Tuesday, April 28, 2015

Soybeans: What Target Price Subsidy?

Reports from Heilongjiang Province suggest that China's pilot "target price" subsidy program for soybeans is accelerating the decline in the country's soybean production. 

The target price subsidy pilot replaced the "temporary reserve" price support program for soybeans and cotton in 2014/15. The program allows market supply and demand to determine a market price. The government will estimate the average price for the marketing season, calculate the difference between the target and market prices and pay farmers a direct subsidy based on that difference (if the market price is less than the target).

The soybean target price of 4800 yuan per metric ton was announced in May 2014. The market price has been well below the target since last fall's harvest, but the government still has not announced the average market price that will be used to calculate the subsidy.

Farmers say they were not happy with the market price after last fall's harvest. They held on to their beans, hoping for a price rebound that never came. Instead, prices kept dropping to as low as 3200-3600 yuan per metric ton now. Farmers still have an estimated 40 percent of their soybeans unsold--normally nearly all of the beans would be sold by this time of the year.

With spring planting approaching, farmers are under pressure to sell their soybeans to generate cash for purchases of seed, fertilizer, pesticide and other inputs. If farmers sell soybeans in large quantities now they will realize losses on their crop, and it may push prices down even further.

The "market price" for calculating the subsidy is the average paid during the October-March marketing season. However, soybean-selling was slow, and less than half of the beans were sold by March. With prices dropping, most farmers will sell their soybeans at a price much lower than the official "market price" calculated for October-March. The "market price" is based on prices paid by crushing factories and warehouses, not the price received at the farm gate. Thus, although many farmers are selling their beans at prices more than 1000 yuan per metric ton less than the target, the subsidy could be based on a smaller difference of 600-800 yuan per metric ton.

According to news reports, farmers have no idea when they might receive a subsidy or how much it might be. The target price for the 2015 crop has not been announced either. [note: The new target price of 4800 yuan/metric ton was announced April 28, 2015, the day this post was written].

The delay in announcing the subsidy could be due to behind-the-scenes arguments over how to calculate the "market price." Central government officials could be quarreling with Heilongjiang Province and State Farm officials over soybean acreage statistics that will be used to distribute the subsidy funds. The National Statistics Bureau's estimates of acreage routinely differ from the province's statistics by a significant margin.

With spring planting time approaching, many dissatisfied farmers are planning to shift land from soybeans to corn. According to an article last week, some in the industry think that soybean area will decline 15 percent in 2015. This could mean even bigger soybean imports and an even bigger corn surplus in China after the first year of the target price pilot.

1 comment:

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