Monday, January 16, 2017

Rural Land Cooperatives Keep Communist Officials Relevant

Chinese authorities have put a priority on clarifying property rights to agricultural land in order to raise farm productivity and encourage villagers to migrate to cities. Their core strategy is to supplant a chaotic rural land market by creating village cooperatives that pool village land and pay dividends to villagers. The financial viability of these arrangements depends on high grain prices and pooling of subsidies that formerly were sprinkled over small land-holding households.

At a State Council news conference earlier this month, China's Minister of Agriculture stressed the urgency of clarifying ownership of collective assets, including village farmland, collective-owned factories and other businesses, and public facilities. The Minister explained that many collective assets are under-utilized or have been improperly sold or appropriated by individuals due to vaguely defined property rights. A pilot program has been launched to clarify ownership, separate ownership rights from business rights, and set up joint stock cooperatives that issue shares to village collective members. The initial focus will be on village land and other resource-type assets.

Communist party officials have a big plan to set up village joint stock cooperatives based on pooled farmland. Villagers' contracted land rights will be converted to membership shares in the village cooperative. The physical land is turned over to a few "professional farmers," and part of their profits will be distributed to villagers in the form of dividends.
Officials distribute dividends for land-based shares to cooperative members 
in Shandong Province's Taozhuang Village (source: Ministry of Agriculture)

To make the cooperative arrangement more concrete, the Ministry of Agriculture recently explained the workings of a joint stock land cooperative in Shandong Province's Taozhuang Village. The village has 290 mu (about 48 acres) of farmland divided among 72 households--with less than an acre per household the land has been highly fragmented. The village pooled the land and "under the direction of communist party cadres" villagers voted to choose four capable and upstanding individuals to farm the village land on their behalf. (Were there farmers who wanted to farm but were rejected? What happened to them? Were they forced to become non-farming shareholders in the cooperative?)

Each household cooperative member received shares in the cooperative based on their previous land-holding. The profits from the village land cultivated by the four designated farmers are distributed to shareholders twice a year, presumably after the wheat harvest in the summer and after the fall corn harvest.

The Ministry of Agriculture article described a January 10 meeting to distribute funds from the fall corn harvest. One member was effusive about his 4600 yuan ($667) dividend payment, "I don't have to plant I can go out to work without concern."

The article emphasizes that the cooperative increases productivity and "liberates" villagers from their land. The communist party secretary says the village's grain production is now entirely mechanized and more land can now be used for production after removing ridges between fields and ploughing up paths that were used to access small plots. By giving villagers shares entitling them to dividends, they can give up cultivating their land and move to cities instead of sitting on their land to protect their rights to it--they are "liberated" from their land.

The joint stock cooperative is presented as a cost-saving alternative to free-market rentals of land rights (Chinese authorities have ruled out privatization of farmland) orchestrated by local communist party officials. Taozhuang village's communist party secretary asserts that the joint stock cooperative saves 420,000 yuan that would otherwise be spent on private land-renting arrangements (hmm, that works out to 1450 yuan per mu). The party secretary projects that village share-holders will reap dividends of 1000 yuan per mu (about $880 per acre) annually without having to do any farming. Free money!
Happy Taozhuang villager collects her dividend.

This scheme is not quite as capitalistic and market-oriented as it might at first sound. Unlike shares in a publicly-traded company, these shares presumably are not transferable so they have no cash value. Cashing-out shares to move away (or overseas) permanently is not an option. Nor can an outsider buy his/her way into the village cooperative to collect these dividends. Nor is it clear what happens to the shares when the shareholders pass away (which may not be far in the future since they appear to be elderly).

The dividends are a distribution of net returns from growing wheat and rice on the village's land. The high dividends ultimately depend on maintaining high prices for grain in China. The high prices, in turn, rely on controlling imports of grain to keep the Chinese price above international prices.

