How Is China Adjusting Its Grain Policy? Chen Xiwen Points the Way

Judging from the statistics, China's grain production has shown an upward trend year by year since 2004. According to China's statistical criteria, China's total grain output grew from 430 million tons in 2003 to 607 million tons in 2014, an increase of 42%. Grain output in 2015 is expected to continue increasing. Judging purely from the statistics, China's grain output has continued to increase, and farmers' incomes have also been rising.

The Current Grain Supply and Demand Situation in China

However, it is worth noting that while domestic output has continued to grow, the volume of grain imports has also increased year by year. In 2014, China's total grain imports reached 104 million tons. As of October 2015, grain imports for the year had already reached 103 million tons, roughly equivalent to the total imports for all of last year. Although the total volume of grain imported in 2015 increased markedly over the same period in 2014, the total value of imports fell compared with 2014, indicating that international grain prices are still trending downward. At present, China's domestic grain output is increasing, yet grain imports are growing, causing social inventories to rise. There are two reasons for this situation: first, there are contradictions in the structure of domestic grain production, such as the fact that dependence on the international market for soybeans has already exceeded 80%; second, China's agriculture, especially bulk agricultural products such as grain, lacks international competitiveness. Owing to natural endowments, China's arable land area is limited and the number of farming households is enormous. At present, China has about 130 million hectares of arable land, while the number of households contracting land reaches 230 million, with the average cultivated area per household being less than 0.5 hectares. This decentralized mode of agricultural production makes it very difficult for Chinese agriculture to improve its international competitiveness. In recent years, although China's grain output has been growing, production costs have also continued to rise, pushing domestic grain prices gradually higher and even above international market prices, causing more grain from the international market to enter China.

Based on prices from January to September this year, the average prices of wheat, corn and rice in China's domestic wholesale markets were 36.6%, 50.6% and 41.6% higher, respectively, than the duty-paid cost after import. Domestic grain prices being higher than international grain prices is not only due to high domestic production costs; other reasons cannot be ignored either. First, international grain prices have fallen sharply since 2011 and 2012. Second, the RMB exchange rate has been strong, with its exchange rate against the US dollar continuously rising, which means that the price of grain denominated in US dollars will continue to fall after entering the Chinese market. Third, in the past two or three years, international energy market prices have plummeted, which in turn caused international shipping prices to plummet. The bulk shipping price for grain from New Orleans on the US Gulf Coast to Huangpu Port in Guangdong, China, was 135-138 US dollars per ton in 2008, and has now dropped to only 35 US dollars per ton, meaning the cost of shipping each ton of grain to China has fallen by more than 600 yuan.

The Approach to Adjusting China's Grain Policy

Under the complex circumstances in which international grain prices are substantially lower than domestic grain prices and grain imports are increasing year by year, how the government should appropriately adjust grain policy requires a comprehensive analysis of domestic and international grain supply and demand relationships. In my personal view, the current state of low international grain and energy prices will not be the norm. This is because the current low international grain prices have already put great pressure on farmers in some major exporting countries, and some are even facing the brink of losses. The finances of several major oil-exporting countries are also difficult to sustain, and they have begun to use funds previously set aside in reserves. Therefore, international energy prices and international grain prices will not remain at such levels as the norm from now on. Of course, the specific degree of recovery still needs further analysis in light of the global economic recovery. However, it is a basic fact that in recent years the grain prices set by the Chinese government have been markedly higher than the international market; and it is also a basic fact that China's grain, with its own output plus imports and inventories, is now clearly in oversupply.

In response to the above two basic facts, since 2014 the Chinese government has made moderate adjustments to the price formation mechanism for major agricultural products, subsidy policies, and purchasing and storage policies. For example, last year, target price reform for cotton and soybeans began to be implemented in Xinjiang, the three northeastern provinces, and eastern Inner Mongolia. On September 18 this year, the relevant departments announced the temporary purchase and storage price for corn in Northeast China at 2,000 yuan per ton, a marked decline compared with last year. Last year, the average temporary purchase and storage price for corn implemented in Northeast China was 1.12 yuan per jin, with Liaoning at 1.13 yuan per jin, Jilin at 1.12 yuan per jin, and Heilongjiang at 1.1 yuan per jin; this year all are 1 yuan per jin. In 2014, the government purchased about 83 million tons of corn in the three northeastern provinces and Inner Mongolia. Compared with last year's price, this year's price is 240 yuan per ton lower, equivalent to a reduction of 20 billion yuan in farmers' income from corn planting in Northeast China this year. Farmers of course have objections to this, but they also understand that the current temporary storage price of 2,000 yuan per ton is still markedly higher than the international market, so all parties are now paying close attention to the next step in grain policy adjustment.

From the basic consensus formed across various sectors, the government's policy of implementing minimum purchase prices and temporary purchase and storage prices for 12 consecutive years has basically achieved the goals of stimulating grain production increases and driving up farmers' incomes. China's grain policy has reached a point where adjustment is needed, but to avoid causing too great harm to the interests of China's enormous number of farmers is indeed a rather difficult choice.

At present, the basic approach to grain policy adjustment is: give play to the fundamental role of market supply and demand in price formation, and have the government provide farmers with necessary subsidies outside the market. Under conditions of growing grain output, growing imports and growing huge inventories, if grain is brought into storage at high prices and released at low prices, it will inevitably bring huge financial losses. Therefore, grain policy adjustment must take all factors into comprehensive consideration. At the same time, it must also be recognized that the most important part of China's grain imports is soybeans, accounting for more than 70%. No matter how reform is carried out, the situation that China needs to import more than 70 million tons of soybeans cannot be changed for a considerable period of time. This is because, according to China's per-mu yield level, to grow more than 70 million tons of soybeans would require at least more than 500 million mu (that is, 34 million hectares) of sown area, and it is impossible for China to have so much arable land to grow soybeans. Therefore, China needs to continue importing soybeans. In addition, the combined imports of the three major grains, barley, sorghum, DDGS (distillers dried grains with solubles) and tubers last year already exceeded 30 million tons. Therefore, the pressure that grain imports bring to domestic production is in fact the increase in grain imports other than soybeans, and this is a structural problem.

