Saturday, March 26, 2016

Five-Year Plan to Transform Agriculture in China

China's 13th Five-Year Plan includes a complete makeover for the country's agriculture. The plan intends to demolish walls between city and countryside and stop pillaging the environment, but it retains inherent contradictions that will ultimately cement the control of China's mandarins over the food supply.

The outline of the sprawling, ambitious plan published March 17, 2016 lays out China's vision for becoming a more mature, self-sustaining economy, and to actively participate in global affairs while maintaining national security. This document consists of a series of aspirations, strategies, and policy initiatives that are rattled off without explanation. Detailed plans for specific sectors will come later. The contents have been laid out in speeches and other documents over the past three years, so there are no big surprises. Most initiatives are already underway.

Four of the plan's 80 chapters focus on agriculture. According to the plan, hordes of peasants cultivating tiny plots with hoes and water buffalo will become a part of China's past. In their place will be "professional farmers" who grow crops as a business on "appropriate scale" parcels of land, using tractors, data-driven management, and high-tech irrigation systems.

The section titled "Pushing forward agricultural modernization" contains four main emphases:
  • restructuring the mix of commodities and the regional layout of farming
  • adopting commercial business models in agriculture
  • utilizing machinery, equipment, information technology, and improving seeds
  • boosting government support for agriculture and making policy measures more effective.
Other components of the plan have relevance for agriculture. China hopes to speed up the conversion of rural people to bona fide city people, address chronic rural poverty (in large part by moving people out of desolate places), play a more active and assertive role in the world economy, participate in global "economic governance," pursue its "one belt, one road" strategy to project influence abroad, and develop designated regional belts within the country.

Reflecting President Xi's obsession with the issue, food security is the first topic taken up in the agriculture section. The plan recites the mantra of "basically self-sufficient in cereals, absolutely secure in food grains."  The first food security measure mentioned is a campaign to designate "permanent farmland" that will be protected from development around cities and transportation networks. A new measure is a proposal to set up protected production regions that specialize in major commodities. A related proposal to set up a regional compensation system for grain-producing areas has been around for nearly ten years and never seems to get implemented.

China will allow imports to play a role in the food supply, but the stream of imports will be tightly controlled. The plan suggests setting up an agricultural trade adjustment mechanism--an element of plans going back to a "white paper" on grains 20 years ago. Food supplies will be ensured by allowing imports of commodities that are in short supply, and by expanding and improving the menu of supplying countries. Exports of commodities in which China has a comparative advantage will be expanded. China will set up overseas bases for producing, processing, and storing farm commodities, and officials will nurture internationally competitive multinational agribusiness enterprises. China will expand areas for international cooperation in agriculture and engage in multilateral cooperation in agricultural technology. 

The plan calls for raising production capacity without sacrificing the environment. Instead of applying ever-greater amounts of inputs, now technology will be used to boost productivity, low-yielding fields are being upgraded, and resources will be used more efficiently by concentrating production of commodities in regions with comparative advantage. For example, the Statistics Bureau recently celebrated the concentration of 62% of cotton production in Xinjiang as a successful example of shifting production to its most efficient region. 

The plan endorses "environmentally friendly" and "green production." It pledges to work on shrinking underground aquifers, clean up soil polluted with heavy metals and remediate ecologically degraded regions. Several regions with water shortages are earmarked for help: southern Xinjiang, the Hexi corridor in Gansu, and Baicheng in Jilin Province. The plan pledges to protect the black soil in the northeastern provinces. 

Creating a system to develop and disseminate agricultural technology is another measure intended to increase production capacity. This plan focuses mainly on seeds: improving the "research environment" at key laboratories, developing breeding and propagation bases, a new "variety upgrade action plan," and nurturing seed companies with integrated breeding and propagation capacity. Varieties compatible with mechanization are singled out for development. While Chinese officials appear to be obsessed with the seed industry, there is no mention of livestock breeding. 

Linkages and integration are themes of the plan. It calls for rotating crops, linking up feed and forage crops with livestock, and strengthening linkages between farming, processing, and marketing. The plan endorses "multifunctional agriculture", including rural tourism, agricultural sightseeing, and giving city people agricultural experiences. 

The plan hopes for agriculture to become "smart." Information technology will be integrated into production, management and marketing. Regional "Internet of things" projects will forge ahead. Internet companies will be encouraged to set up information technology linkages in agriculture. 

