Agricultural policy officials in China say their country will move toward a system of market-driven pricing supplemented by farmer subsidies decoupled from prices, starting with the reform of corn policy announced in March. Officials acknowledge that tinkering with prices has created an expensive problem, but they also acknowledge that their "target price" subsidy experiments have not succeeded yet.
The comments were made in an article from Business Reference News that was posted on many government-sponsored web sites in China today. Officials explain that the government began setting floor prices for rice and wheat after the grain market was liberalized in 2004. Minimum prices were meant to act as a floor under market prices to protect farmers from downside risk. "Temporary" or "provisional" reserves were established for corn, soybeans, rapeseed, sugar, and cotton as officials fretted about unstable prices during 2007-08.
Top ag policy advisor Chen Xiwen told Business Reference News that problems arose after officials began raising the floor prices every year to cover rising production costs. The temporary reserve price for corn rose from 0.7 yuan/500g in 2007--the program's first year-- to 1.12 yuan/500g in 2014. The rise in prices resulted in Chinese prices becoming de-linked from world prices. Chinese commodities lost their international competitiveness as prices in the global market began to fall. Corn production has risen to a record volume, but imports of substitutes for corn flooded into the market, and domestic corn went into government warehouses. Although the temporary reserve price for corn was cut to 1 yuan/500g last fall, it still exceeded the international price.
Vice Minister of Agriculture Yu Xinrong explains that a new mechanism for agricultural price formation will have two characteristics. Agricultural prices will be completely determined by the market. Second, a subsidy separated from price will ensure that returns to farmers in the most competitive producing regions will remain stable from year to year.
Business Reference News says the reform of the corn market system announced for this fall is a model for the future path: prices will be completely marketized, with all types of buyers free to enter the market to purchase corn. Farmers will get subsidies to maintain their income.
Trouble is, no one has explained how the subsidies for corn producers will work, and no one seems to have a workable approach to put in place.
Officials have pinned their hopes on "target price subsidies" as a new approach to subsidizing farmers. Yet, about half of the Business Reference News article is devoted to explaining problems with "target price" subsidy programs encountered during the last two years of pilots for cotton and soybeans. Officials have not given up on the target price subsidy, but there are "many difficulties to be solved."
According to Wang Xiaoyu, vice-secretary of the Heilongjiang soybean industry association, no one seems to be happy with the target price subsidy for soybeans. Farmers complain that a single target price is inappropriate because prices vary from place to place, some farmers have lower production costs than others, and prices fluctuate over the course of the marketing season. Last year, the soybean price began at 4600 yuan/metric ton after harvest but fell to 4060 yuan later in the season. The government apparently collected prices to set the subsidy while prices were at their high point. By late spring the soybean market had seized up--farmers didn't want to sell at a low price and processors didn't want to buy at the price farmers wanted. Grassroots officials in soybean regions complain about the difficulty of implementing the program. It takes a lot of work to verify the area planted and prices, much of the data reported to them is falsified, and they have to deal with disgruntled farmers.
Mr. Ye Xingqing, an agricultural economist with China's Development Research Center, says the cotton target price pilot has succeeded on only one of three criteria. Ye hails the program for narrowing the difference between prices of domestic and imported cotton, thus removing the severe distortion that existed during 2011-2013 when the "temporary reserve" supported the Chinese price about 40% above the international price. However, Ye says that the target price subsidy still distorts production decisions of cotton producers because the subsidy is tied to area planted and volume of cotton sold. Mr. Ye also worries that the target price exceeds China's "fixed external reference price" which means the subsidy "could be above the 8.5% limit" set by WTO for China's "amber box" subsidies.
Meanwhile, the minimum price programs for wheat and rice have been announced for 2016 with no significant reforms, and government stockpiling of newly-harvested wheat is proceeding. Xinjiang Autonomous Region plans to purchase 1.5 million metric tons of wheat for the "temporary reserve" (Xinjiang is not covered by the minimum price program) at a price of 1.18 yuan/500g.
Ye Xingqing urges prompt reform of the price formation system, worrying that the divergence between Chinese and international prices could worsen if no action is taken. According to Economic Reference News, officials estimate that it will take two to three years to install the new system of market-driven farm prices and decoupled subsidies.