Grain prices too low hurt farmers again, with low grain prices and piled-up stockpiles the main causes
China had a bumper grain harvest this year, but farmers are hardly happy, because the sharp drop in grain prices could send their incomes plunging. Since the start of autumn, corn and wheat prices in the main grain-producing areas have all fallen to varying degrees. The drop in corn prices has been especially pronounced, with farm-gate prices falling by an average of
China had a bumper grain harvest this year, but farmers are hardly happy, because the sharp drop in grain prices could send their incomes plunging. Since the start of autumn, corn and wheat prices in the main grain-producing areas have all fallen to varying degrees. The drop in corn prices has been especially pronounced, with farm-gate prices falling by an average of more than 20% and the steepest decline reaching 30% compared with last year, while wheat also went through a cliff-edge plunge before National Day. At present, rice purchase prices are broadly stable, but some areas have also seen small declines compared with previous years. The fall in grain prices has dealt a considerable blow to the grain trading sector, and according to media reports, markets in some areas have fallen into a severe atmosphere of panic.
Some market analysts say it is rare for all three major staple grains to slump across the board in previous years, and the low international grain prices together with domestic stockpile backlogs are both seen as the main causes of this round of grain price declines. The reappearance of the phenomena of “higher output without higher income” and “grain prices too low hurt farmers” in the grain market this year will bring multi-faceted impacts that deserve particular attention.
First, the sharp fall in grain prices directly affects the incomes of hundreds of millions of farmers, and some estimates say this year's grain price slump could lead to negative income growth on the order of hundreds of billions, which has a direct bearing on China's effort to achieve moderate prosperity in all respects. Second, the reduction in farmers' incomes brought about by the sharp fall in grain prices will not only affect the consumer market. Third, the sharp fall in grain prices will dampen farmers' enthusiasm for growing grain and could trigger grain price fluctuations the following year.
In this situation, how China's grain price policy should act requires caution above all. In the view of our research team, although the sharp fall in grain prices this year has hit the market, with the low international grain prices and domestic stockpile backlogs serving as “incidental factors,” the flaws in the domestic grain purchase and subsidy policy system may be an institutional cause that cannot be ignored.
China fully liberalized the grain purchase market and purchase prices starting in 2004, with grain prices formed by the market. After grain prices were liberalized, in order to protect farmers' interests and their enthusiasm for growing grain, the state began in 2004 and 2006 to implement a minimum purchase price policy (that is, the “market-support price”) in the main producing areas for two key grain varieties, rice and wheat. Each year the state comprehensively takes into account factors such as grain costs and returns, supply and demand, market prices and macroeconomic regulation to determine the minimum purchase price levels for each variety of wheat and rice, and announces them to the public before the crops are sown, guiding farmers' planting and promoting grain production. After the new grain comes onto the market, farmers sell their grain at market prices, and when market prices in the main producing areas fall considerably 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 recover reasonably. Since 2008, the state has raised the minimum purchase prices for grain for six consecutive years, and in 2013 the minimum purchase prices for rice and wheat were raised to 1.39 yuan and 1.12 yuan per jin respectively, increases of 92% and 57% over the six years.
From actual implementation, although the market-support purchase policy has protected farmers' interests, it requires the payment of subsidies (indirectly subsidized by the government to state-owned purchasing and marketing enterprises), and the direct consequence of this disguised price subsidy policy is that it raises the market price of grain sales and distorts market-determined prices. Under this price distortion, first, the cost of subsidies is high, with large amounts of state fiscal subsidies flowing into purchasing enterprises and the reserve stage, and farmers benefiting little directly; second, it raises the processing costs of the midstream and downstream grain industries, making it impossible to optimize resource allocation through market-based means, dragging down the entire midstream and downstream industry, directly blocking the smooth flow of the entire agricultural industry chain and affecting the healthy operation of the agricultural industry.
