China's dairy industry has entered a critical period of life and death
The "2015 Fourth China International Agricultural Business Summit Forum" was held in Beijing on May 17. Han Jun, deputy director of the Office of the Central Leading Group for Financial and Economic Affairs, said in his speech that domestic agricultural product prices have now comprehensively approached, and even exceeded, international agricultural product prices. The landed prices of many international grains are still cheaper than domestic ones. Because some varieties are subject to tariff quota restrictions, there is no need in the next three to five years to worry too much about cheap foreign grain hitting the Chinese market.
But he warned that China's soybean self-sufficiency rate is now only about 18%. "The policy goal we have now set is that grains should be basically self-sufficient. In the past it was called basic self-sufficiency in food, and food includes soybeans. There is no way for soybeans to be basically self-sufficient anymore. Staple rations are mainly wheat and rice, and they must be absolutely secure."
As for why the goal of basic self-sufficiency in grains must be upheld, Han Jun gave three reasons. First, it is determined by China's national conditions. China has a population of 1.3 billion, and its annual grain demand is twice the volume of global grain trade. If China abandoned the goal of basic grain self-sufficiency, the impact on the world would be very large, and the impact on global resource allocation would be very large. Second, rural China still has more than 600 million people, and 200 million people grow grain. Farmers' livelihoods cannot be separated from grain. The grain issue is to a large extent an issue of farmers' employment and livelihoods. Third, as a major country of 1.3 billion people, if China abandoned the goal of basing itself domestically and achieving grain self-sufficiency, it would be irresponsible to the world. Conversely, if China solves the food security problem of 1.3 billion people well, it will have made a huge contribution to global food security.
On the dairy industry, Han Jun further said that it has now reached a life-and-death moment. "Especially after being hit by melamine, the shadow has not completely dispersed. The EU announced this year that it will abolish the milk production quota management that had been implemented for 31 years, mainly to respond to the markets of emerging countries, especially China's market."
On the issue of agricultural subsidies, Han Jun said that although some programs have already reached the yellow line stipulated by the WTO, there is still great room for policy adjustment. On environmental issues, Han Jun said that the red light has already been lit. We must shift to a track that places equal emphasis on quantity, quality and efficiency.
The following is a partial transcript of the speech:
Han Jun: Today's theme is very good, opening a new era of modern agriculture. Our agricultural development faces many new challenges. In China, we always consider agricultural issues, rural issues and farmers' issues together. Agricultural issues are not like industrial issues or commercial issues. Industrial issues and commercial issues may mainly be issues of industrial development, but agricultural issues in China are not only an industrial issue, but even more a farmer issue. Any agricultural policy of ours must consider its impact on farmers, on farmers' employment, and on farmers' welfare. Our agriculture has indeed now entered a new stage and faces many severe challenges.
General Secretary Xi Jinping has proposed that for China to be strong, agriculture must be strong; for China to be beautiful, rural areas must be beautiful; for China to be prosperous, farmers must be prosperous. This is the most basic guideline for formulating our policies on agriculture, rural areas and farmers. Now, when discussing a new era of modern agriculture, from China's perspective, the new stage of agricultural development faces two of the most severe challenges when policies are being formulated:
Challenge one: our resource and environmental constraints have already reached their limit. Against this background, how can we ensure our country's food security, and especially how can we improve agriculture's capacity for sustainable development? This is a question we cannot avoid.
Challenge two: domestic agricultural product prices have now comprehensively approached, and even exceeded, international agricultural product prices. Against this background, does Chinese agriculture still have competitiveness? This is also a question we must answer.
Dairy industry development is at a life-and-death moment
The problem we now face is that the impact of imports on the domestic market is difficult to avoid. Grains are still somewhat better off because of tariff quota management, but products without tariff quota management now have more prominent problems. The development of the dairy industry is now at a life-and-death moment. Especially after being hit by melamine, the shadow has not completely dispersed. The EU announced this year that it will abolish the milk production quota management that had been implemented for 31 years, mainly to respond to the markets of emerging countries, especially China's market. In recent years, because China and New Zealand signed a free trade agreement, New Zealand's share of the global dairy product market has already reached 37%, while the EU has only 31%. The EU's abolition of quota management is also aimed at the Chinese market and the markets of emerging countries, so that it can increase its market share. The price ceiling effect is a hurdle, and we must get over this hurdle.
