The financial support system for contract farming urgently needs to be improved

Contract farming mainly takes the forms of agricultural product purchasing and selling, cooperation, and land leasing and subcontracting. Banking institutions have actively innovated credit products, effectively meeting the financial needs of developing contract farming. However, there are still some prominent contradictions between financial supply and demand, and it is necessary to further improve the long-term mechanism for fiscal policy to promote financial support for agriculture, perfect the agricultural risk-sharing mechanism, and establish a multi-level guarantee system. Recently, a research team from the Ministry of Agriculture conducted a study in the Guangxi Zhuang Autonomous Region on financial support for the development of contract farming, visited a number of leading enterprises and contract farming households, and held 2 symposiums to learn about the situation and listen to opinions and suggestions.

Diverse forms of contract farming, with different financial needs

With leading enterprises and farming households as the main participants in developing contract farming and advancing industrialized agricultural operations, Guangxi mainly has 3 forms: agricultural product purchasing and selling, cooperation, and land leasing and subcontracting, and the financial needs also differ for each.

First, agricultural product purchasing and selling. This form is the most common. The main approach is: farming households sign purchasing and selling contracts with leading enterprises and build planting and breeding production bases to engage in agricultural production; the enterprises purchase the farming households' agricultural products according to the contracts. Farming households bear production risks, such as unskilled use of technology or inadequate management, leading to low yields and poor quality of agricultural products that fail to meet purchasing standards; enterprises bear market risks, such as a drop in the market price of agricultural products below the contract price, with the enterprise bearing the losses caused by purchasing according to the contract.

Guangxi Yangxiang Co., Ltd. sells on credit to farming households all agricultural inputs needed for breeding, such as piglets, feed, veterinary drugs, and vaccines, and provides technical guidance throughout the process. Farming households must build pig houses with a breeding scale of more than 300 head, pay the enterprise a deposit of 250 yuan/head, and then receive agricultural inputs for breeding. After the pigs are ready for market, the enterprise buys them back at a floor price of 7.8 yuan/jin, and after deducting the enterprise's agricultural input costs, the remainder is the farming household's income. When the market price of pigs is higher than the floor price, the enterprise buys back at the market price. For the portion of income exceeding the floor price, farming households get 15% and the enterprise gets 85%. In recent years, the income of the enterprise's contract farming households from breeding pigs has been around 120 yuan/head.

In terms of capital needs, farming households need to raise funds to build planting and breeding production bases; leading enterprises need working capital for production or purchasing agricultural inputs and buying back agricultural products, as well as investment in factories, equipment, and other facilities needed for agricultural product processing.

Second, cooperative operation. This form is relatively rare. The main approach is: farming households build planting and breeding production bases, leading enterprises invest working capital such as agricultural inputs, and both parties cooperate in agricultural production and sales, jointly bearing production risks and market risks and sharing income.

Guangxi Juyin Animal Husbandry Group adopted this form in the pig breeding segment. According to the enterprise's requirements, farming households invest in building high-standard pig houses and carry out pig breeding; the enterprise is responsible for providing piglets, feed, veterinary drugs, and other agricultural inputs and technical services. Both parties have property rights over the assets each has invested in. In terms of total investment, farming households account for about one-third and the enterprise about two-thirds. From the pig sales proceeds, after deducting the enterprise's agricultural input costs, the remainder is split equally between the two parties. At present, the enterprise has cooperated with more than 100 farming households. In 2012, the average income from pig breeding was 258 yuan/head, with the enterprise and farming households each getting 129 yuan/head, and both were relatively satisfied.

In terms of capital needs, farming households need to raise funds to build planting and breeding production bases; leading enterprises need working capital for production or purchasing agricultural inputs.

Third, land leasing and subcontracting. This method is developing vigorously. The main approach is: leading enterprises transfer land, build high-standard, large-scale planting and breeding production bases, divide them into several operating units, and hire farming households to manage them. The enterprise is responsible for all inputs, and farming households are responsible for production management and receive remuneration according to the performance standards agreed upon by both parties. Under this method, the enterprise bears all risks and farming households bear no risk.

Guangxi Jinsui Agricultural Investment Group transferred farmland, built standardized banana planting bases in concentrated contiguous areas, planted banana seedlings in different periods and batches, and then, with 60 mu as one unit, hired one farming household to manage it, carrying out fertilization, weeding, spraying, bud protection, flower trimming, banana cutting, and so on. After the bananas ripen, the enterprise pays the farming households remuneration at a price of 0.13 yuan/jin according to the agreed quality requirements. If the per-mu yield is relatively low due to objective reasons such as climate, farming households can still receive a guaranteed income of 1200 yuan/month. Farming household Huang Mingyuan is very satisfied with this form. He said that when he previously grew bananas himself, due to reasons such as water shortage and freezing damage, he lost money in two of three years. Now, growing bananas for the enterprise, he earned 60,000-70,000 yuan in one year.

