Monday, May 4, 2015

Scale Farming: China Feeling Its Way

Chinese officialdom has decided to make a great leap to scale farming without privatizing land. The stated goal of letting the market have a "decisive role" in resource allocation is undermined by banning development of a market to allocate land, the most important resource in farming. The result is a "market failure" which means Chinese officials step in to play a central role in brokering and subsidizing deals to consolidate land and launch new-style scale-farmers.

A sprawling list of 50 farm policies published by China's Ministry of Agriculture last month included new policies aimed at new-style scale farmers--specialized grain producers, "family farms," alliances of farmers, farmer cooperatives, and farming companies. This year, China allocated RMB 23.4 billion (about $3.8 billion) for new-style scale farmers in addition to its usual direct payments, seed, input, and machinery subsidies.

The MOA list also revealed that bureaucracy is a constraint on large-scale farms. It turns out that large farms need large areas of land to dry grain and to store machinery and inputs. Apparently farms have trouble getting approval from the Ministry of Land Resources to use land zoned as cropland for these purposes. MOA called for finding ways to streamline approval for these land uses and coordinating the roles of the agricultural and land ministries in the process.

On May 4, MOA followed up with a call to research ways to clarify villagers' land rights to facilitate transfer of land to form scale farms. Chinese officialdom is creating a convoluted system of multiple types of nebulous rights for three types of rural land; mortgages and loan guarantees for those rights that are sort of like collateralized debt obligations; and impenetrable formulas for distributing increases in land value to the State, the collective and the individual. A lot of "research" is needed to make sure barely-educated villagers who spend their time watching kung fu movies, amateur singing shows, and soap operas thoroughly understand this gobbledygook.

In an essay in the April 2015 issue of the communist party journal Qiushi, the Ministry of Agriculture's chief economist warned that the leap to scale farming will not happen overnight and must be conducted in accord with local realities and economic laws. He cautioned local officials about unrealistic plans to create 1000-mu (165 acres) or 10,000-mu (1,650 acres) farms. He warned against a common misconception that bigger farms mean bigger profits. In fact, he said, large farms also have higher costs and sometimes lower yields per hectare. The MOA economist was concerned that a polarization was emerging in some areas where super-large farms coexist alongside tiny household farms. He also warned against turning land over to companies that convert the land to nonagricultural uses.

The economist explained several ways that scale-farming can increase productivity. Large, specialized farms reduce labor input by mechanizing, they are more inclined to adopt new crop varieties and utilize extension services, and they can reduce waste of land by eliminating ditches and berms that separate small fields. He claims that scale wheat farms have 30-percent lower pesticide costs and their yields are about 25-kg higher than those for small, scattered farms.

The economist also asserted that local specialization and agglomeration can improve productivity. When farms and agribusinesses are clustered in one location, it becomes easier to pass on technical and market information and to offer extension services and technical training. Agribusiness companies clustered in a region specializing in a particular commodity can get achieve similar synergies and scale. This is the thinking behind China's program to set up "demonstration" or "model" districts specialized in particular commodities with large-scale specialized farms.

The MOA economist envisions a flood of subsidies for the new-style scale farmers. He acknowledges that WTO rules limit the amount of "amber box" subsidies, but he claims China's current amber box subsidies are only 2 percent of the value of production. (He apparently is excluding the huge value of market price support which should be counted.) Moreover, he claims that China's limit on "amber box" subsidies is 17 percent of the value of production. He estimates that China can increase subsidies to grain farmers by RMB 174 billion (about $28 billion) and stay within its WTO spending cap. In fact, the limit is 8.5-percent (and he knows it)...he may be adding together product-specific and non-product-specific limits at 8.5 percent each.

The MOA economist then estimates that scale farmers will be able to earn a net return from producing grain of RMB 500 per mu, plus RMB 130 per mu in subsidies, a net income of RMB 630  per mu (about $620 per acre). He thinks a 100-mu farm in the north and 50-mu in the south will give farmers an income comparable to what they could earn in cities.

This is a generous return compared to what U.S. farmers make. According to USDA estimates, the net cash flow for U.S. wheat growers was $121 per acre in 2014, but U.S. wheat growers lost $67 per acre after accounting for the opportunity cost of their land and labor, depreciation on equipment, taxes and overhead.

How can Chinese farmers make such high returns? First, the MOA "economist" does not seem to have accounted for rental payments. When net income for farmers is high, others will clamor for the land to get a piece of the action, thus driving up land rents. Chinese farmers are paying land rents equal to about $300 to $900 or more per acre. The USDA estimated land rental cost for U.S. wheat growers at $65 per acre in 2014. The high Chinese net returns are based on Chinese wheat prices that are roughly double those in the United States. These high prices are maintained by limiting imports through a restrictive tariff rate quota system. If imports were allowed to flow freely (i.e., if the market was allowed to have a "decisive role"), the fat Chinese returns would be erased by lower prices.

The economist also suffers from grain myopia, a common malady among Chinese officials. He presumes that Chinese scale farms will grow nothing but grain, a crop that produces less than 20 percent of China's agricultural value added and uses more than 70 percent of its agricultural land. If scale farmers are going to pay high rents for land, will they use that land to grow a low-value crop?

Ultimately, China's "decisive role" of the market is an empty slogan. As long as land remains under a convoluted "collective" ownership system (in which Chinese officials are the de facto owners and decisionmakers) and land is designated by officials as cropland, "construction land", or "housing land," the supply of crops produced on the land will ultimately be decided by officials, not the market. Moreover, self-sufficiency in grain will demand high prices enforced by restrictions on imports.

The "decisive role" will be in the invisible hands of government officials for the foreseeable future.

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