China's soybean self-sufficiency rate is only about 18%
Next I can first introduce the situation to everyone. First is the ceiling effect on agricultural product prices. We must now face this. This is data as of the end of March. Regarding some price gaps for corn, soybeans, wheat and rice, after taxes are levied on international grain at the border, the landed prices are much cheaper than ours. Soybeans are now no longer subject to tariff quota restrictions, and large quantities have already come in. But corn, wheat and rice are subject to tariff quota restrictions. Within the quota, tariffs are very low, but outside the quota, tariffs are very high. In the next three to five years, we still do not need to worry too much about cheap foreign grains hitting the Chinese market, because it is now very difficult for them to enter outside the tariff quota. Last year our grain self-sufficiency rate was still above 98%, and the soybean self-sufficiency rate is now only about 18%.
What may now be an even more severe situation is oilseed crops and sugar crops. In April, sugar imported within the tariff quota was quite cheap. Outside the quota we levied a 50% tariff, and foreign imported sugar was still 500 yuan cheaper per ton than ours. There is no way around it. It will enter if it should enter. This is completely a market behavior. The impact now facing our dairy industry is very large. It is reported that in the United States the purchase price of one kilogram of fresh milk is about 2 yuan, in Australia and New Zealand about 2.6 yuan per kilogram, and in China the cost price of one kilogram of fresh milk for farmers is now 3.7 yuan. If it is lower than 3.7 yuan, farmers may have no profit to make. It has now been below this price for 16 consecutive weeks. Our production cost for one ton of raw milk powder is more than 10,000 yuan higher than abroad.
Last year we only imported more than 8 million tons of grain, which means our grain self-sufficiency rate is still above 98%. Now there are more and more products replacing corn. Because corn imports are subject to tariff quota restrictions, in order to bypass the tariff quota restrictions, imports of barley, sorghum and corn distillers grains have grown explosively in the past two years. Barley used to be used for beer, but now half of barley is used for feed. In the first quarter we imported 2.6 to 2.7 million tons of sorghum and barley. Last year alone, imports of these products replaced at least 10 million tons of corn. Corn inventories have risen sharply in the past two years.
There is now a lot of discussion about why China imports soybeans and whether it can produce them itself. If we wanted to produce them ourselves, we probably would not have that much resources. One of the most realistic problems China faces is that we lack both edible vegetable oil and feed protein. Importing soybeans is on the one hand to meet ordinary people's demand for vegetable oil, and on the other hand to meet the development of modern animal husbandry and its demand for high-quality protein feed.
When it comes to agriculture, for a country as large as China, food security is a question we cannot bypass and must answer. Since reform and opening up, there have been many international evaluation index systems for food security. In recent years, the Economist Intelligence Unit of the United Kingdom has released a global food security knowledge report, and China has ranked very high every year. Relative to our per capita GDP and level of economic development, our food security index is still very high, ranking 42nd among 107 countries. In my impression, India is about 43rd.
There is great room for adjustment of agricultural subsidies
The second issue is the cost of our agricultural production, which we call the floor. Its upward squeeze is becoming more and more obvious. This is very clear. In the past, farmers did not count the cost of labor when farming. Now the cost of labor is getting higher and higher, and inputs of modern factors such as agricultural machinery and chemical fertilizers are increasing. The cost of agricultural production is still on a rapidly rising track.
