Tuesday, December 13, 2016

Farm Costs "Strangle" Competitiveness in China

China's high farm production costs stem from high land rents, incompatibility of fragmented fields with mechanized farming, and tenants' disincentive to make long-term investments, according to a recent article in Economic Information Daily.

The article zooms in on bottlenecks in a countryside set up for small-scale subsistence farming that are "strangling" the competitiveness of newly commercialized Chinese farmers caught between the "floor" of rising production costs and the "ceiling" of low prices for imported commodities. The director of a government grain-buying station in Jiangxi Province identifies high costs as the root problem that keeps Chinese farmers from being internationally competitive. "If we don't address this problem, the volume of grain imports will be hard to reduce," he warns.

The director of rice producers cooperative in Jiangxi said land rent of 350 yuan per mu per crop --farmers here commonly grow two rice crops per year -- is the largest component of  production cost for rice. Taking into account the local yield, the the 850-yuan production cost translates to a break-even price of 2 yuan per kg for paddy rice. That translates to a price for milled rice of roughly $450 per metric ton at the current exchange rate. That price is slightly higher than the average value of China's imports of rice from Vietnam during October 2016.

The Jiangxi Province production cost survey estimated the rice production cost at 958 yuan per mu, but their estimate of land cost was only 150 yuan. The production cost survey estimated that farmers' profit was only 113 yuan per mu, down 26.7% from last year.

The cost survey team in Jiangxi's Fuzhou County estimated the rent for good quality land at 700 yuan per mu (about $250 per acre at the current exchange rate). The Fuzhou team attributed the high rental to competition for a limited supply of good land due to "blind" investment in commercial scale farming by some farmers and outside investors. A local agricultural official in Anhui Province's Taihe County estimated local land rent at 800-1000 yuan per mu ($287-$359/acre), which he described as "exceeding farmers' expectations."

In Quanjiao County of Anhui Province, a provincial agricultural official estimated that the cost of planting a winter wheat crop followed by rice costs 1700 yuan per mu to produce. At minimum prices for both crops and taking into account average yields, he estimates the "profit" at 150-200 yuan per mu.

Farmers would like to mechanize production to save on labor costs as off-farm wages soar. However, the Economic Information Daily reporter found that poor rural infrastructure impedes the mechanization process. An official in Hunan Province described the problem with a popular saying: "Tractors can't get through the gate, can't get down to the field, and can't get home." A large-scale farmer in Jiangxi Province told the reporter that there is a harvester that can be hitched to a tractor but it can't be used in the small, fragmented fields in his area.

Economic Information Daily also found that large-scale farmers have little incentive to make long-term investments to address the poor infrastructure due to "unstable contracting relations." Rural land cannot be bought or sold--farmers who want to expand their operations must rent the rights to use the land from dozens of villagers. Thus, large-scale farmers are tenants who face the risk of losing the land. Another risk is that the villager/landlords may demand higher rents if the tenants make investments in the land that raise their profits.

Another farmer in Poyang County of Jiangxi Province who has been renting in land for ten years gave an example. During rains the roads he uses to reach his fields become flooded and impassible. He finally spent 10,000 yuan to hire trucks to put gravel on the road. The farmer says he would have made a larger investment to pave the road a long time ago if he had more certainty about his control of the farmland. The "instability" of land rental raises costs by inducing farmers to spend money on repeated short-term fixes, the Poyang farmer said.

The Economic Information Daily reporter asserts that slow development of farm services also contributes to high production costs. For example, he finds that farmers are unable to hire people to bring in machinery to plow, seed, or harvest their fields at a reasonable cost because custom-farming services have been slow to develop. The government instead subsidizes small farmers to buy their own machinery which is only used a few times a year. The reporter describes the idle machinery as wasteful and costly.

According to a Jiangxi farmer cultivating 10,000 mu (4050 acres), farmers still have to spend a lot of their own money to buy farm machines even though there is a generous government subsidy. He says the farmers would rather hire someone to come in to do the plowing, seeding and harvesting for them instead of buying their own machines. But they usually charge a high fee--if you can find someone to do it.

This farmer plans to act as an input dealer and offer mechanized farming services to other farmers. He says he can buy seed, fertilizer and pesticide in bulk directly from the factory at a discount which he passes on to farmers who buy from him. He also offers custom farming services. He claims these services can cut production costs for his farmer-customers by 100 yuan per mu.

The director of an extension station in Anhui Province recommends that the government regulate land transfer to facilitate rentals and reduce costs. He recommends setting land rentals to ensure that farmers get a minimum net return. This sounds like turning agriculture into a public utility.

The weak incentives for farmers to make long-term investments means that it's up to the government to make the investments. And indeed, one of the government's headline agricultural support programs is to build "high standard" agricultural fields. However, it's unclear that the government can do all of the investment. The construction programs subsidize only part of the cost, with much of it financed by loans. A local official in Anhui Province's Tongling City observes that the central and local governments have been engaged in such rural infrastructure programs for years, but the pace has been insufficient to address the problems. Moreover, there are too many unpaid debts from this program, the official said.

An official in Gao'an County of Jiangxi agrees that the pace of construction is not fast enough to address the urgent problems. He estimates that it would take 30-40 years to compete the "high standard field" task in his county.

The government is also giving a lot of attention to improving agricultural services, but plans seem vague. The leader of an agricultural services cooperative union in Jiangxi makes typically vague recommendations that the government foster a specialized agricultural services industry, calculate reasonable costs for services, and use subsidized loans and "government buys services" to expand the sector.

1 comment:

Godfree Roberts said...

Great post!! Please keep it up.