Sunday, February 5, 2017

China's Grain Supply Side Reform

Chinese President Xi Jinping decreed at last December's "rural work meeting" that "supply side reform" will be the slogan guiding rural policy in 2017. "Supply side reform" is a catch-all for fixing everything: overhauling the countryside by moving rural people into cities and consolidating farms, attacking pockets of rural poverty by moving people out and creating new industries, improving the agricultural product structure and making farming more profitable and competitive using "the two hands of government and the market."

One of the many targets of supply side reform is China's grain industry, which is suffering from one of the biggest mismatches of supply and demand ever created. In an interview with the official Xinhua News Service last month, the deputy director of China's State Administration of Grain pronounced that 2017 will be a key year for reform of the grain industry.

While celebrating the massive 43-percent increase in grain production achieved during 2003-2016, the official fretted over "structural contradictions" that are evident in the grain sector. He said corn and rice are clearly in excess supply, there is a shortage of high- and low-gluten types of wheat, and China has a huge deficit of soybeans. Now China is contending with growing pressure from "high inventories, high imports, and high costs" -- "urgent problems" that have created "huge financial burdens and waste of resources," the official said.

The geographic locus of grain production has shifted from its traditional concentration in the south to areas of northern China where the growing season is shorter and water supplies are limited. The geographic separation of grain production from final demand means that more grain needs to be stored and transported, but the official complained that China's grain distribution costs are twice as high as those in developed countries.

Disposing of corn reserves will be the top line priority for China's grain industry in 2017 (as it was last year). Specific measures include expanding fuel ethanol production, exploring other measures to use up corn, and more support for corn processors. The official promises to "coordinate departments to encourage more exports of processed grain products," "get a grip on imports," and crack down on smuggling of grain. Grain departments in coastal provinces will "guide" local companies to purchase more grain from grain-producing provinces. China hopes to speed up sales of grain from reserves through auctions, encourage a wider variety of companies to purchase grain, and encourage farmers and companies to store more grain. The surplus of grain notwithstanding, grain-producing areas will increase their grain production capacity.

The grain official pointed out that China has added much infrastructure for grain distribution and storage but the mechanisms for allocating resources are not effective. While China insulated itself from fluctuations in the global market, its price-formation mechanism needs improvement, resource allocation is distorted, and the grain industry is plagued by "high inventories, high imports, and high costs," the official said.

The grain industry plans to become more competitive by "deepening" reform of state-owned industry and consolidating grain companies. The official does not explain how competitiveness will be improved by combining small inefficient provincial grain companies to make bigger ones. A "mixed" ownership plan aims to attract private investors to put money into state-owned companies whose main advantages are their size and their pipeline to loans from state-owned banks.

The official promises China will build on the elimination of the floor price program for corn by investigating unspecified "improvements" in the minimum price programs for wheat and rice. The comments seem to endorse moving from a price system that rewards pure volume of production to one that gives farmers incentive to produce the high quality grain that is now demanded in China. The official calls for a marketing system that satisfies demands for safe food: stronger safety and quality assurance that prevents problems of excessive pesticide residues, heavy metal contamination, and spoilage.

A December article in China's Business Reference News probed more deeply into the grain policy angle of supply side reform. The minimum price policies for wheat and rice are expected to continue, but the "tough battle" will be for corn and soybeans. Disposing of corn inventories--reserves equal a year's supply according to Business Reference News--will be one of the toughest parts of supply side reform, the article speculates.

According to the National Development and Reform Commission, the new policy is to allow market forces to set the price for corn while giving subsidy payments to producers in the key corn-producing regions. Business Reference News reveals that the path forward for soybean policy, however, is not settled. The third year of the trial "target price" subsidy for soybeans is being completed in 2016/17, and there is disagreement about the policy's effectiveness. Some observers deem the target price pilot to have failed because soybeans are still not as profitable as corn. Others say it's still too early to tell. An official with a soybean industry association in the northeastern provinces endorses the target price as a "non-distorting" policy that he asserts is in the WTO's "green box". He urges government officials to consider keeping the program, especially since there is nothing else to replace it.

The Minister of Agriculture urged local agricultural officials to push structural adjustment of crop-planting in a February 4 meeting kicking off preparations for spring planting. He told local officials to "fight" for a 10-million-mu (667,000 ha) reduction in corn area planted this year--about 1.8 percent of the area planted last year. The Minister encouraged more planting  of soybeans and fodder crops, including corn for silage to support cattle and sheep production. Combining livestock and feed production is a major thrust of this year's work.

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