Wednesday, August 10, 2016

China Corn Subsidy Funds Announced

China's Finance Ministry has allocated 30 billion yuan ($4.5 billion) for the new "corn producer subsidy" that will be paid to farmers in the four northeastern provinces this year. This signals China's entry into a brave new world of giant farm subsidies.

The funds will be issued to the four provinces (apparently on the basis of the amount of land planted in corn in each): Heilongjiang 11.6 billion yuan, Jilin 7.3 billion yuan, Inner Mongolia 6.6 billion yuan, and Liaoning 4.6 billion yuan. The provinces are responsible for setting up their subsidy programs. Last week, Heilongjiang released its subsidy implementation program which said the payment would be based on the amount of land farmers planted in corn this year, but it did not specify the amount of the payment. This subsidy is for the 2016/17 crop that was planted last spring, will be harvested in September-October, and sold from October through April.

Calculations based on last year's data suggest the amount of the 30-billion-yuan corn subsidy funds equal about 130 yuan per mu ($119 per acre at the current exchange rate) of corn planted in each of the four provinces.

The corn subsidy replaces the "temporary reserve" program that placed a floor under corn prices from 2007 to 2015. The "temporary reserve" price was cut about 10 percent a year ago, and a government announcement in March eliminated the program. Corn prices have already dropped since last fall and will drop further when China's new corn crop is marketed this fall. Will this subsidy be big enough to make farmers happy?

A numerical example suggests the subsidy may not be enough to fully compensate farmers for the drop in price. Suppose the corn price drops from last year's temporary reserve minimum of 2 yuan/kg to 1.5 yuan/kg this year--a 25-percent decline. That would represent a loss of .50 yuan in gross income on each kilogram of corn produced. A farmer with a corn yield of 400 kg/mu would lose 200 yuan in income from the falling price on each mu he harvests. That 200-yuan theoretical loss would exceed the prospective 130 yuan/mu subsidy. The adequacy of the subsidy depends on how much corn prices drop during the coming marketing year--a big unknown.

Corn producers outside the northeastern provinces will not get a subsidy. However, corn farmers outside the northeastern provinces were already hit with plummeting prices over the past year.

China's new subsidy system appears to be shaping up: a hefty basic payment to all grain producers (the "support and protection payment" to all grain farmers) topped up with big subsidies for specific crops (soybeans, cotton, corn, rapeseed) that are limited to the biggest production regions. Wheat and rice still receive guaranteed minimum prices as their primary means of support.

The 30 billion-yuan corn subsidy funds could equal about 20 percent of the gross value of corn production in the four northeastern provinces if the average corn price falls to 1500 yuan/metric ton for the 2016 crop. However, subsidy funds as a proportion of the value of national corn output would be lower--about 9 percent--since the subsidy will be offered in just four provinces. The actual percentage will depend on how much the price falls, but it looks like China's new corn subsidy will be close to its WTO-imposed limit of 8.5 percent, and could exceed that threshold. 

Farmers who plant corn in the northeastern provinces will get the corn producer subsidy in addition to the "support and protection subsidy" paid to all grain producers. Last month, Heilongjiang Province announced that the support and protection payment will be 71.45 yuan per mu ($65.20 per acre), so corn farmers in Heilongjiang should get a total subsidy of 201.45 yuan per mu ($184.20 per acre) for land planted in corn. Other provinces have not announced the subsidy amounts. China has declared that the "support and protection payment" will be used for "soil improvements" and to fund credit programs for big farmers. This appears to be a gambit by China to declare the "support and protection" payment as a "green box" measure exempt from WTO limits, thus making room for big corn, soybean, and cotton subsidies that push up against the 8.5-percent ceiling.

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