prices and improved yields for his wheat and rice. His spending on fertilizer, pesticides went up marginally, but land rent soared from 400 yuan per mu to 1100 yuan (about $1075 per acre). He spent equal amounts for inputs and for land rent in 2014.

The rent in Gaoyou county is about four times the average rent for Iowa farmland in 2014 of $260 per acre.

Another villager, Mr. Zhou, reported a similar experience. He said he more-than-tripled the size of his farm but his income only doubled. He said the grain price went up 20 percent in three years but his land rent went up 175 percent. Mr. Zhou complains that he pays ever-rising expenses, but all the farm subsidies are paid to the villagers he rents the land from.

Another problem is the short-term year-to-year contracts for land rentals. Rents are raised annually and farmers can never be sure whether they will retain plots of land from one year to the next. With such insecurity, farmers who rent land cannot make any investments or improvements in the soil.

Labor is still a problem for large farmers too. While some tasks can be mechanized, others still require a lot of labor. Most of the young people in Gaoyou County have left the countryside, so wages are rising and there only old people left to do the work.

Drying and marketing the grain is another problem. Small-scale farmers often dry their grain on courtyards, roadsides, basketball courts, etc., but this is problematic for farmers with huge volumes of grain. When there is rain at harvest time, farmers may have to sell damp or even moldy grain at a steep discount.

The article recommends more government intervention and subsidies. It calls for the government to monitor land rents and place limits on them. The article recommends giving subsidies to the tenants who till the land rather than the villagers who rent land to them.

Some provinces are already giving out such subsidies. Shandong Province is giving a subsidy of 40 yuan per mu for farmers who plant at least 300 mu of wheat, rice, and corn this year. In Guangdong's Zhongshan municipality, rice farms of at least 100 mu can get a subsidy of 250 yuan per mu (adding this to other subsidies, total payments are now up to 493 yuan/mu). Zhejiang Province gives a subsidy of 80  yuan per mu for farms of 50 mu or larger. Sichuan's subsidy varies from 20 yuan per mu for a 30-mu farm to 100 yuan per mu for a 500-mu farm. Anhui's Nanling County has a pilot program to give subsidies up to 300  yuan per mu for large farmers who have a contract to rent land for at least 5 years.

The article further calls for paying out subsidies based on the volume of grain they sell to state-owned grain reserves in order to give farmers stronger incentives and ensure that government reserves are replenished. According to the article, this type of subsidy is used in other parts of Jiangsu (and it is used in a number of other provinces as well). They also call for increased use of production contracts that specify varieties of grain to be grown as a way to increase the production of types of grain that are in short supply.

By the end of the article it is apparent that it was written by China's grain bureaucracy. The article goes on to call for subsidies for state-owned grain enterprises and an increased role for them to ensure that farmers can sell their grain smoothly. The enterprises need money to rebuild dilapidated granaries and buy grain-drying equipment. They need to go out to farms to buy grain at the farmer's door (private grain traders already do this--without subsidies, somehow).

It turns out that large-scale farmers have to pay for their land, and the villagers who rent it to them are demanding ever-higher rents. This means grain prices have to go higher to cover rising costs. Prices can't go any higher because China already has the world's highest commodity prices and imports are pouring in to take advantage of the price-gap. This means farmers demand higher subsidies. No more decoupled subsidies that act as an entitlement to the rural masses--China is increasingly talking about tying subsidies to production and sale of specific commodities.

China's narrative of poor peasants needing subsidies to compete with big American farmers is crumbling fast. China once took land from the "greedy landlords" and gave it to the "poor peasants." Now the peasants are the ones demanding big rents. Chinese farming is morphing into farm businesses just like those in developed countries and the subsidy system will soon be an impenetrable alphabet soup of acreage bases, deficiency payments, and Olympic averages. If only George Orwell were here to see this real-life "Animal Farm" taking shape.

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