Sunday, February 26, 2017

Farm Consolidation Undermined by Falling Grain Prices

As grain prices fall and profits shrink, some of China's new large-scale farmers are walking away from land rental contracts or demanding lower rents.

Corn prices in China were down 20.5% from a year ago in January 2017, according to the latest monthly Situation and Outlook Report from the Ministry of Agriculture. The National Development and Reform Commission has just announced that minimum prices for rice will be reduced in 2017. With shrinking profits and other unanticipated problems, quite a few of China's large-scale tenant farmers are returning their rented farmland to village collectives or asking for lower rents.

An article in the magazine Liaowang (Outlook) describes the situation in several counties of Shandong Province. One farmer in Wucheng County said he lost 16 million yuan growing corn and wheat on 8,749 mu (1,440 acres) of land he rented on a 10-year contract. He gave back the land and will now concentrate on his furniture business in Beijing.

One farmer told Liaowang he refused an offer to rent 800 mu of land from a nearby village because he was certain he would lose money. No one in the village wants to farm, so they are trying to rent out the village's entire allotment of farmland.

A farmer in Shandong's Jining City said he wants to give up farming the large parcel of land he has rented so he can focus on his off-farm job. He's worried neighbors will make fun of him if he leaves the land fallow, so he let other farmers cultivate the land rent-free to avoid embarrassment.

A Wucheng official says his county had six farms of 1000 mu (165 acres) or more in 2015, but only one was left at the end of 2016. The number of farmers with 500-1000 mu fell from 23 to three.

The Liaowang author reports that local officials are worried that rural villagers may become disgruntled if they fail to receive the promised rental proceeds. They also worry that abandonment of land may threaten food security.

"Fight to maintain food grain planting area; prevent large 'landslides,' holding on to food security as the bottom line" was the first directive in the Ministry of Agriculture's instructions for officials on preparation for the 2017 crop-planting season. "Landslides" presumably refers to widespread collapse in grain-planting.

"Villagers feel helpless," according to Liaowang. One villager said the large farmer who rented their land said he would refuse to pay the rent this year if they did not let him out of his contract. "There was nothing we could do," the villager complained.

The farmers had entered into rental contracts several years ago at rents that were based on the high grain prices prevailing at the time. Many farmers interviewed by Liaowang said they had negotiated their rent down by 100-200 yuan/mu because they can't make money if they have to pay high rents.

One leader of a "cooperative" said the land rent went as high as 1200 yuan/mu in 2012 when the corn price was 2.6 yuan/kg. Rents fell to 1000 yuan in 2014 when the corn price fell to 2.2 yuan/kg. Now, with the corn price down to 1.5 yuan/kg, rents are 800 yuan/mu.

The problem is not confined to corn farming. An article on rice farmers says the reduction in rice price just announced seems small, but it could mean large losses for farmers who have 1000 or tens of thousands of mu. On the other hand, small-scale farmers say the price cut will have little impact on their income because they earn most of their money from off-farm jobs. In Jiangxi Province's Gao'an City, farmers say the cut in rice price may reduce their income by 10-20 yuan per mu, but they can easily make that up by working off-farm.

In Hebei Province, one farmer who rented a village's land to raise medicinal crops for herbal medicines disappeared without paying rent. Another farmer discovered that wells and other infrastructure were not adequate to support large-scale farming operations.

In Jilin Province, on the other hand, it is reported that some corn producers are taking advantage of lower rent by expanding the scale of their farms. In this region, land rent peaked at 530 yuan/mu or even 1,000 yuan/mu in 2014, but rent has fallen to 200 yuan/mu this year--about the same as ten years ago. One farmer in Jilin's Gongzhuling City is reportedly expanding his operation from 2,700 hectares last year to 10,000 hectares this year [comment: this seems like an implausibly large farm].

Many villagers are taking their large-farmer tenants to court. An article in 21st Century Business News yesterday reveals that the uptick in farmland transfers has produced a surge of disputes that are being investigated by courts around the country. In many instances, new companies or city-based entrepreneurs found that farming is not as easy or profitable as they thought and defaulted on rental contracts when their farming businesses failed. Belly-up farming schemes include fruit trees, seedlings, plants for herbal medicine, and rural tourism. Minister of Agriculture Han Changfu acknowledged the surge in legal disputes and said more efforts are needed to deal with relations between traditional villagers and new-type farmers, clarify each party's property rights, and effectively avoid and settle land disputes in order to ensure agricultural growth and social stability.

The Liaowang article includes a plea for subsidies to large farmers, including a proposal by local officials for a target price subsidy for grains. The Jilin article praises the province's early efforts to target subsidies to large-scale farmers, including machinery subsidies, loans for maintaining profits from land (土地收益保障贷款), technical services, and subsidies for adoption of no-till farming. The Jilin article did not mention producer subsidies for corn which would bring in a tidy sum of 150,000 yuan ($21,740) for a 1000-mu (165 acre) farm.

Who is entitled to the original grain subsidies introduced in 2004 has become a thorny issue as more land is transferred. In Shandong Province, the "grain" subsidy of 125 yuan/mu is distributed based on area planted in wheat but it has been unclear whether the subsidy goes to the villager who has contract rights to the land or the tiller of the land who rents the operation rights. The Liaowang article reports that one large farmer in Shandong's Linba county is due to pay 900 yuan/mu in rent for his land this year, but his actual cost of land will be reduced this year because he will get the 125-yuan grain subsidy--in the past the subsidy was paid to the villagers with contract rights who rent out the land to him.

The structures built on the land can also be a problem. The farmer who gave up his rented farm in Shandong's Wucheng County gave away the buildings on his land to friends for free.

Once again, Chinese officials are learning that farming is an inherently risky business. Prices do not rise forever. Officials got themselves into a serious mess by trying to build an agricultural pricing system based on an assumption of ever-rising agricultural commodity prices that seized up when global prices started falling several years ago. Now it turns out their plan to pay villagers dividends for "operation rights" to their farmland is based on unrealistic expectations for farming profits. Classical economists explained centuries ago that land rents in farming are determined by farm prices which go up and down. Owners of land--the factor of production with inelastic supply--are always the big winners when farm prices rise and losers when prices fall. Unrealistic expectations for farm profits also exposes a hole in the plan to mortgage operation rights. Bankers will be hesitant to voluntarily make loans securitized by farmland operation rights if the rights are likely to fall in value and have no secondary market.

No chance of privatizing land ownership, though. Minister of Agriculture Han said collective land ownership must remain the foundation of China's countryside.

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