Thursday, August 4, 2016

Target Price Subsidies: Implementation Problems

China's target price subsidy pilot for soybeans is an improvement on the temporary reserve policy it replaced, but investigations in northeastern provinces also revealed high administrative costs, plunging soybean production, "diluted" payments, and a perverse incentive to maintain production on marginal land.

Chinese authorities launched the target price subsidy pilot in four northeastern provinces in 2014. It replaced a "temporary reserve" that set a floor price for soybeans from 2007 to 2013. The target price program lets the market determine the price, then pays a subsidy to farmers based on the difference between a target price and the market price. The lower the market price, the bigger the subsidy. Authorities have hopes that the target price method can be used more widely to replace floor prices as a less-market-distorting approach to supporting farmers and stabilizing their incomes.

Two reports on the soybean target price pilot have appeared recently. A Ministry of Finance (MOF) investigation focused on Jilin Province. A Ministry of Agriculture (MOA) survey interviewed farmers as well as traders and processors in the northeastern region.

The MOA team praised the pilot for allowing the market to work more efficiently. Under the temporary reserve program prices were rigid, the government was forced to procure large volumes, and imports of soybeans accelerated. The target price program allows the market to determine the price. Chinese prices have fallen in line with international prices since the pilot was launched, narrowing the big price gaps that persisted during 2008-2013. Trading on the Dalian futures exchange has jumped, and processors and trading companies say they are more satisfied with the target price policy. The budgetary burden on government finances has declined (but only by about a third--MOA puts the current price tag for the soybean target price subsidy at 3.25 billion yuan--$485 million at the current exchange rate). What they didn't mention is that soybean imports have grown even faster under the target price program.

Both studies stressed the problems encountered in the implementation of the target price pilot. Both studies pointed out that soybeans were much less profitable than corn, so farmers had little interest in planting them. The MOF study reported that the area planted in soybeans in Jilin Province fell 37 percent between 2014 and 2015. In one village surveyed, 80 percent of land was planted in soybeans in 2010, but it was down to 30% in 2014, and no one planted soybeans in 2015. The MOA report agreed that soybean returns were much less than returns to growing corn.

The MOF survey criticized the Jilin program for subsidizing every single soybean grower. Payments were made in each of the province's 51 counties, including some where only a few farmers grow soybeans. Farmers got payments for plots as small as 2 mu (less than one-third acre). The smallest payment was 16 yuan ($2.40) to a farmer with 0.3 mu. Some of the Jilin farmers collected subsidies based on the area planted, but didn't sell any soybeans. Some farmers waited in vain for market prices to rebound, and never sold their beans; others just grow them for at-home use. All got subsidies if they grew soybeans.

The MOF study also surmised that a fixed payment per unit of land encouraged production on marginal land. Many soybean plots are in gullies, under trees, or on hillsides. The yield in Jilin varies from as high as 308 kg/mu in the best areas to 113 kg/mu in other areas. The MOF team thought that farmers in high-yielding areas were unsatisfied with the diluted payment per kilogram of output, and were inclined to switch their land to corn. Conversely, the high payment per unit of output encouraged farmers with low-yielding land to keep planting soybeans.

The MOA team criticized the price-collection scheme for diluting the subsidy payment. The MOA team said most market prices were collected in regions where there is relatively little production. Average prices tended to be higher in these places than prices in major production regions. When officials calculated the difference between these relatively high market prices and the target price the resulting subsidy was less than farmers expected. The MOF team also reported that farmers hoped for a higher target price, and they also mentioned that some farmers are not market-oriented and are accustomed to looking to the government to support them.

The MOA pointed out that subsidy payments are further diluted by a statistical cat-and-mouse game between local and central officials. The central government issues subsidy funds to the provinces based on the land area planted in soybeans. However, the actual land area planted is larger than the central government's statistics say, so local officials don't get enough funds to pay the full subsidy.

The MOA report says that local officials in far-flung areas of the northeastern provinces fail to report "reclaimed" cropland created by plowing up grasslands, marshes, river bottoms, hillsides, and forests. According to the MOA report, Beijing sent down funds to cover 38.65 million mu of land counted in official statistics, but provincial statisticians estimated there were 42.5 million mu of soybeans planted in 2014. So the funds had to be spread over a 9-percent larger amount of land.

Both studies also complained that the cost of implementing the target price subsidy is high. Most of the cost involves measuring fields and verifying land area. Farmers are widely scattered, so officials needed to travel and they had to buy GPS equipment. The MOA team reported that one county spent 315,000 yuan on implementing the program, and that didn't include the salaries of officials.

The two teams recommended collecting more and better information to operate the target price program. The MOF team suggested setting up a database that includes complete information on farmer land-holdings and planting. Officials were advised to combine this with activities delineating village farmland holdings by collective members which is also underway. The MOA team called for rectifying the deviation between central and local land data, and taking off-the-books land into account. The MOA team recommended shifting price collecting points to production areas.

The MOF team suggested focusing subsidies on major production regions and large-scale commercial-oriented farmers, with a minimum threshold of 2 mu (one-third acre) to get a subsidy. The MOA team recommended distributing subsidies in a more timely manner, giving half to farmers early in the season and the other half after planted area had been verified. The MOA team said the central government should also subsidize the administrative expenses, since local officials should not have bear the cost of a central government subsidy program.

The researchers urged officials to consider carefully the relative returns of soybeans and corn. The MOF team suggested "guiding" farmers to rotate soybeans with other crops instead of mono-cropping corn. Separately, a Heilongjiang professor recommended including spring wheat in northern Heilongjiang in the national minimum price program for wheat to encourage soybean-wheat rotations.

This is the second year of the target price pilot program, yet there are still a lot of kinks to be worked out. More troubling, the program led to an even steeper drop in soybean production and it preserved production on marginal land. The fundamental problem is that competing crops--corn and rice--each had support prices. If the soybean subsidy had been raised enough to keep soybeans as profitable as corn, the program might have cost as much or more as the "temporary reserve" program it replaced.

Officials are preparing to roll out a corn subsidy program that has been drawn up on the fly, is completely untested, will be much larger, and will receive much more scrutiny than the soybean pilot. This new corn subsidy will make the relative returns of soybeans and corn even more uncertain. When new problems arise, more bells and whistles will need to be added.

Once they get started, farm subsidy programs have an uncanny knack of turning into a Rube Goldberg contraption that no one really understands.

1 comment:

Jenny Tang said...

Hi - I'm a current MBA student concentrating on supply chain / ag, and have worked in China for the past 2 yrs. I've been reading your posts and would be interested in helping out with research and writing. Would you be open to talking about working together?

Thanks,
Jenny