Corn procurement and storage price falls 10% from last year, the dilemma of cheap grain hurting farmers awaits resolution
“When sowing, we hoped for a good harvest, but after the autumn harvest, we often fear that grain prices won't rise and we won't get a good price, wasting a whole year's work.” A farmer in Rizhao, Shandong, told the China Industry and Economy News reporter.
This year's autumn harvest is nearing its end, yet some farmers cannot feel happy at all. Because this year's corn procurement price is lower than last year's, the excitement after the autumn harvest has completely vanished.
Recently, some media published articles stating that due to low corn prices, grain farmers' enthusiasm for growing grain has been severely dampened, and some large grain-growing households who transferred land have even begun to break contracts and abandon leases.
According to what the reporter learned during interviews, previously, the National Development and Reform Commission, the State Administration of Grain, the Ministry of Finance, and the Agricultural Development Bank jointly issued a document announcing this year's corn procurement and storage price. The listed procurement price was 1 yuan per market jin, down 10.7% from last year's average price of 1.12 yuan per market jin.
Changes in supply and demand relations
“Corn prices are mainly affected by supply and demand relations.” Dr. Zhang Zongyi, associate researcher at the Nanjing Institute of Agricultural Mechanization under the Ministry of Agriculture and provincial-level analyst for the Jiangsu wheat industry chain, said in an interview with the China Industry and Economy News reporter that this year's low corn price is mainly due to a large increase in supply. In addition to the supply increase caused by a bumper harvest, imports of corn and substitutes also rose sharply.
According to forecasts by the China National Grain and Oils Information Center, China's new-season corn output is expected to reach 232 million tons, setting a new record high. In addition to increased corn output, publicly available data show that from January to August this year, China imported a total of 4.562 million tons of corn, up 162% from the same period last year.
In addition, according to estimates by the China National Grain and Oils Center, in 2015 China's imports of feed barley, sorghum, corn distillers' grains, and dried cassava that can serve as feed and related products such as alcohol processing as substitutes for domestically produced corn are expected to reach 25-28 million tons, an increase of nearly 10 million tons year on year. Imported substitutes have had a huge impact on domestic corn market consumption.
At the same time, there is still high inventory pressure domestically. Since 2012, China has cumulatively purchased about 184 million tons of temporary stored corn, while cumulative auction sales of temporary stored corn have amounted to only 30.73 million tons.
Zhang Zongyi said that inventory plus imports and imported substitutes have already approached or even exceeded the country's annual corn consumption. With supply so high, demand not increasing substantially year on year, and national grain depots facing limited storage capacity and funds, procurement and storage capacity has been greatly weakened, making a corn price decline inevitable.
Zeng Haiwei, director of the research center of the Huashang Academy Industrial Research Institute, has his own views on corn supply and demand relations. In an interview with the China Industry and Economy News reporter, Zeng Haiwei said that this year's low corn price is due first to the low-price shock from traditional major corn exporters such as the United States and Canada; second, because last year China's hog farming industry was affected by low pork prices, with many farmers going bankrupt, changing trades, or reducing scale, greatly reducing demand for corn feed; at the same time, favorable new energy developments and national subsidy policies also contributed to an expansion of corn planting area, ultimately leading to supply-demand imbalance.
In fact, whether it is the specific increase in corn output, imports, high inventories, or the reduction in corn demand from a certain industry, all indicate that China's corn supply and demand relations have changed this year. When supply exceeds demand, according to the law of value, a price decline is also reasonable.
Temporary procurement and storage paradox, policy needs improvement
It is worth mentioning that, in order to protect farmers' enthusiasm for growing grain, China's top leadership has also implemented subsidy policies for grain. Some industry observers believe that policies push up corn prices, ultimately raising enterprises' raw material costs, and higher raw material costs in turn make enterprise products uncompetitive, leading to losses in production, after which the state provides subsidies.
However, this has also formed a strange cycle: driven by national policy, corn prices detach from the market, while corn deep-processing enterprises must also rely on policy subsidies to survive, thus creating a vicious cycle.