The third issue is agricultural subsidies, which we call the yellow line. When we joined the WTO, we stipulated some measures related to tariff quota management and also promised limits on agricultural subsidies. When we joined the WTO, we promised that subsidies could not exceed 8.5% of agricultural output value, that is, there are limits on government subsidies that distort production and trade. Now some of our products have already exceeded the yellow line limit, but with this yellow line we still have a great deal of room for regulation. For example, in recent years the EU adjusted its yellow line agricultural subsidies from 70 billion euros to 7 billion euros. We are also studying the EU's experience. For example, this year we have had a major policy adjustment. We adjusted our agricultural subsidies (grain planting subsidies and comprehensive subsidies for agricultural inputs). After the adjustment, we can turn the more than 100 billion in comprehensive subsidies for agricultural production inputs, which used to belong to yellow line subsidies, into green box subsidies by decoupling the subsidies from input prices. This issue is a potential challenge. For policy making, we have a great deal of room. Our yellow line is still far from being used up, and in the future the room for turning yellow line subsidies into green box subsidies will still be very large.
Environmental problems have already shown a red light
The biggest problem is resources. The red light on the environment has already begun to light up. In some respects resource and environmental constraints have reached their limit. What everyone is most concerned about is the problem of chemical fertilizers, pesticides and plastic film. Our fertilizer use per hectare is among the highest in the world. For example, on the issue of plastic film, the land using film in the Xinjiang autonomous region alone has reached 4.7 million mu. Most of this film is non-degradable. Now the residue in one mu of land in Xinjiang has already reached 16.5 kilograms. The national average is much lower. How can we now replace the current non-degradable film with degradable film? This is a major topic in our agricultural environmental governance.
One hurdle Chinese agriculture must now pass is this: if we want to open a new era of modern agricultural development, we must transform the agricultural development model. For a long time, to some extent, we relied on resources and environmental factors, mainly pursuing output growth. Now we must shift to a track that places equal emphasis on quantity, quality and efficiency. This year's Central Document No. 1 clearly proposed paying more attention to improving agriculture's international competitiveness, paying attention to agricultural technological innovation, and paying more attention to agriculture's sustainable development. Transforming the agricultural development model means shifting agricultural development to the "three equal emphases" (quantity, quality and efficiency).
In answering this question, transforming the agricultural development model does not mean sacrificing China's food security. The complete policy formulation of our food security has three layers of meaning:
The first layer of meaning stresses that we must rely mainly on ourselves, base ourselves on the domestic market, and ensure production capacity. The core is to ensure production capacity.
The second layer of meaning is moderate imports. We have things to protect, things to relax and things to control. Because our resource endowment has no comparative advantage at all, we still need to appropriately import a portion of grain and other products.
The third layer of meaning is that ensuring national food security must be supported by science and technology.
China's achievement of basic grain self-sufficiency is being responsible to the world
The policy goal we have now set is that grains should be basically self-sufficient. In the past it was called basic self-sufficiency in food, and food includes soybeans. There is no way for soybeans to be basically self-sufficient anymore. Staple rations are mainly wheat and rice, and they must be absolutely secure.
Now some people say that foreign grain is very cheap, so why not import it? Agricultural issues and grain issues are essentially farmer issues. We often say that farmers earn only a few dozen yuan from one mu of grain, but if you go to farmers and do the accounts, farmers will tell you that I can now earn 700 to 800 yuan from one mu of grain. Farmers' cash income from growing one mu of grain is now about 754 yuan, rice is 939 yuan, wheat is 576 yuan, corn is 794 yuan, and soybeans are only 476 yuan. Now fewer and fewer farmers in Northeast China grow soybeans.
When farmers calculate how much they earn, they do not count their labor, and rural areas also do not count how much rent one mu of land costs, because it is their own land. But when we calculate costs, even if it is your own land, we still calculate rent for you. It is the same in the United States. When we live in our own house and calculate the cost of living for you, we also simulate for you how much it would cost if you rented a house.
First, why did Chinese leaders propose that the rice bowl must be firmly held in our own hands? When this statement is brought internationally and discussed with many economists and many foreign policy makers, they very much agree with China's proposal of such a policy goal. First, it is determined by China's special national conditions. A major country with 1.3 billion people will eventually have a peak population of more than 1.4 billion. Our annual demand is twice the volume of global grain trade. There is no doubt that if China abandoned the goal of basic grain self-sufficiency, the impact on the world would be very large, and the impact on global resource allocation would be very large.
