The key to agricultural supply-side reform lies in resource allocation

Since the Fifth Plenary Session of the 18th CPC Central Committee, and especially in recent times, the Party Central Committee and the State Council have repeatedly stressed the need to strengthen “supply-side reform”, which is becoming a keyword in China's economic reform. Supply-side reform is defined in contrast to demand-side reform, emphasizing the resolution of excess capacity on the supply side, the adjustment and optimization of structure, and the promotion of industries toward the mid-to-high end. Agriculture, as the primary industry, also faces the situation of deepening reform on the supply side.

Deepening agricultural supply-side reform means targeting the major problems currently facing agricultural development and, starting from the supply side, introducing strong reform measures. It is necessary both to break down the fences that obstruct the flow of agricultural production factors, so that the market plays a decisive role in agricultural resource allocation, and to better play the role of the government in safeguarding national food security.

At present, China's agricultural development faces three major prominent problems: First, the prices of bulk agricultural products such as grain, cotton, oil, sugar and meat are comprehensively inverted. According to monitoring data, since the beginning of this year the average wholesale prices of domestic wheat, corn and rice have all been more than 30% higher than the cost price of imports after customs duty; domestic pork and sugar prices are about 2 times the import prices; cotton and soybean prices have also long been higher than import prices. Second, the net profit from the production of bulk agricultural products is very low. While domestic prices of major agricultural products remain high, the net profit from the production of bulk agricultural products is instead very low. Third, agricultural product inventories are pressing down heavily, and the potential losses from purchasing and storage are enormous. On comprehensive judgment, in 2015-2016 the combined inventories of corn, wheat and rice in China reached as high as 254 million tons, which will set a record high in history. Taking cotton as an example, in 2015 China's cotton inventory accounted for about 50% of global inventory; since 2013 cotton inventory has exceeded 10 million tons for three consecutive years, and in the past two years the price gap between domestic cotton and imported cotton has been very large, with the state's potential losses from purchasing and storing cotton at high prices exceeding 60 billion yuan.

China's agriculture has seen the phenomenon of “three simultaneous increases”: increased agricultural output, increased import volume and increased inventory volume. Imported agricultural products are consumed in large quantities, while the output increased at home is stored in warehouses. This precisely shows that China's agricultural production does not match market demand, and that there is a problem on the supply side. This has put us in a “dilemma”: on the one hand, if support prices for agricultural products are lowered to ease the pressure of purchasing and storage, farmers' production profits will fall further, dampening farmers' enthusiasm for production; on the other hand, if support prices are maintained or raised to protect farmers' interests, the price inversion will become more serious and the state's potential losses from purchasing and storage will be greater.

This requires us to improve the efficiency of resource allocation in agriculture, advance supply-side reform, adopt targeted measures, and focus on solving the problem of distorted resource allocation. First, solve the problem of distortion in domestic and international agricultural resource allocation. The price gap between domestic and international bulk agricultural products is very large. In terms of grain prices, since 2010 the domestic spot price of wheat has been 1000-1200 yuan/ton higher than the international spot price, rice 1100-1600 yuan/ton higher, and corn 900-1200 yuan/ton higher. It can be seen that the cost of producing grain in China is very high, and China does not have a comparative advantage. While ensuring domestic staple food production, we should strengthen analysis of the global agricultural development potential, environment and risks, and make full use of both domestic and international resources and both markets to ensure the supply of grains such as corn.

Second, solve the problem of distorted resource allocation among the three industries. China's share of employment in the primary industry is relatively high, and the ratio of the output value of agricultural product processing to agricultural output value is relatively low. Both indicate distortion in resource allocation among the primary, secondary and tertiary industries. In recent years, China's grain prices have risen year after year, slowing the pace of the transfer of rural production factors, especially rural labor, to the secondary and tertiary industries. It is necessary to regulate the allocation of labor resources between the primary industry and the secondary and tertiary industries through market mechanisms, and to raise farmers' productivity. At the same time, advance the confirmation of rural land rights, accelerate the flow of land factors; develop the new-type sixth industry, guide capital and technology from the secondary and tertiary industries into agriculture, and promote the free flow of production factors.

Third, solve the problem of distorted resource allocation among industries within agriculture. The comparative returns of China's land-intensive agricultural products have long been extremely low. According to data from the National Development and Reform Commission, in 2014 the average net profit per mu of vegetables in China was 2069.78 yuan, 10.1 times that of rice, 23.6 times that of wheat, and 25.30 times that of corn. Apple cultivation shows a similar situation, while the net production profits of land-intensive agricultural products such as cotton, sugar crops and soybeans are all negative. This fully shows that resource allocation is unreasonable between China's land-intensive industries such as grain and cotton and labor-intensive and technology-intensive industries such as fruits, vegetables and aquatic products. China's per capita and per worker land resources are very low, and it is very difficult to cultivate a comparative advantage in land-intensive industries. On the premise of ensuring food production security, we should strongly support labor-intensive agricultural products such as vegetables, fruits, silkworms and aquatic products, focus on cultivating China's agricultural comparative advantage, and enhance China's agricultural competitiveness.

To rationally allocate resources among industries within agriculture, it is also necessary to handle well the relationship between grain and the production of other agricultural products. In implementing the major policy of “absolute security of staple food and basic self-sufficiency in grain”, we should give play to the regulating role of protective prices on the scale and structure of grain production, maintain a reasonable small increase in the minimum purchase price of staple food, and ensure staple food security. At the same time, we should consider creating conditions to gradually abolish price support policies for corn, soybeans, rapeseed, cotton, sugar and so on, so that the market plays its due role in the allocation of agricultural production factors.

Link:

Supply-side reform

“Supply-side reform” means starting from the supply and production side, and promoting economic development by liberating productivity and raising competitiveness. Specifically, it requires clearing out “zombie” enterprises, phasing out backward capacity, locking the direction of development onto emerging fields and innovative fields, promoting the adjustment and optimization and upgrading of the industrial structure, and creating new growth points for the economy. “Supply-side reform” can be traced back to the “supply-side school” among schools of economics. This school emphasizes the supply side of the economy and holds that demand automatically adapts to changes in supply, hence its name.