Zhang Zongyi believes that domestic corn production and consumption are basically in supply-demand balance at present, and there is no need to maintain such a high inventory level. Even less is there a need, on the grounds of protecting farmers' enthusiasm for growing grain, to implement a temporary procurement and storage policy to support market purchases of corn. Doing so may lead farmers to form mistaken expectations, continuously expand the planting area of corn and other grain crops, and thereby create even higher inventories and distort the market. But if the policy were suddenly canceled, it would also cause a major shock to the market and affect the security of the entire industrial chain.
The reporter learned in interviews that, in fact, grain subsidies are not unique to China. It is understood that Japan, the United States, and neighboring South Korea all implement subsidies for agriculture.
Zeng Haiwei told the reporter that Japan's policies offer lessons for China. This is because Japan's agricultural subsidies include subsidies for farmland water conservancy infrastructure, agricultural modernization, agricultural loans, and agricultural product price subsidies. Price subsidies are the most important form of subsidy. Japan gives different forms of price subsidies to almost all agricultural products brought to market.
“For example, rice is subject to a directly state-controlled ‘dual rice price system’; pork and silkworm cocoons have a price stabilization system; sweet potatoes have a guaranteed minimum price system; milk and soybeans have a price-difference subsidy system; vegetables and eggs have a price stabilization fund system. Rice is Japan's staple food, so rice is the core of Japan's price support policy, and subsidies for rice account for more than 70% of all price subsidies. That is, the ‘producer rice price’ the state pays to farmers is clearly higher than the ‘consumer rice price’ at which it sells to consumers, and the inverted purchase-sale gap is compensated through the agriculture, forestry, and fisheries budget.” Zeng Haiwei introduced.
From the above introduction by industry insiders to Japan's grain subsidies, it can be seen that China's subsidy mechanism is somewhat crude in its reform.
Fortunately, it seems the top leadership has also recognized the problems currently facing China's grain procurement and storage policy. In response to the current domestic grain price formation mechanism, it has already decided to make changes during the “13th Five-Year Plan” period.
The reporter learned in interviews that the government has decided to use the approach of “differentiated policies by variety and gradual advancement” to improve the price formation mechanism and implement differentiated support policies for different varieties.
Among them, for rice and wheat, the minimum purchase price policy will be improved and continue to be implemented; for cotton and soybeans, according to the principle of separating price and subsidy, the target price reform pilot will continue to be implemented, focusing on giving play to the decisive role of the market in price formation, guiding production through market price signals, adjusting supply and demand, and improving subsidy distribution methods; and for corn, which currently has a huge surplus, its procurement and storage policy will be reformed and improved, and market-oriented price reform will also be launched.
How exactly can “cheap grain hurting farmers” be fundamentally solved? Should procurement and storage policy be combined with marketization, or should the market's regulatory role mainly be brought into play?
Strengthen information disclosure and rational policy guidance
Zhang Zongyi believes that to fundamentally solve “cheap grain hurting farmers,” it is necessary to strengthen information disclosure and rational policy guidance. It would be best not to directly link subsidies to specific production varieties, to cancel the temporary procurement and storage system, and to implement a policy linking subsidies to land. As long as one engages in agricultural production, subsidies should be given according to planted area or cultivated land area, regardless of what the farmer specifically plants, and farmers' planting structure should be regulated by the market. Only in this way can the market mechanism be brought into play.
Zhang Zongyi further stated that using fiscal subsidies to raise farmers' enthusiasm for growing grain is based on the mistaken assumption that farmers' enthusiasm for growing grain is lower than for growing cash crops, and on excessive worry about food security. We have always believed that the returns from growing cash crops are much higher than those from grain crops, and farmers are unwilling to grow grain crops.
In fact, in recent years, the gradual disappearance of the demographic dividend has led to very high labor costs. With the widespread use of mechanization, large rural growers, family farms, and other scaled operating entities have continued to emerge. In addition, the mechanization level of cash crops is relatively low, while the mechanization level of grain crops is very high. Therefore, some scaled operating entities can only choose to grow grain crops.
