Where does the strange phenomenon of grain's "three quantities rising together" come from: price inversion and competition
In the past two years, a strange phenomenon has appeared in China's grain sector: annual grain output has remained stable at more than 600 million tons and increased year by year, but import volume has grown rapidly, while grain inventories have also continued to grow, with particularly severe backlogs of corn and other varieties. This "three quantities rising together" of grain production, imports and inventories is a new situation rarely seen in the past. So where are the reasons for the "three quantities rising together"? And how should this situation be resolved?
Chen Xiwen, director of the Office of the Central Rural Work Leading Group, said at the recently held "2015 China Rural Development High-level Forum" that China's grain is showing the strange phenomenon of production, imports and inventories "all rising together," and it is becoming increasingly severe. If allowed to develop unchecked, it will have an adverse impact on the healthy development of China's agriculture and the growth of farmers' incomes.
Strange phenomenon: importing while stockpiling
Why is the "three quantities rising together" a strange phenomenon? In a given period, a country's grain situation mainly depends on grain production capacity, inventory levels and import capacity. Generally speaking, when demand is basically fixed, if a country's grain output keeps growing, imports should not remain high; if imports keep growing, then inventories should not be backlogged, since there is no need to increase imports when inventories are high.
The facts are precisely unusual. In the past two years, China's annual grain output has remained stable at more than 600 million tons and increased year by year, but import volume has grown rapidly, and last year's annual grain imports exceeded 100 million tons for the first time. At the same time, grain inventories have continued to grow, with particularly severe backlogs of corn and other varieties, highlighting inventory pressure and tight warehouse capacity, while imports have continued to increase, creating the new problem of "importing while stockpiling."
Chen Xiwen believes that the asymmetric structure of production and consumption, namely the structural contradiction between the supply of and demand for agricultural products, is an important factor in the surge in imports. Last year, grain imports exceeded 100 million tons, but more than 70% of that was soybeans, with 71.4 million tons of soybeans imported for the year, up 12.7% year on year. Domestic soybean output was only just over 12 million tons, indicating that China's soybean production cannot meet domestic demand.
The "three quantities rising together" phenomenon is a new situation in recent years. Its emergence has a certain inevitability. Some domestically short varieties indeed need to be imported. In addition to soybeans, imports of some high-end quality rice, high-quality strong-gluten and weak-gluten wheat, and feed corn have met diverse domestic needs and are largely of a balancing-surplus-and-shortage nature. The main reason is still that competition in the international agricultural product market is becoming increasingly fierce, and China's agricultural competitiveness is not strong.
Chen Xiwen said that the domestic and international price gap for bulk agricultural products shows that the competitiveness of China's bulk agricultural products has clearly weakened. Data show that in June this year, the duty-paid price of imported Thai rice was 1.37 yuan per jin, and the domestic wholesale price of late indica rice was 51.8% higher. The wholesale price of domestic high-quality wheat was 1.55 yuan per jin, 56.6% higher than the international market; the domestic corn price was 1.24 yuan per jin, 65.3% higher than the imported corn price. Under such a price gap, grain processing and trading enterprises can profit from importing grain, so their motivation is naturally high.
Along with "importing while stockpiling" is the problem of "foreign goods entering the market while domestic goods enter warehouses," which is especially obvious with corn. According to UN Food and Agriculture Organization data, the U.S. export price of corn reached 324 U.S. dollars per ton in November 2012, but fell to 164 U.S. dollars by September 2014, a drop of nearly 50%. China's corn price, by contrast, remained relatively stable under the market-support policy. To protect farmers' interests, corn harvested by domestic farmers was purchased into state-owned grain depots at a temporary storage price higher than the market price. The state paid huge price differences and storage costs, while low-priced imported corn became raw material entering circulation and processing.
High inventories are directly related to the grain market-support purchase policy China has implemented since 2004, and also to China's long-standing relatively high grain reserve rate. Internationally, a reserve rate of 17% to 18% is taken as the safety warning line for the grain inventory-to-consumption ratio. Against this benchmark, China is now over-reserved. Ma Xiaohe, vice president of the Academy of Macroeconomic Research of the National Development and Reform Commission, believes that it is not the case that the more grain reserved the better, and the reserve volume should be reduced to a reasonable range. Given the slow reform of China's grain circulation system and the country's large size and population, the grain security reserve rate can be higher, but it is best not to exceed 30% of that year's social consumption.
New problem: price inversion and low competitiveness
So why are China's agricultural product prices higher than similar foreign products? Ke Bingsheng, president of China Agricultural University, believes that the important reason why domestic agricultural products are not competitive is high labor prices. International agricultural product prices can rise and fall because mechanization is relatively high and labor costs account for a relatively small share. He gave examples: "The harvesting cost of Guangxi sugarcane has already accounted for one-third of the sugar crop price, and for Xinjiang cotton, only the picking cost accounts for about 40% of the cotton price. These are all advantageous production areas for these agricultural products, yet all face the problem of excessively high labor costs." Data show that China's real wages have grown at an average annual rate of about 8% in recent years.
