Friday, July 10, 2015

China Re-engineers Farm Subsidy System

Chinese authorities have launched a reform of their decade-old farm subsidy program that will divert funds for grain subsidies to "new-style" large-scale farm operations that don't currently get subsidies. Most subsidy funds will still go to villagers for their contracted land, but those subsidies are redesigned to make sure they plant grain on the subsidized land. The details on how the subsidies will be given are left up to authorities in five pilot provinces.

The reform was initiated in an obscure document issued by the Ministries of Finance and Agriculture May 22, 2015. The reform focuses on so-called "three subsidies":
  • a "general input subsidy" for grain producers
  • a direct payment to grain producers
  • subsidies for "improved seeds" for rice, wheat, corn, soybeans, rapeseed, cotton, peanuts, and highland barley.
The document says the reform is necessary because changes in the countryside have rendered the subsidies ineffective in mobilizing farmers to produce grain. The reform aims to convert the subsidies from a near-universal income entitlement for rural households to a subsidy that rewards producers of grain. The "three subsidies" are to be combined into a single "agricultural support protection subsidy" (农业支持保护补贴). Major themes are to fold new-style large farms into the subsidy program by giving them financial and technical services, stop giving subsidies for land not used to plant grain, and convert the traditional subsidies to measures that promote soil productivity and curb chemical fertilizer and pesticide use.

Pilot counties will be chosen in 5 provinces--Shandong, Anhui, Hunan, Sichuan, and Zhejiang--to experiment with the reform during 2015. Other provinces can experiment with the reforms as long as their pilots are confined to a limited geographic region. The experience will be evaluated in 2016 to determine whether the reform should be spread nationwide.

The MOF/MOA document gives general guidance about how new subsidies should be implemented, emphasizing that they should be adapted to local conditions. One chunk of funds will subsidize "appropriate scale grain operations" that include large grain farms, family farms, cooperatives, land trusts, companies renting land from villages, and organizations providing technical services. It will divert 20% of "general input subsidy" funds for this purpose, supplemented by a fund for large grain farmer subsidies. Any increases in grain subsidy funds will go to the large farmer subsidy fund. The document emphasizes that these funds will be used to begin establishment of a nationwide farm credit system that will eventually cover all grain-producing areas. The initial measures will be loan guarantees and interest subsidies that cover no more than half the interest on loans. Cash subsidies may be given to nongovernmental organizations that provide technical services to farmers (probably machinery cooperatives and pest-control teams).

The second tranche of subsidies will go to the traditional targets: village households with land contracting rights. This will include 80% of the general input subsidy funds, the direct payment for grain producers and the improved seed subsidy. Farmers must agree not to leave their land idle and the productivity of their land must not decline (the language is ambiguous: "地力不降低"). They will not get subsidies for land used for greenhouses, livestock farms, trees, or nonfarm uses. The subsidies will be used to "strengthen farmers' consciousness of ecological protection."

Sichuan announced that the recipients of "appropriate scale grain producer" subsidies would be producers of wheat, rice, corn, potatoes, soybeans, highland barley, and buckwheat, including large grain farmers (粮食大户), family farms (家庭农场), farmer cooperatives (农民合作社), and nongovernmental providers of technical services (农业社会化服务组织), and agricultural companies (农业龙头企业). Each type of farm has a different minimum size threshold for receiving the subsidies, and the thresholds are slightly larger in the Chengdu region--there are 10 thresholds in all, ranging from 30 mu (5 acres) to 1000 mu (165 acres). The pilot will cover the entire province.

Households with contracted land in Sichuan were to receive their "cropland fertility protection subsidy" payment in their bank account by the end of June. Subsidies for "appropriate scale" operations can take various forms, including establishment of a loan guarantee system, interest subsidies, and aid for provision of technical services.

Shandong Province announced that subsidies will be more targeted and full mobilize farmers' enthusiasm for planting grain after its subsidy reform. The subsidies for households will be 125 yuan per mu ($121 per acre) of wheat planted. The subsidy for large farms of 50 mu or more will be 60 yuan per mu ($58 per acres) with an upper limit of 125,000 yuan ($20,000).

In Shandong, the subsidies for wheat and corn seeds will be folded into the single subsidy for wheat area planted. The cotton seed subsidy will no longer be given separately; it will be folded into the new "target price" subsidy for cotton. The peanut seed subsidy will continue for a year with expanded coverage.

Shandong's household farm subsidies will be used for a long list of environmentally friendly measures, including reduction of chemical fertilizer and pesticide use, supplying silage for ruminant animals, eliminating burning of straw, deep-ploughing fields, developing water-saving agriculture, integrating agricultural water and fertilizer industries, water-saving livestock production, and even rural garbage and sewage treatment. There are no details about subsidies for large farms in Shandong.

The themes of restructuring agriculture, improving financial services, and dealing with environmental problems were featured in a July 1 communist party study session for agricultural officials led by Party Secretary and Ministry of Agriculture Han Changfu. He instructed officials to do a good job in pilot programs for land transfer, grasp the "historic opportunity" to transform the mode of agricultural development. "Important instructions from the central leadership" were given to guide the orderly transfer of cropland, increase support for new-style farming operations, and actively and safely guide industrial and commercial investment in the agricultural sector.

Speeches by the Minister and Vice Minister to a national meeting on livestock modernization also called for accelerating the transformation of livestock from backyard modes to "appropriate scale" and nurturing new-style livestock operations. 

The General Agricultural Development program--a program to leverage investment in basic agricultural infrastructure like digging irrigation canals, building roads, and leveling fields--was revised to include new-style farms alongside the traditional village-wide or township projects.

The subsidy reform reflects orders from top officials to push forward the restructuring not only of farming but also the administrative system designed to oversee it. Since the "household responsibility" reform of the late 1970s, the village land-contracting system has been the basis for carrying out most agricultural policies. Officials have now been pushed into a new reform that will remold farming into larger-scale, more commercial-oriented entities. A new approach to overseeing these new-style farms and giving them services is needed. At the same time, officials have been forced to come to terms with decades of maximizing production without regard to environmental consequences or future productivity of land.

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