In terms of capital needs, leading enterprises need to raise funds to transfer land and build standardized production bases, and also need working capital for production or purchasing agricultural inputs, as well as investment in factories, equipment, and other facilities needed for agricultural product processing; farming households do not need to invest.

It can be seen that different forms of contract farming have different capital needs, generally concentrated in building planting and breeding production bases, producing or purchasing agricultural inputs, and building factories for processing, showing the following characteristics: First, the demand is large. Among agricultural production costs, agricultural input costs are the largest component, especially in the breeding sector. For example, the costs of chicks, feed, vaccines, and so on consumed in broiler breeding account for more than 80% of the purchase price. At the same time, leading enterprises have relatively few owned assets, which are disproportionate to the funds needed for purchasing and selling agricultural products. According to a survey of 808 national key leading enterprises in production and processing, enterprises' raw material procurement funds were 2.27 times their fixed assets. Second, strong seasonality. Agricultural production has a certain cycle, and working capital demand accordingly shows strong periodicity and seasonality. According to a questionnaire survey of 16 leading enterprises in Guangxi, 11 enterprises had peak agricultural product procurement seasons and conducted concentrated purchasing. Third, long occupation time and slow recovery. On the one hand, in agricultural production, working capital is tied up for the entire production cycle; on the other hand, agriculture has relatively low returns, and investment in factories, processing equipment, and so on takes a long time to recover. Moreover, once natural disasters or abnormal market fluctuations occur, large losses can result.

Innovative exploration of financial support for contract farming

Innovating the “company + farming household” credit model to help farming households obtain production funds. Banking institutions, taking advantage of long-term cooperation and mutual understanding between leading enterprises and farming households, have explored and developed the “company + farming household” credit model, encouraging leading enterprises to provide guarantees for loans to contract farming households. Such loans mostly operate in a closed loop, that is, after the loan is issued, it enters a special account supervised by the leading enterprise, specifically for purchasing feed, fertilizer, and other agricultural inputs; after the enterprise purchases the farming households' agricultural products, the payment is transferred into the special account, first repaying principal and interest to the bank, and the remainder is transferred into the farming household's personal account. With a guarantee from Guangxi State Farms Sugar Industry Group Liangqi Sugar Company, Agricultural Bank of China Guangxi Branch, through the “company + farming household” method, cumulatively issued loans of 48.49 million yuan to 3287 farming households, and so far not a single non-performing loan has occurred.

Innovating guarantee methods to alleviate the difficulty of leading enterprises lacking mortgage collateral. Banks have explored and innovated guarantee methods such as land income rights, forest rights mortgages, and pledges of inventory, equity, and intellectual property, broadening the scope of mortgage guarantees and alleviating the difficulty of enterprises having insufficient effective collateral. Guangxi Rural Credit Union, through pledges of land contractual management rights and pledges of future income rights, issued a loan of 160 million yuan to Guangxi Jinsui Agricultural Investment Group. The mortgage valuation of land contractual management rights refers to the land transfer fee paid by the enterprise, that is, once the loan becomes overdue, the bank can transfer the land out at the same price. Bank of China Guangxi Branch launched a series of agricultural-benefit loan products such as cocoon merchant loans and dark tea loans, encouraging cocoon merchants and tea merchants to provide joint guarantees and mutual guarantees. At present, the loan balance of the bank's agricultural-benefit loan series products reached 266 million yuan.

Innovating financial services to meet the personalized capital needs of leading enterprises. In response to the funding characteristics of contract farming, banks have continuously improved credit business processes and flexibly set loan interest rates and loan terms, becoming the “close friends” of leading enterprises and farming households. Agricultural Bank of China Guangxi Branch can approve credit limits according to enterprise needs for seasonal purchasing loans for leading enterprises at or above the provincial level.

Innovating direct financing products to broaden the financing channels of leading enterprises. Banking institutions have actively carried out bond underwriting, private financing, project financing, and other businesses to broaden direct financing channels for leading enterprises. Bank of Communications Guangxi Branch, through asset pools and trust plans, provided services such as medium-term notes, short-term note bonds, private placement bonds, and corporate bonds for Gaofeng Forest Farm and Qipo Forest Farm, with a planned financing of 2 billion yuan in 2014. Agricultural Bank of China, as the lead underwriter, supported Guangxi State Farms Group in issuing 1 billion yuan in corporate bonds and implementing projects such as a technical transformation for sugar production with an annual output of 300,000 tons.