"Before 2005, Chinese agriculture was still very competitive, because in addition to low labor costs, the cost of leasing cultivated land was also relatively low." Huang Jikun, director of the Center for Chinese Agricultural Policy of the Chinese Academy of Sciences, said that from 2008 to 2013, farmland rents in Northeast China and North China increased by 51% and 70% respectively. Changes in materialized costs are global, but changes in labor and land costs are national, and will significantly affect a country's international market competitiveness in agricultural products.
Low agricultural labor productivity is another reason for price inversion. At present, the per-unit yield of China's main crops is close to or even exceeds the world's advanced level, while agricultural labor productivity is far below the world's advanced level, appearing "long in one leg and short in the other." A report by the China Center for Modernization Research of the Chinese Academy of Sciences shows that China's rice and wheat per-unit yields have reached the level of developed countries, and corn per-unit yield has reached the level of moderately developed countries, but China's agricultural labor productivity is only 47% of the world average. In recent years, it is precisely in varieties with low labor productivity such as cotton that China's imports have increased sharply.
For many years, although the state has taken many measures, agriculture has never emerged from the predicament of rising costs and declining benefits. At present, China's average tariff level on agricultural imports is only 15.2%, one quarter of the world average, making it one of the countries with the highest degree of agricultural openness. As China advances the building of free trade areas with New Zealand, Australia and others, the degree of agricultural openness will increase further. In the future, China will face competition not only from developed countries with abundant agricultural resources and a high level of agricultural modernization, but also from developing countries with obvious labor advantages.
China applies quota management to grain imports: wheat at 9.636 million tons, corn at 7.2 million tons, and rice at 5.32 million tons. The import tariff within the quota is only 1%, while outside the quota it is 65%. At present, grain imports are still within the tariff quota, but China is completely open to imports after the out-of-quota tariff is levied. If the tariff quota is breached and, after the 65% high tariff is levied, domestic and international agricultural product prices are still inverted, then it will bring consequences such as reduced enthusiasm among farmers for growing grain and the decline of the agricultural industry. According to expert estimates, based on current production costs and price trends, in another 5 to 7 years, imports of the three major grains at the out-of-quota tariff rate will become a reality.
Seeking countermeasures: expand scale and improve quality
"If there is no strong government support, the resource factors of agriculture will drain away." Chen Xiaohua, vice minister of agriculture, said, "In the past, our goal in supporting and protecting agriculture was to increase output. Now we should take changing the development model as the goal, and corresponding support policies should focus on how to improve comprehensive agricultural production capacity and how to achieve sustainable development, with more attention to quality and efficiency." Agriculture is China's strategic industry. No matter how tight fiscal resources are, it is necessary to ensure that agricultural input increases rather than decreases; it is necessary to improve the ways of supporting agriculture, make them more precise, targeted and guiding, and comprehensively use fiscal, financial and industrial policies to support China's agriculture in responding to international competition.
Experts believe that the urgent task is to comprehensively use means such as quota management, trade remedies, controls on the use of imported products, inspection and quarantine, and "green box" subsidies to prevent the negative effects of price inversion from further expanding, and to hold the three bottom lines of farmers' incomes, staple grain production capacity, and the supply of important agricultural products. In the long run, the fundamental way to safeguard national grain security is to enhance potential production capacity. This requires, on the basis of continuing to uphold the previously emphasized "sticking to the cultivated land red line, advancing high-standard farmland construction, and accelerating scientific and technological innovation," developing appropriately scaled operations and grain industrialization. In the future, the focus of benefit adjustment should shift toward new agricultural operating entities and major grain-producing areas.
At present, China should cultivate new types of entities, improve service systems, and accelerate the development of appropriately scaled operations. Many problems in agriculture are related to the small and scattered scale of operations, which requires cultivating new types of operating entities and developing agriculture with modern industrial concepts. There are still more than 240 million small farmers nationwide, and conditions vary greatly from place to place, with different development foundations, so promoting innovation in agricultural operation methods must be adapted to local conditions. Experts suggest actively guiding land transfer and guiding and supporting the growth of large planting and breeding households, family farms, farmer cooperatives, leading enterprises and other entities; improving the agricultural social service system, and compensating for the insufficiency of land operation scale by expanding service scale.
Most major grain-producing counties are fiscally small counties, and the state should increase support. At present, relevant departments are studying and improving the benefit compensation mechanism for major grain-producing counties, with the goal of ensuring that major grain-producing areas do not lose out by growing grain and that places that value agriculture and grain have motivation. In the future, fiscal rewards and subsidies to major grain-producing provinces and counties should be increased, the fiscal burden on major producing areas should be reduced, commercial grain transferred out of major producing areas should be compensated, agricultural infrastructure construction in major producing areas should be strengthened, and a benefit linkage mechanism between major producing areas and major sales areas should be established.