Monday, January 18, 2016

China to Transform Agriculture by Spending Billions

Chinese authorities have pledged to spend billions of dollars this year to transform agriculture. They plan to fine-tune grain subsidies to encourage structural change in farming, boost farm productivity, and protect the environment. Officials say structural adjustment in agriculture is an "urgent task" for this year.

The planned spending was summarized in a Zhongguo Caixin Bao article December 30, 2015. The biggest expenditures are on programs that have been in existence for a number of years, but they will be tweaked to focus on supporting new types of farms and making farming more productive and environmentally sustainable. Several new smaller programs are being introduced to accomplish these goals.

China's planned expenditures for "agricultural transformation" in 2016
Program Million US dollars
20% of General input subsidy earmarked for "new-type" farms 3,344
Pilot programs steer "three subsidies" toward land fertility improvements 18,688
Subsidy for farm machinery purchases 3,688
Construct high standard fields 6,531
"Modern agriculture" industry development fund 3,181
Structural adjustment of crops 47
Integrate primary, secondary, tertiary sectors in 9 provinces 156
Support for farmer cooperatives 313
Agricultural services pilot programs 156
Agricultural extension 406
Popularization of ag technology 156
Rectification of soil contaminated with heavy metals 234
Governance of underground aquifers 1,078
"Grain for green" land retirement 781
National forest protection 3,047
Wetland protection 250
Source: Zhongguo Caijing Bao; figures converted to U.S. dollars using exchange rate of 6.4 RMB/$.

The biggest chunk of money China spends on agricultural support is the "three subsidies"--a direct payment to grain farmers, improved seed subsidy, and general input subsidy that began in 2004. This year, authorities will begin streamlining and re-targeting these subsidies to reduce the number of separate payments, shift payments toward farmers who rent land from others, and earmark payments for improvements in land fertility.

This year 20% of the "general input subsidy" funds ($3.3 billion based on last year's funding for the general input subsidy) will be set aside for "new-style" farms--farmers who rent in land from neighbors, "family farms," cooperative farms, and farms run by agribusiness companies. These funds will be added to pilot programs for assisting these types of farms and any increase in grain subsidies this year will also be set  aside for these farms.

The remaining 80% of the input subsidy plus direct payments to grain farmers and seed subsidies would total $18.7 billion based on the 2015 budget. In 2016, pilot counties for reforming these subsidies will be chosen from five provinces: Anhui, Shandong, Sichuan, Hunan, and Zhejiang. The pilot programs will consolidate the three subsidies into a single "support and protection subsidy" and use the  funds for activities to improve land fertility and support of large-scale farms.

Subsidies for purchase of farm machinery were also initiated in 2004 and funds have increased 11-fold since then to $3.7 billion in 2016. Officials say they have spent 143.5 billion yuan (over $22 billion) since 2004 to subsidize machinery purchases. The subsidy pays buyers a rebate or discount on a wide variety of equipment. This year's subsidies will support the initiative to strengthen links between farming, processing and distribution and could include processing and milling equipment, milking machines, automated feeders, greenhouses, drones for spraying pesticides, as well as tractors and combines. This year's focus is on equipment needed in key links of grain, cotton, and oilseed industries as well as livestock, aquaculture, vegetables and fruit sectors.

Another big chunk is $6.5 billion to be spent on upgrading contiguous fields, irrigation facilities, and road infrastructure. Water-saving irrigation and management of underground aquifers are major priorities. Chinese authorities say they have spent over $32 billion over the past five years to create 7.2 million hectares of high-yielding fields.Local governments in China will be encouraged to allocate funds earned from renting out state-owned land to "general agricultural development", and authorities will experiment with share-holding investment funds and other methods to attract private investment in farming projects.

Another $3.2 billion will be allocated for "modern agricultural development." Revised regulations for this program issued in 2013 indicate that these funds are like a block grant to local governments which can use the money for building irrigation infrastructure or just about any other agricultural industry development considered to be in the local area's comparative advantage, including pig- and dairy-raising communities, aquaculture, apple and orange orchard construction, vegetables, and flowers. The modern agriculture funds will be steered toward diverse new-style farm operators.