Saying that China's grain prices are higher than the international market refers to the fact that only grain imported within the tariff quota has such a large gap. However, the tariff quota quantities China committed to upon joining the WTO are limited: wheat 9.636 million tons per year, corn 7.2 million tons per year, and rice 5.32 million tons per year. Judging from imports within the tariff quota, last year only more than 2.5 million tons of wheat, more than 2.5 million tons of corn, and more than 3 million tons of rice were imported, totaling 8.18 million tons, accounting for only about 40% of the tariff quota quantity. Only a 1% tariff is levied on this portion of imported grain, which is why its price is much lower than the domestic price.

When China joined the WTO, it committed that if imports of the three major grains exceeded the tariff quota quantity, a normal tariff, that is, a 65% rate, would be applied. After exceeding the tariff quota quantity, the three major grains from the international market currently cannot enter the Chinese market. However, in international trade over the past two years, there has been a phenomenon of using corn substitutes to bypass tariff quotas. Imports of barley, sorghum, DDGS, cassava and so on as substitutes for corn have dealt a shock to domestic corn sales, resulting in unsold stockpiles. This is a prominent problem currently facing China's grain market. Therefore, for the Chinese government and farmers, the issue that needs consideration is what measures to take to regulate domestic grain prices so as to curb the arbitrary growth of corn substitute imports.

Domestic grain prices should return to a level close to international market grain prices. This would help curb grain imports, reduce domestic grain inventories, and restore the market circulation of domestic grain. As for farmers' income losses, the government can make them up through green box subsidy policies permitted by the WTO, and such subsidies are decoupled from grain output and grain prices.

Policy Adjustment Must Consider Farmers' Interests and the Impact on the International Market

Of course, what is described above is only a preliminary approach to adjusting grain policy, and many difficulties will be encountered in the specific implementation process. Specifically, in terms of total production, China's total grain output (excluding soybeans and tubers) exceeds 500 million tons, the highest in the world. But for the Chinese government, adjusting grain policy requires not only considering the safeguarding of food security, but also taking into account the survival and development of the more than 600 million farmers still living in rural areas. Therefore, China's grain policy is not merely a pure industrial policy, but a major economic and social policy that bears on the survival and development of 600 million farmers. China has both confidence and worries in ensuring national food security. Historical lessons tell us that if agricultural policy is improper and harms farmers' interests, it will lead to a sustained decline in grain output.

In the 37 years since China began reform and opening up in 1978, China's grain output has experienced two major fluctuations. The first was around 1984. From 1979, in the early period of reform and opening up, grain output grew continuously for six years at a rate of about 5%, until 1984, when grain output exceeded 800 billion jin (more than 400 million tons) for the first time. The government adjusted grain policy, but farmers did not accept it, so grain output declined for four consecutive years, and it was not until 1989 that grain output recovered to the level of five years earlier. The second was in the late 1990s. In 1998, China's grain output reached the highest level of the 20th century, reaching 512.3 million tons. But starting in 1999, grain output began to decline, falling all the way to 430 million tons in 2003. Then, under the stimulus of a series of policies, grain output began to recover from 2004, and it was not until 2008 that it surpassed 1998. The "one downhill, one uphill" path of grain output took a total of ten years to recover.

Therefore, from historical experience, the Chinese government must be particularly cautious in adjusting grain policy, and reform of the grain price formation mechanism, subsidy policies for farmers, and grain purchasing and storage policies must fully consider farmers' interests and avoid another large-scale decline in grain output.

At the same time, as the world's largest grain producer and an important grain importer, China's grain policy adjustments will also have a huge impact on the international grain market. China currently imports more than 100 million tons of grain (cereals + soybeans + tubers) from the international market each year, making it the world's largest grain buyer, and changes in its grain policy will have a relatively large impact on the global grain market. Especially since the outbreak of the global financial crisis in 2008, the old structure of growth drivers in the global economy has been broken, while a new structure of drivers has not yet taken shape. The current cutthroat competition at any cost in fields such as energy, mineral resources and grain is unsustainable.

Taking into comprehensive account various domestic and international factors, the Chinese government's next step in grain policy is to appropriately reduce current output, but it will focus on maintaining the stability and enhancement of production capacity. In the recently adopted recommendations for the 13th Five-Year Plan, some policies have been proposed, such as carrying out pilot projects for crop rotation and fallowing, and implementing the strategy of "storing grain in the land and storing grain in technology," which in effect sends a signal of appropriately adjusting recent grain output to a certain extent. But as a major country with a population of 1.37 billion, China must adhere to the national policy of relying on its own capacity to ensure food security. In the recommendations for the 13th Five-Year Plan, emphasis is still placed on basic self-sufficiency in cereals and absolute security of staple grains. Chinese people's staple grains are basically wheat and rice, and this major policy will not undergo major adjustment. Other demand besides staple grains will rely more on the international market for regulation, and this will be a long-term guideline. In a certain sense, the long-term stability of China's grain supply and demand relationship is also conducive to safeguarding global food security. In adjusting grain policy, China must also take a responsible attitude toward the global grain market, coordinate domestic and international grain markets, and seek the best balance between domestic grain production and moderate imports.