The Ministry of Agriculture provided accounting information for the Taozhuang joint stock cooperative that shows the high dividends rely on very high grain prices. The table below compares the Taozhuang cooperative's corn income with estimates for Illinois farmers from farmdoc daily. The dividend paid to villagers is equal to $358 per acre. This is essentially their share of the net return from growing corn on their farmland--analogous to a rental payment. In the United States the equivalent would be the rental payment on land which is paid to landlords. In central Illinois the rent paid for farmland this year is estimated by farmdoc daily to be about $220 per acre.

Estimated net returns to corn production, Fall 2016
Item Unit Taozhuang village
Central Illinois
Yield bu/acre 131
Price US$/bu 5.46
Gross income $/acre 715
Cost $/acre 252
"Net" income $/acre 463
"Dividend" to villagers $/acre 358 Land rent 220
"Service center" expense $/acre 105 Farmer loss (-43)
Sources: Ministry of Agriculture web site,
Schnitkey, G. "2016 Gross Revenue and Income Projections for Corn and Soybeans in Central Illinois." farmdoc daily (6):224, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, November 29, 2016

Let's work through how the Taozhuang cooperative generates enough money to distribute $358 per acre to villagers who do no farm work. The corn yield in Taozhuang village is higher than the average in China but still only 57 percent of the average yield in central Illinois. The low yield in Taozhuang is offset by a higher price than in Illinois. The corn price in Taozhuang is 1500 yuan per metric ton, or $5.46 per bushel, which is 65 percent higher than the price of $3.30/bu expected in central Illinois for the 2016/17 market year. With these yields and prices, gross income per acre is estimated at $715 in Taozhuang and $762 per acre in central Illinois.

The cost per acre reported for Taozhuang is just $252 per acre. This is less than half the production costs usually reported in China--probably because it does not include land rent, labor, and possibly mechanized services. This is probably just the cost of purchased inputs like fertilizer, seed, and hired labor. For Illinois farmers all costs except land rent total $555. are deducted from gross income.

After these deductions, $463 per acre is available for distribution to Taozhuang villagers and support for a "service center." The villagers' dividend payment is $358 per acre and $105 is paid to the "service center." It is unclear what the "service center" is--it may coordinate the cooperative and may be a conduit for providing technical advice or custom farming services. It is also unclear how the four Taozhuang farmers who do the farm work are compensated. In comparison, the Illinois farmers absorb a loss of $43 per acre after paying an estimated average rent of $220 per acre to landlords.

This accounting does not include substantial subsidies. In Shandong Province (where Taozhuang village is located) there is an annual grain subsidy payment of 125 yuan per mu based on the area planted in wheat (most grain land in Shandong is planted in winter wheat which is followed by a corn crop in the fall). The subsidy would be $110 per acre, or a total of about $5250 for the cooperative's entire land base. Based on new rules, the subsidy should be paid to the four farmers who grow the crops. There is also a subsidy of 100 yuan per mu ($88 per acre) as an "award" for consolidating and renting out farmland to other farmers for a term of at least 3 years. (Shandong is one of 11 provinces piloting this arrangement to encourage transfer of farmland, and presumably this cooperative is eligible). It is unclear whether this subsidy is paid to villagers or to the collective organization.

So far, we're up to $198 per acre in subsidies that are not included in the accounting above. The government also subsidizes 30 percent of farm machinery purchases, and there are other subsidies for village projects that Taozhuang's well-connected communist party officials have surely applied for. If grain prices fall and the dividend is reduced, the shareholders may not be so happy. They may observe that the cooperative has cut their dividend yet is still flush with subsidies. What if the shareholders discover that their dividends would be higher if the land was used to raise garlic or fish?

Communist party officials view themselves as necessary intermediaries to engineer structural transformation of the countryside. The Ministry of Agriculture's description of the Taozhuang land cooperative concludes by pointing out that the cooperative arrangement revives the relevance of village communist party officials. According to the description, "In the past it was said, 'after distributing land to households the [village] communist party branch was no longer needed." But the Ministry says that communist party officials are now of central importance in the village: "Now that land rights are issued to households, the rights can only be assured by the communist party branch."

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