For example, in Heilongjiang Province, chaotic grain subsidies caused more than a thousand unsubsidized grain enterprises to halt production this year, with large quantities of grain continuously purchased from farmers into state reserve warehouses by state-owned enterprises at the higher subsidized prices, but processing enterprises unable to obtain raw grain at reasonable prices; Sinograin's warehouses were overflowing with grain, and the 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 halted production. In Jilin Province, a major corn-producing province, the leading private corn processing enterprise Dacheng Biochemical was recently forced to halt production and had to be taken over by a local state-owned enterprise with a government background, which also reflects the influence of the price subsidy policy.
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: the target price, the intervention price and the threshold price. Direct agricultural subsidies provide direct monetary subsidies according to the unit output of each different region.
The United States began using agricultural product subsidy tools in 1933, and over more than 80 years its agricultural subsidy policy has continuously evolved, on the one hand bypassing WTO[Weibo] rules and on the other balancing domestic and international price relationships to ensure the maximization of the price advantage of US agricultural products in international trade. Specifically, US agricultural subsidy policy is mainly divided into five major categories: loan deficiency payments, direct income subsidies, counter-cyclical payments, resource conservation subsidies and agricultural product trade subsidies. In 2005, US agricultural subsidies amounted to 25 billion US dollars, an increase of 68% over 2001.
If subsidy amounts are compared, China does not spend little on grain subsidies and purchasing and storage. Some statistics say that the central government's annual fiscal subsidies to agriculture now exceed 1 trillion yuan (including grain price subsidies), while the cost of grain purchasing and storage also reaches several hundred billion yuan a year. With such high fiscal input, yet it cannot bring a significant increase in farmers' income from agriculture, nor a smoothly operating agricultural product market. Why is this so? How should reform proceed? These questions cannot be avoided.
Overall, for the reduction in farmers' incomes caused by falling grain prices, we can no longer simply adjust subsidies in the old way and let the matter rest; 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 the targets of subsidies, increase direct subsidies to farmers and increase farmers' incomes. In response to the severe distortion of grain market prices caused by China's market-support purchasing, reform should be promoted to decouple the grain price formation mechanism from government subsidies, and, on the premise of protecting farmers' interests, the minimum purchase price, temporary purchasing and storage, and agricultural subsidy policies should be gradually shifted toward a target price system for agricultural products.
The sharp fall in grain prices affecting farmers' incomes and consumption is only one manifestation of the problems in China's grain price policy. Around the grain price formation mechanism, China needs to advance reform cautiously, systematically, but resolutely, using fiscal subsidies as an auxiliary means, to ultimately achieve the healthy operation and normal development of the grain market.
Some market analysts say it is rare for all three major staple grains to slump across the board in previous years, and the low international grain prices together with domestic stockpile backlogs are both seen as the main causes of this round of grain price declines. The reappearance of the phenomena of “higher output without higher income” and “grain prices too low hurt farmers” in the grain market this year will bring multi-faceted impacts that deserve particular attention.
First, the sharp fall in grain prices directly affects the incomes of hundreds of millions of farmers, and some estimates say this year's grain price slump could lead to negative income growth on the order of hundreds of billions, which has a direct bearing on China's effort to achieve moderate prosperity in all respects. Second, the reduction in farmers' incomes brought about by the sharp fall in grain prices will not only affect the consumer market. Third, the sharp fall in grain prices will dampen farmers' enthusiasm for growing grain and could trigger grain price fluctuations the following year.
In this situation, how China's grain price policy should act requires caution above all. In the view of our research team, although the sharp fall in grain prices this year has hit the market, with the low international grain prices and domestic stockpile backlogs serving as “incidental factors,” the flaws in the domestic grain purchase and subsidy policy system may be an institutional cause that cannot be ignored.
