Thursday, March 12, 2015

Provinces Issuing Cotton Subsidies

Several Chinese provinces have announced "target price" subsidies equal to over $200 per acre for the cotton crop that was harvested six months ago.

Until 2014, the only subsidy for cotton was a small seed subsidy of 15 yuan per mu (about $15 per acre). Authorities supported farmers mainly by stockpiling cotton via a "temporary reserve" policy until it was abandoned last year. A "target price" subsidy pilot program was announced, but only for Xinjiang Autonomous Region. Nine other "inland" provinces had no price support and only the seed subsidy until a vague announcement of a subsidy of up to 2000 yuan per metric ton was announced last fall.

This month, "inland" provinces are announcing their subsidies for the crop harvested in the fall of 2014. The subsidies are being called "target price" subsidies, although the "target price" pilot was to be limited to Xinjiang. The subsidies are fixed amounts per unit of land to be distributed based on records of cotton which are 2-to-3 times the amount of grain subsidies. The "target price" subsidy is supposed to be based on the difference between the target and the market prices, but the government has not announced an average market price.

One county in Xinjiang announced that its target price subsidy was 267 yuan per mu (about $267 per acre). The funds were paid out in two installments: one 224-yuan/mu payment was based on acreage planted and another of 0.688 yuan for each kilogram of cotton sold.

Shandong Province announced a "target price subsidy" of 235 yuan per mu (about $235 per acre) with expenditure of 1.3 billion yuan. It will be distributed to over 1 million farmers cultivating 5.6 million mu of cotton in Shandong. Each farmer's subsidy is based on the area of cotton planted in 2014. Apparently there is some record system for distributing the cotton seed subsidy that will be used to determine each farmer's subsidy. Funds are to be paid into farmers' electronic accounts by April 10.

Jiangsu Province announced a "target price subsidy" of 206 yuan per mu with expenditure of 320 million yuan to benefit 850,000 farmers.

In January, Anhui Province announced it was beginning its first cotton subsidy program, but has not yet announced the amount of the subsidy. Hebei Province made a similar announcement. Perhaps announcements from other provinces will be made soon.

In Dongying, a prefecture of Shandong, news media reported that the cotton price had fallen from 4.4 yuan/500g last year to 3.1 yuan/500g this year. Cotton area planted in the district decreased. In Jiangsu there has also been a decline, and it was reported that business was extremely slow for cotton traders to the extent that many went out to find other jobs after the Spring Festival.

In December a report from the Dongying Price Bureau calculated a hypothetical target price subsidy for Dongying farmers of 329.6 yuan per mu--higher than the subsidy just announced--and the report noted that there is no target price subsidy outside of Xinjiang.

The Price Bureau estimated the gross value of cotton output at 1584 RMB/mu. The 235 yuan subsidy just announced is equal to 15% of the output value (well above China's 8.5% WTO-imposed limit on subsidies). The cotton subsidy is also more than double the subsidies given for grain in Shandong.

The main deterrent to cotton production is its high labor requirement. After deducting the opportunity cost of family labor, cotton was estimated to yield a net loss of -779 RMB/mu.

The cotton subsidies appear to exceed the 8.5% limit imposed by its WTO accession agreement. They are clearly in the "amber box" since they are based on area planted, and announcements emphasize that subsidies are to be paid to those who grow the crops (not to landowners, unless a rental agreement specifies who gets subsidies). However, it will be impossible to verify China's subsidy amount since cotton subsidies are being calculated separately by each province and reported piecemeal.

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