Second, and most core, rural China now still has more than 600 million people, and 200 million people grow grain. Farmers' livelihoods cannot be separated from grain, and they can still earn 800 to 900 yuan from farming. Now foreign grain is cheap, and whoever is cheap, we buy from them. But there are two preconditions: our urbanization must be able to absorb these farmers. These farmers are farmers of the 1950s, 1960s and 1970s, all elderly, more than half are women, and 70% have only an elementary school education. Can our cities absorb them? When we analyze labor, we should not regard every laborer as homogeneous. Labor is not homogeneous. Many of the laborers remaining in rural areas now have no way to go to cities. If we want to import cheap foreign grain and abolish this set of tariff quota management, the precondition is whether our farmers can get out. It is impossible to send our farmers abroad. The grain issue is to a large extent an issue of farmers' employment and livelihoods.
Third, as a major country of 1.3 billion people, if China abandoned the goal of basing itself domestically and achieving grain self-sufficiency, then toward the world, as many economists say, especially some politicians and decision makers in developing countries, including officials of the UN Food and Agriculture Organization, have repeatedly said, this would be irresponsible to the world. Conversely, if China solves the food security problem of our 1.3 billion people well, it will be a huge contribution to global food security.
We must accelerate the building of a system for sustainable agricultural development. Our policy goals are very clear, and our policy tools are also gradually being improved. The State Council has already approved the plan for sustainable agricultural development led by the Ministry of Agriculture. In this plan, some systematic policies have been proposed for how agriculture can build a modern sustainable agricultural industrial system and how to solve prominent problems facing the agricultural environment. For example, total water use has already reached its peak, and total water use must now decrease year by year. Chemical fertilizer and pesticide use must achieve zero growth in the next five years. The resource utilization of straw must be greatly advanced. The central finance has already supported, for example, fallow and rest in Hunan for cultivated land polluted by heavy metals, and in Hebei, central finance supports comprehensive treatment in areas with groundwater overexploitation. In short, agricultural development must shift to the track of resource conservation, environmental effectiveness and circular development.
Promote deep adjustment of agriculture
Now, in transforming the agricultural development model, from a policy perspective, we must do a major piece of work well: promote deep adjustment of the agricultural structure. This topic is very closely related to our business community. The adjustment of the agricultural structure is not about planting more vegetables or more flowers. Now we need to advance in depth and in breadth, extend the agricultural industrial chain, develop agriculture's multiple functions, develop many new agricultural business forms, and tap agriculture's potential value to the maximum extent. One new formulation we now have is to promote the integrated development of the primary, secondary and tertiary industries. Agriculture is the primary industry. The biggest characteristic of the agricultural industry is that it cannot be separated from the secondary and tertiary industries. This is called connecting the second and linking the third. Agricultural products need processing, and agriculture is also linked with many service industries. In Japan and South Korea there is a new formulation called the sixth industry. Agriculture is the sixth industry, which gives agriculture a comprehensive character.
This year's Central Document No. 1 proposed, and especially stressed, that we should tap the value of rural ecological leisure, tourism and sightseeing, and cultural education, and closely combine agriculture with tourism and leisure and cultural inheritance. Not long ago I met an official from Japan's Ministry of Agriculture, Forestry and Fisheries. He told me a story. After an Australian minister toured all 46 prefectures in Japan, he highly recognized Japan's proposal of agriculture's multifunctionality, because in East Asian economies (including China) agriculture has a very strong function of cultural inheritance. This is true of any country. In recent years, agriculture's multifunctionality has gained increasing global recognition.