China fully liberalized the grain purchase market and purchase prices starting in 2004, with grain prices formed by the market. After grain prices were liberalized, in order to protect farmers' interests and their enthusiasm for growing grain, the state began in 2004 and 2006 to implement a minimum purchase price policy (that is, the “market-support price”) in the main producing areas for two key grain varieties, rice and wheat. Each year the state comprehensively takes into account factors such as grain costs and returns, supply and demand, market prices and macroeconomic regulation to determine the minimum purchase price levels for each variety of wheat and rice, and announces them to the public before the crops are sown, guiding farmers' planting and promoting grain production. After the new grain comes onto the market, farmers sell their grain at market prices, and when market prices in the main producing areas fall considerably 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 recover reasonably. Since 2008, the state has raised the minimum purchase prices for grain for six consecutive years, and in 2013 the minimum purchase prices for rice and wheat were raised to 1.39 yuan and 1.12 yuan per jin respectively, increases of 92% and 57% over the six years.
From actual implementation, although the market-support purchase policy has protected farmers' interests, it requires the payment of subsidies (indirectly subsidized by the government to state-owned purchasing and marketing enterprises), and the direct consequence of this disguised price subsidy policy is that it raises the market price of grain sales and distorts market-determined prices. Under this price distortion, first, the cost of subsidies is high, with large amounts of state fiscal subsidies flowing into purchasing enterprises and the reserve stage, and farmers benefiting little directly; second, it raises the processing costs of the midstream and downstream grain industries, making it impossible to optimize resource allocation through market-based means, dragging down the entire midstream and downstream industry, directly blocking the smooth flow of the entire agricultural industry chain and affecting the healthy operation of the agricultural industry.
For example, in Heilongjiang Province, chaotic grain subsidies caused more than a thousand unsubsidized grain enterprises to halt production this year, with large quantities of grain continuously purchased from farmers into state reserve warehouses by state-owned enterprises at the higher subsidized prices, but processing enterprises unable to obtain raw grain at reasonable prices; Sinograin's warehouses were overflowing with grain, and the 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 halted production. In Jilin Province, a major corn-producing province, the leading private corn processing enterprise Dacheng Biochemical was recently forced to halt production and had to be taken over by a local state-owned enterprise with a government background, which also reflects the influence of the price subsidy policy.
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: the target price, the intervention price and the threshold price. Direct agricultural subsidies provide direct monetary subsidies according to the unit output of each different region.
The United States began using agricultural product subsidy tools in 1933, and over more than 80 years its agricultural subsidy policy has continuously evolved, on the one hand bypassing WTO[Weibo] rules and on the other balancing domestic and international price relationships to ensure the maximization of the price advantage of US agricultural products in international trade. Specifically, US agricultural subsidy policy is mainly divided into five major categories: loan deficiency payments, direct income subsidies, counter-cyclical payments, resource conservation subsidies and agricultural product trade subsidies. In 2005, US agricultural subsidies amounted to 25 billion US dollars, an increase of 68% over 2001.
If subsidy amounts are compared, China does not spend little on grain subsidies and purchasing and storage. Some statistics say that the central government's annual fiscal subsidies to agriculture now exceed 1 trillion yuan (including grain price subsidies), while the cost of grain purchasing and storage also reaches several hundred billion yuan a year. With such high fiscal input, yet it cannot bring a significant increase in farmers' income from agriculture, nor a smoothly operating agricultural product market. Why is this so? How should reform proceed? These questions cannot be avoided.
Overall, for the reduction in farmers' incomes caused by falling grain prices, we can no longer simply adjust subsidies in the old way and let the matter rest; 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 the targets of subsidies, increase direct subsidies to farmers and increase farmers' incomes. In response to the severe distortion of grain market prices caused by China's market-support purchasing, reform should be promoted to decouple the grain price formation mechanism from government subsidies, and, on the premise of protecting farmers' interests, the minimum purchase price, temporary purchasing and storage, and agricultural subsidy policies should be gradually shifted toward a target price system for agricultural products.
The sharp fall in grain prices affecting farmers' incomes and consumption is only one manifestation of the problems in China's grain price policy. Around the grain price formation mechanism, China needs to advance reform cautiously, systematically, but resolutely, using fiscal subsidies as an auxiliary means, to ultimately achieve the healthy operation and normal development of the grain market.