What Are the Misconceptions About the Target Price Subsidy Policy for Agricultural Products?

The target price subsidy policy for agricultural products originated from the 1973 U.S. Farm Bill and is an important agricultural support policy in the agricultural history of developed countries. In 2014, the No. 1 Central Document explicitly proposed launching a pilot reform of soybean target price subsidies in the three northeastern provinces and Inner Mongolia, and a pilot reform of cotton target price subsidies in Xinjiang. More than a year into the reform pilot, there has been considerable controversy in academic and theoretical circles over the area measurement, subsidy space, and even whether the target price subsidy policy can continue to be implemented. The fundamental reason for the controversy is that there are still many misconceptions in China about the target price subsidy policy for agricultural products. The target price subsidy policy bears on the overall reform of China's agricultural product price formation mechanism, so we must stand at the overall level and correctly understand the target price subsidy policy for agricultural products.

Misconception One: Target prices and support prices cannot coexist

China launched the target price subsidy policy for soybeans and cotton to replace the temporary purchase and storage policy, that is, using target prices to replace support prices. On the surface, it seems that target prices and support prices cannot coexist. So can target prices and support prices actually coexist? The answer is yes. Implementing the target price subsidy policy requires support price policies as a supporting measure. Target prices and support prices are not in a simple either-or substitutive relationship. In practice, the United States, as the earliest user of the target price subsidy policy for agricultural products, has an agricultural product price formation system mainly composed of three parts: market prices, target prices, and support prices. Since its target price subsidy policy was implemented, although the levels of target prices and support prices have been adjusted in various periods, it has never abolished support prices for agricultural products, whose form of expression is the non-recourse loan rate. But it should be pointed out that after implementing the target price subsidy policy, the level of support prices for agricultural products is somewhat lower than the original level of support prices. This is because the original level of support prices actually contained an income support function to raise farmers' incomes. After implementing the target price subsidy policy, the original income support function of support prices must be separated out, retaining only the function of covering production costs and ensuring that farmers' interests are not harmed.

⟦NL> Misconception Two: Target price subsidies have only one form, the price difference subsidy

The popular domestic explanation of the target price subsidy policy is: the government announces the target price of the agricultural product before sowing, farmers sell at market prices after harvest, and the target price subsidy equals the difference between the target price and the market price. From this, some people have formed the misunderstanding that target price subsidies are equivalent to price difference subsidies. In fact, only when support prices are abolished while implementing the target price policy are target price subsidies equivalent to price difference subsidies. The target price subsidies currently implemented in China indeed include only price difference subsidies, but this does not mean that target price subsidies have only one form, the price difference subsidy. Early target price subsidies for agricultural products in the United States included two parts: support price subsidies and price difference subsidies, and later fixed subsidies were introduced. The target price subsidy policy in China's reform pilot stage is only the primary form of target price subsidies, namely price difference subsidies. In the future, China's target price subsidy policy for agricultural products should develop toward a higher stage, rather than being confined to a single form of price difference subsidy.

Misconception Three: Target price subsidies must be linked to the current planting area and output

Implementing the target price subsidy policy is intended to explore advancing the decoupling of the agricultural product price formation mechanism from government subsidies. It is an act of actively adapting to the market-oriented reform of agricultural products, rather than simply stimulating grain production. International trade in agricultural products and the market-oriented reform of agricultural products require governments of all countries to minimize intervention in market prices. The transition of agricultural product price subsidies from linked to decoupled is an inevitable trend. Once target price subsidies are linked to the current planting area and output, they will directly affect agricultural production and distort the market prices of agricultural products, which has been proven by both theory and practice. From international experience, since the birth of the target price subsidy policy, it has also undergone a transition from being linked to current planting area and output to being decoupled. When the U.S. government calculated target price subsidies for agricultural products between 1973 and 1984, it linked them to the current planting area and output, but after the 1985 Farm Bill was enacted, it used historical planting area and output as the basis for calculation. As a responsible major market economy, China actively participates in global international trade in agricultural products, so it should no longer adopt a subsidy form linked to current planting area and output, but should actively shift to a form decoupled from current planting area and output. It is suggested that the average of farmers' planting area and output data over the past 5 years be used as the basis for calculating target price subsidies. This is because it basically covers “good, poor, and average” harvest conditions, and can also effectively solve difficulties in the current reform pilot such as the difficulty of verifying subsidy area and high administrative operation costs.

