New Farm Subsidies Reflect China's Farm Worries

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. 

Sprawling 5 Year Plan for Xinjiang

China's 14th five-year plan for Xinjiang Uighur Autonomous Region envisions great opportunities for development and westward-facing trade in the region--and the plan makes it clear that it has Xi Jinping's personal stamp of approval. The plan promises huge material economic progress, and it includes measures to ensure it is not impeded by social instability or threats to the communist party's leadership. The plan calls for expanding vocational training schools, reeducating ethnic minorities, and creating Islam with Chinese characteristics. 

The Xinjiang plan is an exhausting catalogue of projects that goes on for pages and pages. They include high-tech industry clusters; petroleum- and coal-based chemicals; steel and nonferrous metals; upgrades of textiles and agricultural processing; new energy and e-commerce; industrial clusters and industry parks sprinkled across the desert; new roads, rails and canals crisscrossing the region; hordes of tourists; build new cities and schools; and a reformed string of army-run "production corps" settlements that "maintain border stability." This plan--like others published this year--reveals obsessions with "security," resistance to risks, industry "agglomeration," "clusters," "supply chains" and "industry chains." 

Development of Xinjiang is a strategy for shifting the momentum of development westward--the plan describes it as "a national chess move for the new era." Chinese planners view Xinjiang as a westward-facing conduit for trade with Central, South, and West Asia. The plan describes Xinjiang as a core region in the "silk road economic belt," a "highly open border region" and a corridor for trade with the central and eastern regions of China. 

The importance of Xinjiang development is reflected by promises of policy support and the plan's advocacy of the "Xinjiang aid counterpart" initiative which presses government organizations and state-owned companies to provide various kinds of support, open branches, offer technical assistance and travel to Xinjiang. 

In agriculture, cotton is Xinjiang's most prominent crop--the region produced 87 percent of China's cotton last year. However, the region's priority is to keep cotton output steady and focus on maintaining a slight surplus in the region's wheat production.

The plan calls for upgrading cotton quality, concentrating cotton production in the best-suited areas, building big contiguous cotton fields with roads and irrigation, increasing uptake of improved cotton strains to 98 percent by the end of the plan, and increasing mechanization of cotton production to 80 percent.

Xinjiang's cotton is about 2,500 miles away from most of the textile industry (which requires a  transportation subsidy not mentioned in the document) so the plan calls for bringing the textile industry to the cotton. Xinjiang will boost the local yarn-spinning and dyeing industries as well as a labor-intensive industry development plan that includes garment manufacturing. Textile industry plans emphasize production of synthetic fiber--presumably linked to the petrochemical industry plans for Xinjiang. 

The plan targets tree fruit and nuts for expansion, including red dates, walnuts, almonds (巴旦木 in Chinese…it’s a long story), grapes, apples, pears, apricots, new plums, and medlars. Agricultural processing industry is another target industry for creating jobs and adding value to local crops. The plan includes instructions to improve the quality of the naan (flat bread) industry, tree fruit, wine, tomato processing, dairy, horses, herbal medicines, chilled aquatic products (in the desert?!) and regional specialties like camel milk and buckthorn. 

The plan includes a fleeting endorsement of an ongoing initiative to artificially alter the weather (which has alarmed some of China's neighbors).

Livestock will also be boosted in Xinjiang. Beef, sheep and dairy are mentioned first, but pork is also targeted for development (in a purportedly Muslim "autonomous region"). In a seemingly "back to the future" recommendation, Xinjiang will promote "courtyard vegetable production" to increase the supply of vegetables. Other crops mentioned are oilseeds and sugar beets. 

The Xinjiang Production Corps is an archipelago of military settlements and farms strung across the region. The corps is involved in many industries, but it has a significant role in mechanizing cotton production and increasing use of improved varieties. The plan's paragraph on the corps doesn't mention cotton or textiles. The plan says we should "view the army as a game of chess" and calls the corps "...a stabilizer for border security, a melting pot that gathers people of all ethnic groups, and a demonstration area for advanced productivity and culture." 

Agricultural and sideline product processing and export-oriented industrial clusters are planned for four locations. Textile and garment import-export processing, export processing districts, border trade and western-oriented opening industry bases will be created in Xinjiang. An International Textile Product Garment Trade Center is planned for the capital, Urumqi. Other export-oriented industries planned include electronics assembly, Chinese herbal medicine, shoes and hats, toys, wigs, bags, and leather goods. 

The plan will continue the ethnic employment strategies that have prompted foreigners to ban Xinjiang goods. A paragraph on vocational training and employment targets "surplus workers in rural and urban areas" and poor people. The plan includes an initiative to train 200,000 people for technical jobs in construction over 3 years and to achieve a goal of increasing urban employment by 450,000 per year. Another initiative is a "dynamic reset" for urban households with zero-employment. The plan calls for enrolling all junior high school graduates in vocational education. Another paragraph calls for construction of high quality vocational training schools in counties and cities with relatively large populations, and programs to improve quality of teachers. 

Although it's a plan for the "Uighur Autonomous Region," the "Uighur" ethnic group is never mentioned in the 50-page document except in the title. The phrase "Chinese nationality" (中华民族) appears 14 times and "unity" (团结) appears 34 times. According to the plan's prologue, Xinjiang has laid a foundation for development by strengthening "...each ethnic group’s sense of gain, happiness, security...[with] social stability and people living and working in peace and contentment." Yet the plan intones that the region must "persist in maintaining social stability as an overriding political task."

The plan promises to protect freedom of religion, upgrade places of worship and support religious schools. But religion must follow Chinese law, and "infiltration" and "crime" will not be tolerated. The plan requires "Sinification of Islam." Clerics who collaborate ("patriotic religious figures") are promised rewards if they educate religious believers in national, civic and legal awareness and "play a role in critical situations." The plan promises to crack down on religious extremists and continue to deepen de-radicalization. Socialist adaptation for religious people must be improved.

