Wednesday, January 13, 2016

Soybean Target Price Subsidy Adjusted in Heilongjiang

Much like their ham-handed approach to financial markets, authorities in China are also in a quandary about how to deal with volatile agricultural markets. Chinese authorities are pinning their hopes on a "target price" subsidy method that was abandoned decades ago by the United States. They have revealed little about experiments with the program on a trial basis since 2014, but indications are that this approach is fraught with problems and clearly not ready to be rolled out on a large scale to other crops.

The target price program calculates the difference between the local market price and a "target" set by authorities. When the market price is less than the target, the government makes a cash payment to each farmer based on his/her land area planted in soybeans. The subsidy was 60 yuan per mu (approximately $57 per acre) in Heilongjiang Province last year (2014/15). While it sounds simple on paper, the program is much harder to implement in practice.

The Heilongjiang Province price bureau announced tighter restrictions on land that is eligible for the target price subsidy during the second year of the pilot program. The subsidy can only be collected if farmers have planted soybeans on land that has been approved by authorities with a valid rental or lease contract. Soybeans cannot be planted on wetlands, land designated for forestry or grassland use, or land enrolled in the "grain for green" land retirement program, or on land that was "reclaimed" for agriculture without official permission. The new requirements suggest that farmers have been planting soybeans where they are not supposed to.

(Heilongjiang Province has a long history of hiding and misreporting land to higher authorities--until the 1990s they hid taxable land to reduce their tax liabiliity; they then began reporting so-called "black land" when it became eligible for subsidies ten years ago.)

In September 2015, local officials in Heilongjiang were ordered to fan out into the countryside to verify soybean area reported by villages as eligible for the "target price" subsidy. One town reported that officials visited every village leader and accountant, and met with individual farmers to verify the 1013 mu (167 acres) of soybean area reported in their jurisdiction. (The whole town's soybean area is less than a single farmer's soybean acreage in the United States.) Officials recorded the names of every farmer and the names of people they rented their land from. Village leaders were warned not to withhold or falsify land-holdings and they were told only to claim land that has been legally planted in soybeans.

There is also legal ambiguity over who is entitled to collect the subsidy--the actual farmer or his/her landlord. A local court in Heilongjiang settled such a dispute over target price subsidies in November by forcing the farmers and their landlords to split the subsidy payment.

There have been similar concerns about the target price subsidy pilot for cotton in Xinjiang Autonomous Region. Authorities tightened up restrictions on planting cotton on ineligible land and simplifying the convoluted formula that distributed funds in three separate tranches. There was a report that cotton warehouses and farmers used a strategem to artificially depress the market price which inflated the subsidy payment and allowed the purchasers to save money. The cotton market remains in disarray despite the plunge in market prices.

Chinese authorities hope the "target price" subsidy can replace market-distorting support prices as their primary means of subsidizing farmers. While they insist that the target price pilots for soybeans and cotton have been generally successful, they acknowledge that there are high operational costs and other unspecified problems to be ironed out. Despite relatively generous subsidies, cotton and soybean production in China both plunged during the first year of the target price trials.

Support prices have thrown Chinese ag markets into turmoil and are being abandoned one by one, but the target price policy is clearly not ready to roll out more widely. Note that the rapeseed price support was quietly abandoned in 2015 with no subsidy to replace it. Neither is the target price subsidy ready to be rolled out for producers of corn--China's largest single crop. Yet the corn market is in turmoil, urgently in need of reform and can't wait another year or two to refine a new subsidy policy.

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