Misconception Four: The target price subsidy policy is greatly constrained by the total Amber Box subsidy ceiling, and therefore cannot continue to be implemented

The target price subsidy policy belongs to the “Amber Box” policies in WTO agricultural support. When China joined the WTO, it committed to a total Aggregate Measurement of Support of 0 and enjoys only an 8.5% de minimis allowance. At present, many people fail to truly understand the meaning of “8.5%” and mistakenly believe that the total amount of all agricultural subsidies in China must not exceed 8.5% of total agricultural output value. In fact, according to the Protocol on the Accession of China to the World Trade Organization, “8.5%” includes two meanings: first, the Amber Box subsidy for a specific agricultural product must not exceed 8.5% of the output value of that agricultural product; China's specific agricultural products refer to 7 major categories: cotton, soybeans, corn, wheat, rice, rapeseed, and hogs; second, the Amber Box subsidy for all non-product-specific agricultural products must not exceed 8.5% of total agricultural output value. So-called non-product-specific means not specifically subsidizing a particular category of agricultural products. Therefore, although the total Amber Box subsidy ceiling greatly constrains the implementation of the target price subsidy policy, China can still continue to implement target price subsidies for specific agricultural products such as soybeans. First, the 8.5% product-specific agricultural subsidy can be used well and fully. For example, the product-specific subsidy for soybeans is 8.5% of total soybean output value. At present, the product-specific subsidy for soybeans includes only two items, improved seed subsidies and target price subsidies. We can use all product-specific subsidies except improved seed subsidies for target price subsidy expenditures. Second, the non-product-specific agricultural subsidies for all agricultural products can be reasonably optimized and allocated. This means that a certain category of specific agricultural products, while enjoying product-specific agricultural subsidies, can also enjoy non-product-specific agricultural subsidies not specifically targeted at it, so the subsidy amount it actually has can exceed the 8.5% limit. Finally, because the target price subsidy policy for a certain agricultural product is generally implemented only in its main producing areas, while the total subsidy ceiling is calculated based on the output value of that agricultural product nationwide, the actual target price subsidy level in the main producing areas can be appropriately raised.

Misconception Five: Implementing the corn target price subsidy policy carries great risks, so it should not be carried out as early as possible

As the grain crop with the widest planting area and largest output in China, corn has drawn much attention to its policy direction. In 2014, China launched pilot target price subsidy policies for soybeans and cotton. In 2015, the state lowered the temporary storage price for corn for the first time, and corn price policy moved toward a more market-oriented target price subsidy policy, which is an inevitable trend of reform. However, many people currently believe that implementing a corn target price subsidy policy in China carries relatively great risks, and therefore it should not be carried out as early as possible. Their main concern is that after implementing the target price policy, corn prices will fall quickly and corn output will fall quickly, endangering national food security. The logical relationship between target prices and market prices, corn output, and food security is worth discussing. Theoretically, after implementing the target price subsidy policy, corn prices are regulated by market supply and demand. Because corn output is high and storage costs are high, it is conducive to selling at market prices, and given the reality of high domestic corn inventories, a decline in corn prices will be an inevitable trend. A decline in corn prices will affect corn output, but at the same time we should also understand: first, a decline in corn prices helps narrow the domestic price gap and reduce the import shock from foreign grain; second, China's corn inventories are currently huge, and a decline in corn output helps digest inventories and reduce fiscal costs; third, under the guidance of target prices, the decline in corn output will be limited. This is because after implementing the target price subsidy policy, the price factor affecting corn output is no longer only the traditional market price, but a supply-inducing price weighted from market prices, target prices, and even support prices. The state can regulate corn output by adjusting target prices. Given the current severe situation of high corn output, high inventories, strong import shock from substitutes, and declining farmers' incomes in China, China should implement the corn target price subsidy policy as soon as possible. Specifically for implementing the corn target price subsidy policy, it is suggested to consider the following aspects: first, while implementing the target price subsidy policy, retain the corn support price, but appropriately lower the support price level; second, decouple target price subsidies from the current planting area and output, linking them only to the current market price; third, introduce a fixed subsidy for corn.