High Land Rent Discourages Grain-Planting

Chinese villagers have been renting out more of their farmland in recent years as officials encouarged liberalization of land markets. However, rents have been soaring and officials are concerned that land rental is discouraging production of grain which doesn't generate enough income to cover the high rents. 

The latest alarm is sounded by Economic Observer's report on a land rental survey conducted by Shandong Province agricultural officials. The report found that 19.6 percent of the province's farmland has been rented or transferred. The more alarming finding was that only 32 percent of land was planted in grain after it was rented out. That's less than half the 70 percent of the land  planted in grain before it was rented out.

The rental rates for farmland in China have soared. Until the early 2000s, farmland was viewed as a liability since villagers had to pay tax on it. Many charged no rent, letting their neighbors cultivate their land rent-free. Land-based taxes were eliminated by 2006 and replaced with subsidies, and land is now a valuable asset. Farmland rents have soared along with the general real estate market in China. Many companies have sought to rent farmland, sometimes as a speculative land grab, sometimes sincerely hoping to make money farming. Land rents have soared from zero to a few hundred yuan per mu to over 1,000 yuan per mu in many places in 2014. That's roughly equal to about $ 1,000 per acre.

According to USDA data, United States cropland rents also doubled from 2003 to 2013, but they still averaged only $ 136 per acre in 2013, far less than in China.

A Shandong news article reports that a fruit cooperative's rent rose from 800 yuan to 1,200 yuan over five years. Land rent comprises half of the cooperative's production costs now. They think the rent could go up to 1,800 yuan in a few years. The article also finds that net returns to a cooperative growing four crops of spinach and melons in greenhouses each year are seven times the returns earned by a well-known grain farmer.

In one village, a company offered to rent land at 1,200 yuan per mu, but villagers turned them down. They expected to get 1,400 yuan.

The Shandong article cites another example of a company that rented 5,260 mu (870 acres) of land to grow medicinal crops and set up a tourism project. The company expects to net 5,000 yuan per mu. Thus, they can afford to pay much more rent than a grain farmer earning 1,000 yuan or less per mu.

Another Shandong article gives the example of Mr. Liang who returned to his hometown to take up farming when his construction business slowed. He rented 195 mu of land (32 acres) at 1,300 yuan per mu. His plans to raise livestock fell through, and he grew corn and wheat instead. He didn't even make enough money to cover the rent. His rental contract linked his rent to that of a local industrial park. His rent was raised to 1,600 yuan this year.

The situation is not unique to Shandong. A 2013 survey in Xinxiang, a prefecture of Henan Province with over 5 million rural families holding land rights, found that one-third of its farmland was rented. Rents in Xinxiang were generally over 1,000 yuan per mu and as high as 1,400 yuan. The report also raised concerns about the conversion of land from grain to high-value crops. It noted that some local governments in Henan had set up funds to subsidize land renters, but it said funds for such subsidies were insufficient.

One of the Shandong articles worried that subsidies for grain farmers are only 200 yuan per mu (about $200 per acre). Moreover, the subsidies are not based on actual production. The reporter complained that many land-holders still got "grain subsidies" after planting vegetables, fruit trees, or nursery crops on their land.

In 2013, the average grain yield in China was 358 kg per mu (2,173 kg per acre). At a price of 2.2 yuan per kg, the gross income would be 787 yuan. Even with a subsidy of 200 yuan there is not enough money to pay a 1000-yuan rent...and this is at a price equal to over $9 per bushel of corn--double U.S. prices now. Will China choose a path of high prices and subsidies to ensure that its farmers keep planting grain?