Chinese leaders announced new farm subsidies this month that reflect worries about shrinking profits for scaled-up grain farms and farmer cooperatives. With costs escalating year by year, officials worry that newly-minted commercial farmers may abandon their land if grain prices fail to keep rising.
|Premier Li Keqiang squatted in a corn field for a photo-op with local officials and farmers|
to announce a new one-time grain subsidy for 2021.
In a carefully orchestrated visit to Jilin Province on June 15-16, 2021 Premier Li was photographed in a corn field where farmers assured him that another bumper harvest is expected this year. However, the farmers also complained that they were worried that increasing prices of fertilizer, fuel and other inputs will eat up profits from record-high corn prices.
According to Xinhua News Agency propagandists, Premier Li turned to comrades in his delegation and pronounced, "This is a key period for grain production; we must adopt effective measures to stabilize agricultural input prices. We must have reasonable prices for agricultural products."
(Li's photo-op in Jilin where corn had already been planted was probably aimed at motivating farmers in provinces like Shandong, Henan, and Anhui to plant a summer corn crop in fields where they have just harvested winter wheat this month.)
Back in Beijing on June 18, Li Keqiang chaired a meeting of the State Council's standing committee that announced 20 billion yuan (about $3 billion) in one-time subsidies for "farmers who actually plant grain" to offset rising farm input costs. The committee also pledged to expand pilot crop insurance programs that indemnify the full cost of grain production and insure against income fluctuations for grain farmers. No details or specific plans were provided.
On June 25, the Ministry of Agriculture and Rural Affairs (MARA) held a meeting to discuss implementation of the subsidies, demonstrating the communist party leadership's concern for the farmer masses. MARA has been ordered to work with the finance ministry and other departments, put procedures in place and deliver the subsidies as soon as possible.
On June 30, the Ministry of Finance announced that the 20 billion yuan one-time subsidy would be added to the 120.485 billion yuan budgeted for this year's farmland fertility protection subsidy--representing a 16-percent increase--in order to offset increased costs of farm inputs.
(This is not the first time China has given subsidies to offset rising input costs. In 2006, a general input subsidy was launched to compensate farmers for rising fuel and fertilizer prices. That subsidy ballooned from 12 billion yuan in 2006 to 107.8 billion yuan in 2012-15. In 2016 that input subsidy and an 11.5-billion yuan grain subsidy were rolled into the farmland fertility protection subsidy.)
National Bureau of Statistics price data appear to confirm that prices of nitrogen fertilizer, fuel, and pesticide have increased in 2021. Nitrogen fertilizer prices were up about 25 percent from last year in the spring planting months and they had risen another 25 percent by June. Compound fertilizer (NPK) is up only 11 percent from last year. Diesel fuel prices have risen, but they have recovered from depressed levels during last year's pandemic. Pesticide prices have more than doubled from last year. No discussions of the issue in Chinese news media have cited such price data.
|Indexes calculated from China National Bureau of Statistics raw material purchase prices.|
The chart below illustrates Chinese officials' worries about vanishing farm profits. Official corn production cost data shows that corn prices mostly stayed ahead of production costs from 2000 to 2013 before plateauing and dropping sharply in 2016--below production costs--when China abandoned a corn price support policy. Rumors about farmers abandoning their rented land began to circulate as corn prices plummeted in 2016. The surge in corn prices during 2020 appears to have been a welcome return to profitability. However, profits for this year's crop could evaporate if corn prices dip by the 2021 fall harvest and costs rise. That could undermine the expected rebound in China's corn production in 2022. More broadly, rising costs that wipe out profits for scaled-up farmers or other types of grain producers with big investments in land rent, equipment, and inputs may send them scurrying for the exits. Raising grain prices even higher could cause problems by prompting even greater imports and boosting costs for struggling livestock farmers.
|China National Development and Reform Commission production cost survey; |
data for 2020 and 2021 are estimates based on market prices.
A May 28 article--over 2 weeks ahead of Premier Li's visit to Jilin--in Business Reference News set up the propaganda theme by describing frustrations of operators of several scaled-up grain farms and cooperatives in Heilongjiang and Hunan Provinces. These "new-type farmers" operating hundreds or thousands of acres are being counted on by Chinese officials to be the vanguard in achieving greater productivity and "modern agriculture." While grain prices are relatively high, the farmers complained that profits are being squeezed by rising prices of inputs, land rents, and labor. Rice farmers in Hunan claimed to make no profit from growing rice--they earn all their profit from raising shrimp in their rice paddies.
The farmers complained to Business Reference News that subsidies actually contribute to the increase in production costs. So-called new-type farmers rent dozens of plots from village collectives, leaving them vulnerable to rising rents. When more grain subsidies are given out, the village collectives demand that the scaled-up farmers pay higher rents. Thus, rising rents eat up much of the benefits from subsidies to grain producers.
News media always describe the one-time subsidy as a payment for "farmers that actually grow grain." This addresses a concern voiced in the Business Reference News article: large-scale farmers complained that subsidies were often paid to the villagers who "own" the land, not to the farmers who actually cultivate it. The Finance Ministry said the new subsidy would be distributed to farmers who actually grow grain by using existing subsidy data, insurance records, large-scale farmers' own information and other data compiled with advanced information technology.
The distribution of existing subsidies is a months-long process of reporting villagers' land holdings up the administrative chain and sending money to farmers' bank accounts. The land fertility subsidy is supposed to be distributed by June 30; Heilongjiang farmers are supposed to get corn payments by September. The administrative task of counting actual plantings will be even more challenging, and the potential for fraud is multiplied when farms plant grain on a large scale in fields located in multiple villages.
Weak ability of farms to bear risk is another theme hammered in recent subsidy propaganda. Business Reference News cited impacts of last year's typhoons and drought on Heilongjiang corn producers and flooding on southern rice producers as examples. The article cites a "Green Book" issued by the Chinese Academy of Social Sciences last year that predicts increasing incidence of flooding, forest fires, drought, and "political frictions" due to climate change.
According to Business Reference News, farmers are frustrated with crop insurance programs that only cover a small portion of production costs, have complex and "unscientific" claims processing. "Full cost insurance" pilots indemnify farmers for the costs of land, labor as well as purchased inputs. An income insurance pilot is said to stabilize corn farmers' income. These insurance programs have been in the planning and pilot stage for about a decade. MARA has been ordered to expand them to 500 major grain-producing counties this year and to all counties in 13 major grain producing provinces next year.
China's farm subsidy boost is a sign of weakness, not strength. Officials didn't anticipate that a transition to commercial farms that pay market prices for inputs and factors of production would result in an ever-rising cost base. Various subsidies and price supports have proven to be ineffective, a lot more expensive than expected, contentious, and fraught with unanticipated consequences.