Monday, December 18, 2017

Officials Ponder China's Ag Policy Direction

Chinese officials and scholars have recently been discussing rural policy for the "new era" proclaimed in Xi Jinping's October speech to the 19th communist party congress. Agriculture faces a number of conflicts in fulfilling Comrade Xi's various pledges to be an open economy, maintain secure control over the food supply, be a leader in environmental governance, and bring all segments of society into relatively well-off status by 2020.

With shrinking land and water resources, rising rural labor costs, the need to maintain food security, and a new pledge to produce high quality products,  Ke Bingsheng, president of China Agricultural University and an agricultural economist, commented that it would take a "miracle" for China to produce enough food for its growing consumption. Since communists are atheists, they have to put their faith in technology and government planning, so Professor Ke proclaims "modern agriculture" is the needed "miracle."

The countryside has become a warehouse for the elderly, infirm, and others marginalized by China's economic transformation. Ke Bingsheng observed that agriculture still employs 28 percent of the labor force, but it produces less than 9 percent of GDP. That means labor productivity--and therefore farm income--is still very low for those engaged in agriculture. The economy needs to grow faster to absorb even more rural laborers, and farm productivity must rise in order to boost rural incomes.

Nurturing new-type farm operators who have higher productivity and are more internationally competitive is a core component of the ideas for revitalizing the countryside offered in Xi Jinping's October speech. This month, a meeting of the State Council's standing committee chaired by Li Keqiang emphasized programs to nurture new-type operator as well as other measures to promote agricultural "modernization" and link farming with industry and service sectors. The meeting endorsed training for new-type farmers, support for various mortgage loans and provincial loan-guarantee companies for farmers, subsidies and new leasing arrangements for farm equipment, and improved services for farmers, Prof. Ke said.

The Ministry of Agriculture's Zhang Hongyu assured small-scale farmers that they will not be left behind as China modernizes agriculture. The capacity to "pull along" small farmers is one of the criteria for evaluating the new-type farm operators. The large-scale farms and agribusinesses are expected to provide training, financing, technical advice, and other services to bring the general population of rural households into agricultural modernization. Small farmers need to be organized into cooperatives and collective organizations need to be mobilized.

Keeping farm prices high would boost incomes for small farmers, but there seems to be consensus now that China's high agricultural prices must be allowed to fall in line with prices in global markets to make China's products more internationally competitive. Professor Ke Bingsheng surmised that the international market is having an unprecedented influence on Chinese markets, and he warned policymakers that they must consider effects of international markets when designing farm policies.  He cited China's experience with the grain market as a "warning."

In a similar vein, Economy Daily warned officials not to let up on agricultural price reforms, despite another big grain harvest this year. The commentary reviewed the problems with price support programs and their elimination for soybeans, rapeseed, cotton, and corn, and said reform of price-setting mechanisms for rice and wheat should be next on the agenda. Economy Daily said wheat reserves are now 70 percent of annual consumption and rice reserves are 60 percent of consumption--"far higher than international standards"--and a perverse phenomenon of "domestic grain going into reserves; foreign grain going into the market" needs to be corrected by letting the market determine the grain price.

Development Research Center economist Cheng Guoqiang offered several suggestions for reforming the rice minimum price program: set a single minimum price for all kinds of rice (there are now separate prices for three kinds of rice); or cut the minimum price to 2400 yuan/metric ton (this year it ranged from 2600 to 3000 yuan) and give farmers a subsidy similar to the corn producer subsidy; or start purchasing rice at minimum price a month later than usual to let the market set a price before the government begins purchasing.

The mantra for supporting farmers is now to "separate price from subsidies" by allowing crop prices to be set by the market while giving farmers subsidy payments. Heilongjiang Province--China's largest corn and soybean-producing region--announced that its subsidy payments to producers of corn were 133.46 yuan/mu (about $123 per acre) and payments to soybean producers were 173.46 yuan/mu ($160 per acre). The corn subsidy equals close to 20 percent of gross revenue and the soybean subsidy looks like it is over 30 percent of gross revenue for farmers in the northeast.

With China becoming more reliant on imported food, the Development Research Center's Ye Xingqing has set forth a strategy in "Diversification of China’s Global Agricultural Supply System is Inseparable from “Belt-Road,” which calls for China to nurture new suppliers of agricultural imports from "Belt and Road" countries. Dr. Ye worries that China is exposed to risk by (1) relying on a few countries in the Americas and Oceania for most of its agricultural imports, (2) relying on a few maritime shipping lanes, and (3) relying on a handful of multinational grain-trading companies, which exposes China to potential risks. With dependence on agricultural imports persisting--and perhaps increasing--in the future, Dr. Ye recommends following the advice of the 2014 and 2016 No. 1 documents by planning and guiding agricultural imports and diversifying suppliers, as Chinese investors abroad develop new supply chains.

The most prominent example of China's import diversification strategy is its $3.65 billion loans-for-grain deal with the Ukraine initiated in 2012. This clever move to reduce risk diversified corn imports away from the United States--which supplied over 90 percent of China's corn imports at the time--to buy almost exclusively from a country with turbulent internal politics and riddled with corruption which was about to go to war with Russia. China reportedly sued Ukraine in 2014 for failing to pay back the loan. To explain why Chinese investors are now approaching Ukraine cautiously, said, "The most damaging [Chinese] investment was the failed loans-for-grain deal financed by Export-Import Bank of China in 2012." 

Xi Jinping's pledge to make China a leader in "green" development is hitting the country's livestock industry by forcing thousands of pig farms to close or move, imposing requirements for collecting, treating, and utilizing manure, and imposing a tax on polluters due to come into effect in January 2018. A researcher with China's Academy of Agricultural Science (CAAS) worries that the new environmental tax will increase costs for Chinese livestock producers--among China's biggest water polluters--and further reduce their international competitiveness, leading to larger imports. Wang Minji of CAAS recommends increasing subsidies for construction of manure handling and treatment facilities and other assistance for livestock and poultry producers in China to offset the impacts of the tax.

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