Subsidies As High As An Elephant’s Eye

Harvesting wheat in Shulyu Village in Tangxian County, Hebei Province, June 8, 2014.

FARM SUBSIDIES, STARTING with corn and other grains, are to be withdrawn, state media report. The People’s Daily quotes Chen Xiwen, deputy head of the central agricultural work leading team, as saying, “the price will be decided by the market and [the state] will no longer play the role of subsidising farmers” (via FT).

China’s farmers have produced a string of record grain harvests in the face of natural and man-made disasters and shrinking hectarage. At an estimated 621 million tonnes, last year’s annual grain harvest set another record high for the 12th consecutive year.

However, supply still struggles to keep up with the demands of a richer and growing urban population. Stocks and imports cover the gap. China imported 3m tonnes of wheat, 3.4m tonnes of rice and a record 4.7m tonnes of corn (mostly used for animal feed) last year.

While removing incentives for grain production seems counterintuitive in such circumstances, all the state’s guaranteed minimum purchase prices — currently double world prices — is doing is building up record levels of domestic stocks. The US Department of Agriculture estimates those of corn at the end of the 2015/16 crop year will account for more than half the world total, at 113m tonnes.

Policymakers have long recognised that this structural distortion of China’s domestic agricultural commodities markets is not sustainable. So the removal of subsidies has been expected, though it will have to be implemented in ways that do not risk social instability if rural incomes fall too sharply. Subsidies provide on the order of a 20% top-up to farm incomes. Authorities have just announced a new (if sketchy) agriculture investment programme.

That level of support is not out of line with international averages, but the numbers involved are, inevitably, large. The OECD, the rich-countries think-tank, estimates China’s support to its farmers at 1.8 trillion yuan ($292.6 billion) in 2014, the latest year for which comparative figures are available. That is double the amount of five years previously (other countries have been cutting back farm subsidies over that time) and equivalent to 2.5% of GDP, making it a bill worth trimming.

However, the bigger goal is the critical need to improve agricultural productivity overall as China’s shrinking farmland runs up against the limits of what is needed for China to feed itself. The current five-year plan promotes large-scale farming as a priority. By contrast, most grain farming is inefficiently small-scale and labour-intensive.

On average, each farmer plants half a hectare. In mechanised Europe, the ratio is more than 20 times that and in the Big-Agri United States upwards of 100 times. Furthermore, Chinese farms lose or waste some 35 million tonnes of grain a year in the course of storage, transportation and processing, according to state media.

Grain also needs lots of water, an issue in an increasingly water-scarce country, and an acute one on the evermore arid North China Plain, China’s breadbasket. One of the unintended consequences of grain subsidies has been to discourage small farmers from switching to cash crops that make better use of the available land.

Policymakers see large-scale, efficient and technologically advanced farming as the way to address all those challenges — and cut some hefty import and subsidies bills.

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