Price Supports Crumble: What Next?

China's policy of supporting agricultural prices is crumbling at the edges. "Temporary reserve" policies for cotton and soybeans were abandoned in 2014. Now authorities are giving up on supporting rapeseed prices just as this year's harvest begins. It's not clear whether authorities can maintain high prices for cereal grains in the face of pressure from budgetary pressure and cheaper imports. Nor is it clear what alternative policy might take the place of support prices.

According to news from a May 20, 2015 meeting to discuss marketing of "summer grain" (crops harvested and marketed during the summer months) a new policy for rapeseed will take effect this year. The "temporary reserve" policy of offering a uniform minimum price for rapeseed nationwide will no longer operate in 2015. The central government will give five provinces (Jiangsu, Anhui, Henan, Hubei, Hunan) subsidies of 200 yuan per metric ton purchased, but provinces will set their own policies. Provinces can choose to give a direct subsidy payment to rapeseed producers or they can subsidize processors. The details of this year's policy have not been announced, leaving the market in a state of confusion as the rapeseed harvest begins.

An article from Grain and Oils News explains the context of the policy change. The temporary reserve policy for rapeseed was launched in 2009 to shield farmers from plummeting prices after the 2008 global financial crisis. A classic price-support policy, the government set a minimum price and promised to buy up rapeseed when the market price fell below the minimum. The government's grain reserve corporation, Sinograin, purchased the surplus rapeseed, extracted oil from it and stored the oil with subsidies from the government.

The policy worked OK during years of rising prices, but it ran into trouble when global prices for edible oils fell during the last two years. The Chinese policy was out of step with world prices, maintaining a high price of 5100 yuan per metric ton that far exceeded world prices the last two years. This became a "price with no market." Edible oil produced from rapeseed at the support price had to sell for about 10,000 yuan per metric ton to cover costs, but imported rapeseed oil costs about 6000 yuan. Domestic rapeseed was processed and stored, while cheaper rapeseed oil was imported. 

According to Grain and Oils News, an estimated 6 million metric tons of rapeseed oil is now stockpiled in the temporary reserve (that would be nearly a year's production). The annual storage cost is estimated as high as 1.5 billion yuan ($240 million) plus interest costs of 4 billion yuan ($650 million). When oil from the reserves was offered at auction recently at 5800 yuan per metric ton there was little interest due to quality concerns.

The government can't keep stockpiling rapeseed oil forever, so they are throwing the rapeseed subsidy task into the laps of provincial authorities. According to Grain and Oils News, provinces have two options:

• Liberalize the price for rapeseed and give subsidies to rapeseed farmers.
• Continue to set guidance prices for rapeseed and give subsidies to processors who buy rapeseed.

Under the first option, processors would set their own prices for buying rapeseed and farmers would receive a subsidy based on the amount of rapeseed they plant. However, paying a subsidy to farmers will be extremely time-consuming and reported area will be difficult to verify. (Anecdotal assessments already suggest big discrepancies between statistics on rapeseed area and actual area.) Grain and Oils News thinks that such a subsidy would only be given to large-scale growers.

The second option would pay processors a subsidy to offer a relatively attractive price. This would require coordination among provinces to ensure that differences between provincial prices don't cause rapeseed to flow from low-price to high-price provinces. However, prices could vary due to the financial strength of different provinces. In past years 13 provinces were covered by the "temporary reserve" policy This approach would also demand close scrutiny of processors to make sure they don't falsify their reported purchases to claim extra subsidies, said Grain and Oils News.

It's noteworthy that there is NO mention of a target price subsidy for rapeseed. This likely reflects disappointment with results of soybean and cotton target price policy trials this year.

The policy uncertainty makes it hard for buyers to set a price for newly-harvested rapeseed coming on the market this month. The support price for 2013 and 2014 of 5100 yuan/metric ton is far above current market prices of 3200-4200 yuan/metric ton in Hubei Province. If provinces set a guidance price, the level will be limited by provincial finances. Grain and Oil News thinks it will be no higher than 5000 yuan.

A separate China Grain and Oils Net investigation of the rapeseed harvest in Hunan Province reports that processors are paying 3400-3500 yuan/metric ton but they are cautious in purchasing because the subsidy policy has not been released yet. This article describes the subsidy as an attempt to address the conflict between farmers and buyers of rapeseed. Production in the province is estimated to be down 10% this year, mainly because net returns to rapeseed are low.

In Jiangsu Province rapeseed farmers say they are shocked by the sharp decline in rapeseed prices, calling it a "crisis of survival." According to a local official, the price started at 4200 yuan the morning of June 1, fell to 3800 yuan by noon, and is now down to 3200 yuan. Some farmers are paying to have their rapeseed processed and keeping the oil for their own consumption.

There has been some consternation around the world over China's price-support policies, but the policies appear to be collapsing under their own weight, one by one. First, cotton and soybeans, and now rapeseed. While it's hard to verify that China has exceeded its World Trade Organization limits on domestic subsidies, its other commitments are undermining the price supports. As a WTO member, China is not allowed to subsidize exports so it can't dump its stockpiles of surplus cotton, corn, sugar, rapeseed oil and other commodities on the world market. Its relatively low tariffs for oilseeds, feeds, and its commitment not to use unscientific trade barriers allows imports to flow into the market to replace the stockpiled commodities. Concern for the survival of loss-making textile manufacturers, oilseed crushers, and millers also induces officials to allow those businesses access to cheap imports.

The next question is whether China can maintain high prices for cereal grains--corn, wheat, and rice. Chinese officials emphasize that these grains are protected by tariff rate quotas that limit imports. Can China create a wall around its grain markets to facilitate high prices and self-sufficiency while other commodities gradually vanish? Note that replacement of "temporary reserve" programs with subsidy payments for cotton and soybeans resulted in steep declines in production, and rapeseed appears to be set to follow the same trend. Much of the land has shifted to corn and wheat due to their attractive prices.

Officials have indicated that they plan to keep minimum price policies indefinitely for rice and wheat, but there is no clear plan for dealing with the massive overstock of corn. China's tariff rate quotas have protected grains to some extent, but imports of corn substitutes--sorghum, barley, distillers grains, and cassava--are exerting the same pressure that may cause the corn-price policy to collapse. Smuggling is testing the capacity to support rice prices.

With Chinese officials struggling against cheap imports, they might actually welcome another global grain price crisis.