There is no relationship of trust between the secondary and tertiary industries and farmers
The prominent problem now facing Chinese agriculture is that, at the core, through the integrated development of the primary, secondary and tertiary industries, we need to build a new agricultural industrial chain. The biggest problem with our current industrial chain is that the relationship between these secondary and tertiary industries and farmers is basically one of two separate skins. There are no long-term contracts, no loyalty and no trust. For example, the relationship between our dairy product enterprises and the farmers raising dairy cows is one of two separate skins, and a truly cooperative supply chain has not been established. The World Bank divides agricultural supply chains into three types (traditional and integrated supply chains). If you raise dairy cows yourself and make fresh milk and milk powder yourself, that is called an integrated supply chain. Cooperative supply chains are very common globally (especially in developed countries). Producers, intermediaries, processors and purchasers have long-term contracts, trust, stable relationships and common interests. In this way, to ensure the quality and safety of agricultural products, costs will be much lower.
The current rate of agricultural land transfer has already reached as high as 30%
When it comes to the issue of large-scale land operation, the most fundamental theoretical basis for formulating our policies on agriculture, rural areas and farmers is the implementation of the separation of three rights in rural land. Ownership must be clearly defined as belonging to the farmers' collective and owned by the members of the farmers' collective. We must legally define clearly who is a member of the collective. We must stabilize farmers' land contract rights. Only members of the collective may contract collective land. Industrial and commercial capital is a leasing relationship, not a contracting relationship. Under such a premise, we must invigorate the management rights of rural land. Moderate scale operation of land is an inevitable trend in China's agricultural development. This process is advancing independently of human will. Our current land transfer rate, the land contracted by farmers, has now reached as high as 30%, but it is still mainly transferred among farmers. Land transferred by industrial and commercial capital now accounts for about 10%. Such a transfer speed and proportion are almost the highest among developing countries. This shows that the market for the transfer of rural land management rights is automatically developing and growing.
But the process of land transfer depends on our basic national conditions. Since last year the state has formulated two policy documents. One is a policy document on guiding the orderly transfer of land management rights and developing moderate-scale agricultural operations. In April this year the state issued another policy document on the supervision and risk prevention of industrial and commercial capital leasing agricultural land. The basic policy orientation is to encourage development in places with the conditions, in multiple forms, with professional large households, family farms, farmers' professional cooperatives and other entities as the main players, and in multiple forms of moderate-scale operation.
But two preventions must be emphasized: prevent forcing farmers to transfer land, and prevent one-sided pursuit of large scale, especially ultra-large scale. Now when you go to localities, the first thing they show you is 5,000 mu or 10,000 mu. If you go to Japan, South Korea or Taiwan, China, it is very difficult to see farms of tens of thousands of mu. Large-scale farms are not suited to China's national conditions. Prevent and correct the non-agriculturalization and non-grainization of land transfer. In fact, exercising certain controls over the transfer of agricultural land is a common practice even in countries with private land ownership. We have carefully studied the laws on agricultural land transfer in many EU countries.
For example, Hungary. After Hungary joined the EU, it spent ten years studying the laws and regulations on land transfer across the entire EU. After ten years, Hungary formulated its own agricultural land transfer law.
First, under this law, only Hungarian citizens have the right to transfer land. For example, an Austrian citizen transferred millions of hectares of agricultural land in Hungary, and to this day it is still illegal and the law does not recognize it.
Second, there are scale limits on transfer. In Hungary there are limits on the scale of both grain and animal husbandry operations.
Third, the procedures are very strict.
Fourth, after you transfer land, it cannot be subleased again, precisely to prevent speculation.
Our current regulation and management of transfer are still weaker than those of some EU countries. We are now revising the Rural Land Contracting Law. Some of the provisions in these current policy documents will in the future be reflected in the revised Land Contracting Law.
Today I originally intended to talk about two topics, one strong agriculture and one beautiful countryside. Because of time constraints I will talk about strong agriculture. A beautiful countryside and prosperous farmers are a higher policy goal, but if agriculture shrinks, if agriculture is unable to withstand a single blow in the face of international competition, and if everyone thinks that because Chinese people's eating problem need not be worried about and can be completely solved by the international market, farmers themselves will all come to the cities to find their happy lives, then that may be too simple. One point is very clear in China's modernization process: if agricultural issues are solved well and farmers' issues are solved well, we will have confidence in responding to various risks, and the entire economic development will have a great deal of room for maneuver.