China Pushes Reform, Puzzles Over Grain Glut

China's top leadership plans to push ahead with deep structural reforms of agriculture and the countryside next year, but the most pressing matter is how to deal with its huge stockpile of surplus grain.

At their annual conference for rural work China's top leaders held December 24-25, 2015, President Xi Jinping and Premier Li Keqiang sent a signal to the rest of the communist party that they intend to push forward with their ambitious overhaul of the countryside. Xi celebrated the progress made during the 12th five year plan (2011-15), but he warned that agriculture and the countryside still face great difficulties. Xi exhorted officials to make rural work a key priority during the 13th five year plan, firmly pursuing concepts of "innovative, coordinated, green, open, and mutual" development while pushing forward agricultural modernization and rural reforms of all kinds.

Officials hope to move more rural people into cities, consolidate farmland into modern farms, link up farmers with processing and service industries, cut back on excessive use of fertilizer and pesticide use, foster innovation, more egalitarian economic growth, greater openness to the world economy, and much more. This "new idea" about rural development is expected to be the theme of the communist party's "Number one document" for 2016.

The urgency of the reforms is illustrated by some perverse phenomena observed by a China Agricultural University official this week. He notes that China has produced more grain than it needs, and has record inventories, yet it imported 100 million metric tons during 2014. He points out that the world is worried about a shortage of grain, yet China has a problem with surplus. The official marvels that prices in China were low ten years ago, yet now the price of corn in China is about double the FOB price of U.S. corn. He said some people are importing grain at the 65-percent over-quota tariff and still finding it profitable. The official observes the irony that rural migrants now earn about the same wages as recent college graduates--a nanny and a recent college graduate both earn about 4000 yuan per month. Yet a mu of corn brings in only 1000 yuan, rice 700 yuan, and wheat 800 yuan, so who would want to grow crops? Yet China is now cutting prices to achieve parity with imports. The only way forward for China's agriculture, the official argues, is to expand the scale of farms and mechanize.

The structural reforms are necessary, but they will take years to accomplish and produce real change in the countryside. Meanwhile, the rural work meeting puzzled over urgent problems of record-high grain inventories, pressure from imports, and neglect of farming as migrants and capital pile into cities.

The rural work meeting emphasized the urgency of drawing down excessive grain stocks at a more rapid pace, but no specific measures were discussed. The accumulation of surplus grain at high prices over the last three years is in the background as leaders advocate liberalization of farm prices and creating "internationally competitive" farms and agribusinesses that are more productive and have lower unit costs.

According to a Number 1 Business News article on the meeting, Premier Li noted that the amount of corn that needs to be released from reserves is estimated at "several tens of million tons to 100 million tons." While preventing further accumulation, Premier Li estimated that it would take two to three years to draw down excess corn inventories.

Meanwhile, the corn stockpile is still growing. A Grain and Oils News analyst reported that the government is purchasing 5 million tons of corn every week to support prices and had procured 46.2 million metric tons of the 2015 corn harvest as of December 20. The commentator said discussions at the rural work meeting and the Ministry of Agriculture's annual meeting suggested that the "temporary reserve" price for corn will be cut to 1600 yuan/metric ton for the 2016 crop, down from 2000 yuan for 2015. However, the government also has a priority of maintaining "steady growth" in rural incomes in 2016, so unspecified "government departments" are expected to give subsidies to make up the 400-yuan decline in the corn price.

Similarly, Number 1 Business News surmised that the government will likely give subsidies of 400 to 500 yuan ($61-$77) per metric ton to grain processors to use up the surplus corn. Boosting the grain processing industry incidentally is also one of the many priorities in the 13th five-year plan.

A Caixin Net commentary on the rural work meeting highlighted the recurrence of a grain surplus problem similar to that of the late 1990s and the risk of grain deteriorating in quality. Noting the failure to sell off grain reserves of the last three years, the journalist recounted having visited a region in Henan Province where rice purchased by the government in 2013 was still in warehouses.

The Caixin journalist observes that reforms of agricultural subsidies and procurement policies have been brewing over the last two years. Chinese officials have laid out a principle of detaching subsidy support from prices, but they have no clear policy to replace market-distorting price supports. The Caixin journalist observes that the government has put its hope in target price subsidy policies they have been testing for cotton in Xinjiang and soybeans in northeastern provinces since 2014, but many industry experts are pessimistic that these policies can be expanded to other commodities due to the extremely high administrative costs and other problems.

An "Economy and People" column in Beijing's Xin Jing Bao argued that the grain stock problem can only be resolved with flexible grain prices. The author of the column gave two examples to illustrate the flexibility of farmers in responding to economic incentives. He observed that terraced rice fields had mostly disappeared about 10 years ago in his home town in Fujian Province. Most rice paddies in his hometown have been converted to duck ponds, planted in bamboo, or abandoned, yet people there have plenty to eat. Now that they earn more money from off-farm work and high-value crops they are able to buy rice instead of growing it themselves.

The column's author gives another example to illustrate the responsiveness of farmers to incentives. The writer has a friend from eastern Hubei Province which is a highly productive rice-growing region. However, in that region farmers have also been abandoning rice because it is so labor-intensive. Instead, wheat-growing has become widespread because it requires little labor. The writer observes that Chinese farmers switch crops in response to changing market conditions with a surprising degree of flexibility.

As Chinese officials pursue multiple conflicting and nonnegotiable objectives they are running out of ideas on how to proceed on agricultural policy. Caixin Net's commentary noted that the rural work meeting offered many principles but few specifics on what policies to pursue. While the discussion at the meeting reflected a view that liberalization of farm prices that aligns Chinese and world prices is "unavoidable," there are also non-negotiable objectives of maintaining rice and wheat self-sufficiency, preserving a minimum amount of farmland, maintaining rural income growth, and preventing declines in output in the main grain-producing regions. Moreover, officials need to comply with WTO commitments to keep market-distorting subsidies under 8.5 percent of production value and give up export subsidies.

With so many conflicting objectives, China is really out of feasible choices in agricultural policy...something will have to give.