A relatively modest $47 million is earmarked for "structural adjustment" of crops, which supports the initiative to replace corn acreage with more sustainable small grains and fodder crops like alfalfa. Authorities plan to break up massive mono-cropping of corn and rice by encouraging crop rotations of corn, soybeans, and spring wheat in varying combinations for different regions. This initiative is intended to both alleviate chronic excess supply of corn and improve sustainability of cropping patterns.

Another thrust of the transformation is to integrate the different components of agricultural industry. $156 million is budgeted to support integration of farming with processing and distribution sectors. This funding will be focused mainly on wheat and rice production, milling, and distribution in twelve pilot provinces, including Shandong, Henan, and Ningxia.

Farmer cooperatives will get over $300 million in aid as part of the initiative to develop new types of farming arrangements. Thirty percent will be earmarked for pilot programs in 12 provinces, including Chongqing and Jiangsu, where local authorities can experiment with mechanisms to attract private investment. Another $156 million will be spent on developing private-sector services for farmers in 13 provinces.

Local agricultural extension stations will get over $400 million to stabilize extension teams (i.e. pay their salaries) and disseminate new technologies. Another $156 million is budgeted for disseminating new technologies. Officials say they have spent $750 million over the last five years to improve production in dry areas of northern China. However, the landscape is now inundated with scraps of plastic applied to fields to conserve moisture in the soil. This year there will be an emphasis on recycling plastic film to clean up this "white pollution."

Cleaning up environmental problems is another thrust of the agricultural transformation in China. In 2016, $234 million will be allocated to clean up soil contaminated with heavy metals, with a focus on Hunan Province where some rice growing areas are contaminated with cadmium.

Chinese authorities are trying to reverse the depletion of underground aquifers in dry areas of northern China where crops rely on irrigation. A pilot region that began with 48 counties in Hebei Province during 2014 will be expanded to 63 counties and get over $1 billion in funding.

A new round of "grain for green" will pay local authorities and farmers to retire cropland on steep slopes and grasslands with $781 million budgeted this year. The program is dovetailed with antipoverty and environmental initiatives this year by focusing funds on impoverished regions and areas with slopes of 25 degrees or more which are "seriously polluted" (probably referring to mining wastes). The funds finance planting of trees and grass and grants to farmers.

China plans to spend over $3 billion this year on protecting forests. The focus will be on cutting back commercial use of state-owned forests in northeastern provinces and Inner Mongolia. Like the agricultural extension spending, a large part of this will finance employee salaries and benefits. Finally, $250 billion will be spent on wetland protection. The soybean "target price" program has been adjusted this year to withhold subsidies from farmers who illegally grow soybeans on land designated as forest, wetlands, or grasslands.

This sounds like a lot of money, and it is. When the government is the owner of the land, it also becomes responsible for making long-term investments in it. Officials hope these subsidies will attract and leverage private investment.
Investment in China's agriculture has picked up in recent years. Valued at the official exchange rate, investment doubled from about 10 billion dollars in 2010 to over $25 billion in 2014. By comparison, the planned government spending described in this article totals over $40 billion.

Why is China spending so much? When no one really owns the land, farmers who cultivate the land have little incentive to invest in it. Moreover, Chinese farm prices are the highest in the world and expected to fall. Why would farmers invest in an asset that produces output that is expected to fall in price?

The United States also encourages agricultural investment mainly through favorable tax treatment, not so much through direct subsidies for land improvements, buildings, and equipment purchases. USDA statistics show U.S. farm investment is also growing and remains ahead of China's. U.S. farm investment (excluding operator dwellings) grew from $25 billion in 2010 to $45 billion in 2014.

The investment priorities of farmers in the United States and China are mirror images: Chinese farmers invest mainly in building their houses--a much more secure asset than their land--and they invest little in their farms. U.S. farmers invest far more in machinery, equipment, land improvements, buildings, and livestock than they do in their houses.

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