"5 Big Problems" for China's Agriculture

China's Minister of Agriculture warned of five big problems facing agriculture that can't be underestimated.

Minister Han Changfu issued the warning in remarks at a July 2, 2014 conference on the rural economy. First, he warned that weather forecasts indicate a risk of droughts and floods this summer that could prevent another big harvest. He urged local officials to take early preventive measures to ensure another big harvest.

Minster Han also worried that downward pressure on agricultural prices this year threatens to weaken farmers' production incentives. Grain inventories are at their highest-ever level, warned Han. What he failed to mention is that the declining trend in prices is due to the big increases in grain output last fall and the recently-completed big wheat harvest. With a glut of grain of historical proportions, markets tend to push prices down to discourage adding to the excess supply.

Falling prices are ruled out because that would restrain growth in rural incomes. Han warned that difficulty raising rural incomes should not be underestimated. He fretted that falling prices and bulging grain inventories could lead to farmers having difficulty selling their grain. This would threaten a replay of the 1990s when farmers were often paid with IOUs or had their grain refused on spurious "quality" issues. Rural China teetered on the brink of instability during that decade and officials worry that this might resurface.

Han warned that the complexity and arduousness of rural reforms should not be underestimated. He did not elaborate on this point.

The fifth problem not to be underestimated is the risk of food safety and animal disease outbreaks. In the second half of the year, most of the crops come on the market and it's the peak consumption season. It's also the peak season for animal disease, warned Minister Han.

When prices fall, profit margins are squeezed, giving traders and processors greater incentive to cut corners or substitute inferior ingredients. Farmers tend to use low quality feed and crowd pens and barns to cut costs.

Han's warnings are internally inconsistent. He wants big production, but big production brings big problems. Endless increases in grain output push down prices. Crowded animal pens transmit disease.

China's leadership wants the market to have a "decisive role in resource allocation," except when it conflicts with one of its policy objectives, which is almost all the time since there are so many objectives that can't be achieved simultaneously. Thus, the government retains its "decisive role" when the market fails to achieve all of the government's internally-inconsistent objectives.