Corn Purchasing and Storage Policy Loosens After 8 Years, New Wording for Price Reform
On October 15, the government issued the "Several Opinions of the Central Committee of the Communist Party of China and the State Council on Advancing Price Mechanism Reform" (hereinafter referred to as the "Opinions"), to accelerate the improvement of a price mechanism mainly determined by the market. The "Opinions" pointed out that the price mechanism is the core of the market mechanism, and market-determined pricing is the key to the market playing a decisive role in resource allocation.
In the field of agricultural products, it is necessary to “improve the price formation mechanism” and “focus on giving play to the role of the market in price formation, with the prices of agricultural products mainly determined by the market.”
Corn, which has been subject to the temporary purchasing and storage policy since 2008, after the reduction of the purchasing and storage price in September this year, and now with the "Opinions" stipulating “reform and improve the corn purchasing and storage system”, is seen as standing at the forefront of the queue for adjustment of the temporary storage policy, as corn is still included in the grain statistical scope.
Corn Joins the Queue for Adjustment of the Temporary Storage Policy
At the beginning of this year, the National Development and Reform Commission issued a notice stating that the purchase price of tobacco leaves would be liberalized. Since the tobacco leaf purchase price was the last variety in the agricultural product field subject to government pricing, this move meant that after 38 years, the path of national agricultural product price reform that began in 1978 had seen government pricing of agricultural products completely exit the stage of history.
At present, the government mainly guides the reasonable formation of prices through minimum purchase prices, target prices, and other methods, protects the interests of agricultural producers, safeguards national food security, and promotes the sustained and healthy development of the agricultural industrial chain.
The "Opinions" mentioned continuing to implement and improve the minimum purchase price policy for rice and wheat. However, the temporary purchasing and storage policy for corn, which is still included in the grain statistical scope, has now become “reform and improve the corn purchasing and storage system.” This move is seen as a further loosening of the corn purchasing and storage system.
The reduction of the corn purchasing and storage price in September this year already signified a policy adjustment. Although the official notice continued the temporary corn purchasing and storage policy in the three northeastern provinces and Inner Mongolia in 2015, the listed purchase price for temporarily stored corn had already been lowered, set at 1 yuan per jin (national standard third-class quality standard), a reduction of 11.5% compared with the highest level in Inner Mongolia and Liaoning in 2014 of 1.13 yuan/jin.
The minimum purchase price policy began in 2004 and has now been implemented for 11 years. The motive for implementing this policy stemmed from consecutive years of bumper grain harvests, with grain prices facing greater downward pressure. To avoid repeating the old path of “cheap grain hurting farmers,” the state decided to implement the minimum purchase price policy plan. Starting in 2004 and 2006, the main production areas began implementing the minimum purchase price system for rice and wheat respectively. As for the temporary purchasing and storage policy, by this year it had also been “temporary” for 8 years. Since 2008, corn, soybeans, rapeseed, sugar, and others also successively began implementing the temporary purchasing and storage policy. In 2011, the temporary purchasing and storage system for cotton was established.
These two systems, established against the background of domestic agricultural product prices being lower than international prices at the time, are said by industry insiders to have significant limitations in both concept and operation today. The price formation mechanism for agricultural products is distorted, and the role of the market has not been effectively brought into play. Price support policies centered on these two policies have been implemented for many years, and all parties in the market have become increasingly dependent on the policy path. Since the launch of temporary purchasing and storage, purchasing and storage prices have shown a steady upward trend, expectations of “rising but never falling” have strengthened, and the grain market has shown a trend toward “policyization.”
Taking corn as an example, its purchasing and storage price has risen from 1500 yuan/ton in 2008 to 2200 yuan/ton in 2014. If the market-supporting purchase policy continues to be implemented, corn inventories will remain persistently high, bringing not only pressure on storage capacity but, more importantly, a serious burden on public finances.
In addition, domestic and international agricultural product prices are inverted, and import pressure is increasing day by day. Since the implementation of these two policies, the prices of major domestic agricultural products such as rice, wheat, corn, soybeans, and cotton have all approached or exceeded international market prices. If domestic prices continue to rise in the future, the domestic-international price inversion may further expand. For some agricultural products, such as corn, cotton, and sugar, an unfavorable situation has already formed: “domestic production increases — state reserves increase — imports increase — state reserves increase again.” Implementing this policy has both increased the fiscal burden and affected the effectiveness of policy implementation.
Tentative and Phased Policy Reform and Adjustment
If past policy implementation had its historical background and original intentions, then the policies that brought China's total grain output to “eleven consecutive increases” are now gradually revealing a series of new problems and new contradictions. Especially under the new situation in which important changes have occurred in the domestic and international environment, existing support policies are facing increasingly severe challenges.
As the "Opinions" mentioned, “highlight key points, retain what should be retained and release what should be released,” and based on China's national conditions, implement differentiated support policies for different varieties. Choosing corn as the breakthrough point for reforming the temporary purchasing and storage policy demonstrates the government's will to ensure food security and the state's determination to protect staple grains.
Rice and wheat are traditional staple foods, and there is no doubt about this. But although corn is still included in the staple food statistical scope, it has a long industrial chain and, in addition to being eaten, can also be used for feed and industrial processing. With the advancement of urbanization, residents' demand for meat is growing, and corn's role as industrial grain is becoming increasingly obvious.
From the government's decision in 2014 to pilot target price reform for cotton and soybeans in some regions, to the temporary purchasing and storage policy for rapeseed beginning to shift this year, and now to corn joining this ranks. Considering that the market has already formed path dependence on the policy, if it is no longer implemented, it may cause market turmoil. Industry insiders say that China's replacement of such policies cannot be rapid, and is more likely to be tentative and phased follow-up, so it is considering starting by lowering the temporary purchasing and storage price to reduce market expectations.
The "Opinions" mentioned continuing to implement the pilot reform of target prices for cotton and soybeans, and improving the subsidy distribution method.
The so-called target price subsidy means that the government determines in advance a target price for an agricultural product. When the actual market price of that agricultural product is lower than the target price, the government subsidizes producers according to the difference between the two, ensuring their basic income; if the actual market price of that agricultural product is higher than the target price, there is no need to launch the target price subsidy policy.
This policy, implemented for more than a year, has decoupled the price formation of agricultural products from government subsidies. In terms of policy operation, it can both mobilize farmers' enthusiasm for production and effectively guarantee producers' basic income, and also give play to the important role of the market in regulating the supply and demand of agricultural products, reduce market distortions, curb the momentum of excessive development of agricultural resources, and mobilize the enthusiasm of various market entities, reducing pressure on government purchasing and storage. Therefore, it has gained recognition from multiple parties and is also regarded as the basic direction for future adjustment of China's agricultural product support and subsidy policies.
Clues can also be seen from a document previously published by the Ministry of Agriculture. In a document published by the Ministry of Agriculture titled "Summary of Replies to Recommendation No. 1480 of the Third Session of the Twelfth National People's Congress," it was clearly proposed that for varieties such as corn, soybeans, cotton, and rapeseed that have large demand elasticity, long industrial chains, and a high degree of linkage with domestic and international markets, attention should be paid to giving play to the decisive role of the market in price formation, guiding production through market price signals, regulating supply and demand, and promoting the sustained and healthy development of the industry. This means that, in addition to the already piloted cotton and soybeans, corn and rapeseed prices will also bid farewell to the temporary purchasing and storage policy and move toward a structure in which prices are decided by the market.