2015 Grain Output Rises but Income Doesn't: Cheap Grain Hurts Farmers, Bringing Multiple Impacts
The stable and orderly development of the grain market is the basic guarantee for farmers' survival. How did China's grain market perform in 2015? It is reported that the domestic corn market experienced sharp rises and falls in 2014 and is currently moving weakly forward. The overall situation of the grain market in 2015 is not optimistic.
According to reports, as autumn grain harvests successively came in across various regions, the purchase prices of China's three major staple grains showed a trend of sharp decline. Since the beginning of autumn, corn and wheat prices in major grain-producing areas have fallen to varying degrees. Corn prices fell noticeably, with farmers' prices dropping by an average of more than 20%, and the highest decline reaching 30% compared with last year, while wheat also experienced a cliff-like drop before National Day. At present, rice purchase prices are generally stable, but some regions have also seen small declines compared with previous years. The drop in grain prices has brought considerable impact on the grain trade segment, and according to media reports, markets in some regions have fallen into a severe atmosphere of panic.
Some market analysts say that a full-line decline in the three major staple grains is rare in previous years, and both low international grain prices and domestic inventory backlogs are regarded as the main causes of this round of grain price declines. The phenomena of “output rises but income doesn't” and “cheap grain hurts farmers” that reappeared in the 2015 grain market will bring impacts in many aspects and deserve special attention. For more details of the latest grain market analysis, please consult the “2015-2020 In-Depth Research Report on Market Supply and Demand Prospect Forecast of China's Grain Industry” published by China Report Hall.
First, the sharp drop in grain prices directly affected the incomes of hundreds of millions of farmers. Some estimates say that the sharp drop in grain prices in 2015 may lead to negative income growth on the scale of hundreds of billions, which has a direct impact on China's effort to achieve a moderately prosperous society in all respects. Second, the reduction in farmers' income brought by the sharp drop in grain prices will not only affect the consumer market. Third, the sharp drop in grain prices will lead to a decline in farmers' enthusiasm for growing grain and may trigger grain price fluctuations the following year.
Under such circumstances, how China's grain price policy should act requires caution above all. In the view of our research team, although the sharp drop in grain prices in 2015 shocked the market, there were “accidental factors” in the form of low international grain prices and domestic inventory backlogs, but defects in the domestic grain purchase and subsidy policy system may be mechanistic causes that cannot be ignored.
China fully liberalized the grain purchase market and purchase prices starting in 2004, and grain prices have since been formed by the market. After grain prices were liberalized, in order to protect farmers' interests and their enthusiasm for growing grain, the state implemented a minimum purchase price policy (that is, the “market-support price”) in major producing areas for the two key grain varieties of rice and wheat starting in 2004 and 2006 respectively. Each year, the state comprehensively considers factors such as grain cost and returns, supply and demand, market prices, and macroeconomic regulation, determines the minimum purchase price levels for various varieties of wheat and rice, and announces them to society before crop planting to guide farmers' planting and promote grain production. After new grain comes to market, farmers sell grain according to market prices. When market prices in major producing areas fall substantially and drop below the minimum purchase price, state-designated enterprises (Sinograin) enter the market to purchase at the minimum purchase price, guiding market grain prices to rebound reasonably. Since 2008, the state raised the minimum purchase prices of grain for 6 consecutive years. In 2013, the minimum purchase prices of rice and wheat were raised to 1.39 yuan per jin and 1.12 yuan per jin respectively, increases of 92% and 57% over 6 years.
From actual implementation, although the market-support purchase policy protected farmers' interests, it required subsidy payments (indirectly subsidized by the government to state-owned purchasing and marketing enterprises). The direct consequence of this disguised price subsidy policy was raising the market price of grain sales and distorting market-determined prices. Under this price distortion, first, subsidy costs were high, and a large amount of state fiscal subsidies entered purchasing enterprises and the reserve segment, while farmers did not benefit much directly; second, it raised processing costs in the midstream and downstream grain industry, making it impossible to optimize resource allocation through market-based means. The entire midstream and downstream industry was dragged down, directly blocking the smooth flow of the entire agricultural industry chain and affecting the healthy operation of the agricultural industry.
For example, due to chaotic grain subsidies in Heilongjiang Province, more than a thousand unsubsidized grain enterprises stopped production in 2015. Large amounts of grain were continuously purchased from farmers into state reserve warehouses by state-owned enterprises at high subsidized prices, but processing enterprises could not obtain raw grain at reasonable prices. Sinograin's warehouses were overflowing, and grain stored in the warehouses could not enter production and consumption links for a long time. Of the 88 large-scale soybean processing enterprises in Heilongjiang, more than 90% have stopped production. In Jilin Province, a major corn province, the private corn processing leader Dacheng Biochemical was recently forced to stop production and had to be taken over by a local state-owned enterprise with a government background, and price subsidy policy was also a reason in this.
The United States and the European Union both provide huge subsidies to agriculture and farmers, but their subsidies stay close to the market, and their subsidy policies are systematic. The EU's subsidy policy is divided into two types: price support and direct subsidies. Price support means that a unified agricultural product price must be used within the EU, and market prices can be freely set within the range defined by the common price. Once they go beyond this range, the Community must intervene to bring them back within the set range. The price mechanism of the Common Agricultural Policy consists of three parts: target price, intervention price and threshold price. Direct agricultural subsidies provide direct monetary subsidies according to the production volume per unit in different regions.
The United States began using agricultural product subsidy tools in 1933. Over more than 80 years, its agricultural subsidy policy has continuously evolved, bypassing WTO rules on the one hand and balancing domestic and international price relationships on the other, ensuring the maximization of the price advantage of U.S. agricultural products in international trade. Specifically, U.S. agricultural subsidy policies are mainly divided into five categories: loan deficiency payments, direct income subsidies, counter-cyclical payments, resource conservation subsidies and agricultural product trade subsidies. In 2005, U.S. agricultural subsidies amounted to 25 billion U.S. dollars, an increase of 68% over 2001.
If subsidy amounts are compared, China does not spend little on grain subsidies and grain purchase and storage. Some statistics say that central government fiscal subsidies to agriculture now exceed 1 trillion yuan each year (including grain price subsidies), while the cost of grain purchase and storage also reaches several hundred billion yuan a year. Such high fiscal input, however, cannot bring a significant increase in farmers' income from agriculture, nor a smoothly operating agricultural product market. Why is this so? How should reform be carried out? These questions cannot be avoided.
Overall, for the reduction in farmers' income caused by falling grain prices, it is no longer possible to simply adjust subsidies as in the past. Instead, systematic reform centered on the price mechanism should be carried out. In our view, the core is to give play to the role of the market mechanism, adjust subsidy targets, increase direct subsidies to farmers, and increase farmers' income. In response to the severe distortion of grain market prices caused by China's market-support purchases, reform should be promoted to decouple the grain price formation mechanism from government subsidies. Under the premise of protecting farmers' interests, the policies of minimum purchase prices, temporary purchase and storage, and agricultural subsidies should be gradually transformed into a target price system for agricultural products.
The sharp drop in grain prices affecting farmers' income and consumption is only one manifestation of the problems in China's grain price policy. Around the grain price formation mechanism, China needs to prudently, systematically, but resolutely advance reform, using fiscal subsidies as an auxiliary means, to ultimately achieve the healthy operation and normal development of the grain market.