Zhang Zongyi told the reporter that the reasoning is simple: two or three laborers in a household can grow several hundred or even a thousand mu of grain through mechanization, but may not even be able to grow several dozen mu of vegetables. Instead, those farmers with smaller planting scales have a very high proportion of vegetable cultivation. Therefore, growing grain actually does not need to rely on subsidies for guidance.
Zeng Haiwei believes that to solve the problem of cheap products hurting farmers at the root, four major issues must be addressed: first, farmers' per capita cultivated land area must achieve scale; second, the agricultural product processing industrial chain must be upgraded, improving the scale and modernization level of the agricultural product processing industry; third, the state must issue policies to protect and support agricultural product processing technology and processing equipment; finally, and most critically, it should actively learn from the experience of the Netherlands and Japan, establish a nationwide agricultural product procurement system and distribution system, and improve the efficiency of information-based guidance and market-oriented operations.
Zeng Haiwei introduced that agriculture can only be subsidized by the state, which is consistent with the national policies of the United States, Japan, South Korea, and even Israel. For any country, agriculture is a foundational link for food safety and manufacturing.
Zeng Haiwei compared China with the United States. He introduced that the slogan at the entrance of the U.S. Department of Agriculture is: “Agriculture: the foundation of processing and manufacturing.” It can be seen that even in a developed country like the United States, agriculture cannot be ignored. For a populous country like China with a population of as many as 1.37 billion, food security is even more urgent; at the same time, grain prices are also related to the quality of people's livelihoods, and the quality of agriculture and its processing chain can also generate a value-added effect of more than 2.8 times on GDP.
At present, China has more than 500 million rural residents and more than 100 million agricultural laborers. Agriculture is of great importance to China's economy, employment, social stability, consumer prices, and food safety.
Zeng Haiwei said, however, compared with the United States, Chinese agriculture has contradictions: too much agricultural population (less than 2.8% in the United States, less than 1% in Japan, and as high as between 26% and 38% in China, with a long-term plan to reduce it to 7.8% by 2024), and too little per capita cultivated land area (the average U.S. farm area is more than 3,000 mu, Japan's average is around 100 mu, and China's average is less than 10 mu). These determine that farmers' income remains at the level of several thousand yuan a year, and a year of hard work is not as good as one month of working as a migrant worker.
The contradiction between safety and efficiency
Zeng Haiwei said that at present there are four major issues acting as four trip ropes hindering the development of China's grain industry. In China's grain planting, in terms of resources, it faces the problems of land reduction and deterioration of land resources brought by the state's land finance, urban expansion, industrial plant construction, and industrial pollution.
“There is a huge gap between China and the United States, Japan, and Israel in scientific and technological standards and mechanization standards, especially small-scale mechanization standards, which in turn leads to a huge gap in agricultural production efficiency compared with the above countries, and there is also a fundamental contradiction between food security and agricultural wealth benefits.” Zeng Haiwei said.
The reporter learned in interviews that at present, among the production costs of China's three major grain crops, labor costs account for about 42%, which is completely incomparable with less than 5% in the United States.
Zeng Haiwei stressed that relying purely on the market will inevitably lead to greater chaos. “The Western free market has proven to be the main root of current world problems. To solve China's problems, our ancestors long ago provided systematic solutions more advanced than Keynes, such as the stabilization system of Sang Hongyang in the Han Dynasty, which in essence is the superimposed application of state intervention and market mechanisms. Grasping both the invisible hand and the visible hand produces better results. Of course, I believe moderate state protection for agriculture is necessary. If we fail to manage the rice basket, vegetable basket, and meat basket for 1.37 billion people, it will become a huge burden for the whole world.” Zeng Haiwei told the reporter.
Zhang Zongyi finally said that at present, China's corn supply and demand are basically balanced, and there is no need for excessive worry. To make China's grain planting develop healthily, the minimum protective price should be gradually canceled, but subsidies linked to operating land area should be given to farmers directly engaged in agricultural production rather than to holders of land contracting rights, letting the market determine the planting structure and the planting area of each variety. The government should, as needed, purchase an equivalent amount of grain from producers at market prices in the form of orders, rather than promising market-support purchases, so as to maintain a scientifically reasonable inventory level. Only in this way can agricultural producers be protected without distorting market resource allocation.