Food safety is once again a theme, as it has been for 15 years or so. The plan calls for establishing a complete traceability system and identifies residues of veterinary drugs and pesticides and standards for additives in agricultural products as specific issues to work on. An internet-based platform for food safety information is viewed as a beneficial tool. A campaign to develop food safety testing and supervision capacity at the county level is endorsed. 

The most adventurous part of the plan is the overhaul of the agricultural business system that will nurture diverse types of "appropriate scale" farming. "Family farms"--defined elsewhere as farms big enough to be operated with the labor of a husband and wife--are to be the foundation of the system, but other forms of cooperatives, unions of farmers, farming trusts, and company-operated farms will be tried out. This is based on orderly and stable land transfer mechanisms. 

The new-type farms will need development of ancillary institutions to support them. Recognizing the inadequacy of the extension system in China, the support include a mainly privatized service system that includes technical advice as well as e-commerce. However, the system of supply and marketing cooperatives set up in the 1950s to supply inputs to communes is tagged for reform (again).

While the plan endorses moving toward greater market orientation, it also expects to keep its farmers on a steady IV-drip of subsidies in order to ensure their profitability. The plan calls for setting up a mechanism that ensures that the government's spending on agriculture continually increases. In a tacit acknowledgment that the decade-old subsidy payments for farmers have become largely inert and an administrative burden, the plan says the "three subsidies" will be consolidated into a single payment, made to operate more effectively, and tilted toward the new types of farms. The plan says China will expand "green box" subsidies that are not limited by WTO rules and make improvements and adjustments in "amber box" subsidies.

The minimum price policy will remain in place for rice and wheat, but it will be improved. The corn price mechanism and the corn reserve system will be improved. A subsidy for corn growers will be introduced. The plan urges "deepening" the target price subsidy reform for cotton and soybeans, and it endorses exploration of price insurance pilots. The level of grain reserves will be "scientifically determined", and officials will figure out how to inject reserves into the market in a better way. "Smart" grain storage will be built, and officials will entice farms, processors, and other diverse operators to hold reserves of farm commodities. 

Financial services to facilitate lending and risk management also get attention from the plan. Again, there is a call for reforming a 60-year-old holdover from collective agriculture--rural credit cooperatives--as well as initiatives to experiment with new forms of financing--rural mutual savings banks. Officials hope to entice all kinds of banks to participate in financing agriculture. They hope to establish a national loan guarantee system in which local governments capitalize companies that guarantee bank loans for farmers. Other recent innovations endorsed in the plan are "insurance + futures" and weather index futures pilots.

This plan has great significance in its aspiration to de-compartmentalize the Chinese economy. If successful, walls between city and countryside will come down. Agriculture will no longer be a subsistence activity that mainly feeds peasants. The countryside will no longer be a reservoir of unskilled laborers and food that can be tapped when needed by cities and industry. Integration of agriculture, the countryside, and rural people with the rest of the economy is long overdue.

However, the plan retains important contradictions. The obsession with self-sufficiency in rice and wheat reflects an outdated view of China's food system. Officials think agricultural profits need to be higher, but in fact Chinese net returns per acre of land are already sky-high compared with other countries. The incompatible objectives of maintaining "food security," raising returns to farmers, and sustainable development will inevitably conflict, demanding a cascade of subsidies, regulations, and an ever-greater role for officials. 

A critical bottleneck is the intent to maintain tight control over land and banking, two critical components of a modern agricultural economy. That tight control along with the intended flood of subsidies will maintain the role of rural officials as the main players in the agricultural economy and create juicy opportunities to for corruption and business opportunities based on their decision-making power over land use, bank loans, and government funds for construction projects. 

Officials view themselves as directors of the play who are somehow more wise and virtuous than the rest of the population, but that view is ill-founded. Officials made a disastrous miscalculation on agricultural price supports that will cost billions to unwind and result in millions of tons of food waste. At the National Peoples Congress, a professor of socialism from Guangxi complained about rampant corruption of rural officials, including the skimming of subsidy funds.

"Collective ownership" of farmland is purportedly to protect peasants, but in reality it protects and enriches the fiefdoms of government officials. It would be instructive if someone were allowed to find out how many of the 2 million or so new-type farms are controlled by government officials and their cronies.

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