Elsewhere the plan calls for better propaganda education of the masses to unify the people. In education, historical facts and archaeological objects are to be "used effectively" to convince students that members of all ethnic groups that happen to live within the boundaries of communist China have a "common history." 

The plan is rounded out by demanding stronger communist party leadership, an unrivaled leadership role for party committees, party leaders as role models, and grass roots party organizations as "citadels in battle."

Heilongjiang Farmers Get Grain Subsidies a Month Early

China's Heilongjiang Province announced that grain subsidies will be paid a month earlier than usual this year. Producer subsidies for corn, soybeans, and rice will be issued to Heilongjiang farmers by the end of August based on area they planted in the three crops. 

Heilongjiang accounts for about 10 percent of China's grain output, and it produces the biggest surplus of grain to supply to other provinces. The producer subsidy policy is meant to encourage Heilongjiang farmers to produce by offsetting the province's low prices to generate better net returns.

The amount of the subsidies will not be determined until August, but officials indicated the corn subsidy will be raised from last year while the soybean subsidy will be held steady. Last year's corn subsidy was 38 yuan per mu, and the soybean subsidy was set at 238 yuan per mu to stimulate more soybean production. This year the priority has switched to boosting corn output, with corn prices soaring and record corn imports. Last year's rice subsidy was 136 yuan per mu for rice grown with surface water and 86 yuan per mu for rice irrigated with groundwater.

Heilongjiang farmers will report area actually planted in the crops last year (in 2020), so this year's payments will not reflect changes in this year's crop planting. Farmers are believed to be  planting about 4-5 percent more corn this year in response to the boom in corn prices. Government officials will verify the planting reports by July 20, determine the amount of the subsidy by August 15, and make payments by August 30. 

Farmers can't get subsidies for land reclaimed without authorization, and they can't double-dip by collecting subsidies for land for which they're receiving subsidies for growing corn for silage or land idled by the "grain for green" environmental program. 

The terms  are set by a Heilongjiang 2020-2022 corn and soybean producer subsidy work program and a similar Heilongjiang work program for rice producer subsidies.

China ag inflation? Oink...gurgle

Stratospheric Chinese hog prices helped float prices of feeds and meat upward last year, but sinking hog prices this year may be exerting a downward gravitational pull on other prices as hog farmers fall underwater.

Hog prices reported by China's National Bureau of Statistics (NBS) in May 2021 were more than 50 percent below their early January level and are now below breakeven levels for wean-finish farms and at or near the breakeven point for farrow-finish farms in China. Farmers have been selling hogs in a panic as prices fall in the offseason for Chinese pork consumption. Last week's Beijing Xinfadi wholesale market report said mainly large carcasses are arriving--super-sized "second-time fattening" hogs--but very small carcasses are also arriving as farmers slaughter immature animals to cut their losses. Another industry report commented that a fattened hog brought 3000 yuan in profit last year, but now loses 1000 yuan. 

Source: China National Bureau of Statistics, raw material purchase prices.

High hog prices and generous subsidies during 2020 spurred aggressive hog farm expansion, feverish entry, and an erosion of productivity. Feed prices were driven higher, and production costs soared. The price of substitutes for pork--from tofu to beef--were also driven higher. 

The NBS purchasing price data indicate that upward momentum has dissipated for ag prices in China since hog prices began their decline. Prices of corn, soybean meal, and cotton are well above year-earlier price levels--when China was exiting its covid-19 lockdown--but ag prices appear to have peaked during January-March and show little or no upward momentum in May 2021.

Source: China National Bureau of Statistics, raw material purchase prices.

Ministry of Agriculture wholesale price data show beef prices started to slide over the last couple of months. Chicken prices peaked briefly in late 2019 (when pork prices were at their peak) and have fluctuated relatively little over the past year.  

Source: China Ministry of Agriculture and Rural Affairs, wholesale prices.

China's inflationary momentum has shifted to industrial commodities. Year-on-year rises in industrial prices are exaggerated by "base effects" (i.e., industrial prices were depressed a year ago during March-May 2020). Prices of copper, steel rebar, aluminum, and pvc have been on the rise this year, but prices seemed to peak in May as these prices also downshifted late in the month. 

Source: China National Bureau of Statistics, raw material purchase prices.

Chinese analysts think hog prices may bottom out by July-August after the stock of super-size pigs has been cleared out. A diarrhea epidemic that killed off piglets in February may tighten the supply of fattened hogs by late summer, just when seasonal demand starts to rebound. 

Today Chinese officials trotted out recycled plans to stabilize the pork industry by improving the national buffer stock of frozen pork reserves. Twelve years ago an elaborate "hog price alert" stabilization plan was introduced by the same government departments following a disease-driven 2007-08 spike in hog prices. The 2009 plan was supposed to do all the things the same officials are promising today: publish a dozen or so statistical indicators to give farmers more accurate market expectations, issue "early warnings", and trigger government purchases and sales based on the hog-corn price ratio to tamp down gyrations in sow numbers and smooth price fluctuations. Nearly all of the promised data series quickly vanished. The Ministry of Agriculture recently mentioned that it plans to abandon the hog-corn price ratio as a profitability measure.

Why isn't the government swooping in now to buy up the surplus pork? Maybe because analysts estimate that 1.7 million metric tons of import frozen pork are already held in reserves. The commercial value of these reserves has sunk along with market prices. The freezers may already be jammed full of pork. Assuming reserves were purchased on credit officials are surely financially underwater on the reserves they bought last year and unable to finance new purchases to sop up the excess pork in the domestic market now.