The Farmer Income Problem: How to Solve It Under the New Normal

At present, China's economy has entered the new normal, and the external environment and internal conditions of agricultural development have undergone profound changes. Farmer income growth is increasingly influenced by the national economy and global integration. There are opportunities for sustained income growth, but also pressures and challenges. The 2015 No. 1 Central Document proposed that for China to be rich, farmers must be rich, and that we must actively adapt to the new normal of economic development and achieve new results in promoting farmer income growth.

Analysis of the Agricultural and Rural Economy and Farmer Income Situation Under the New Normal

At present, China's agriculture and rural economy are generally improving, with two most notable signs: First, grain production achieved a record "eleven consecutive increases," with total output reaching 1,214.2 billion jin, an increase of 10.3 billion jin over the previous year, exceeding 1,200 billion jin for two consecutive years. Second, farmer income achieved "eleven consecutive rapid increases," with per capita net income reaching 9,892 yuan, and the income growth rate exceeding that of GDP and urban resident income for the fifth consecutive year. The urban-rural income ratio dropped from 3.33:1 in 2009 to 2.92:1. The good situation in the agricultural and rural economy is of great significance to the national economy in stabilizing growth, adjusting structure, benefiting people's livelihood, and promoting reform. These are two important premises for observing the impact of the new normal on farmer income. At the same time, we must also see that as China's economic development enters the new normal, promoting farmer income growth must adapt to the new development environment, respond to new changes and challenges, and create a good policy environment for sustained and relatively rapid growth of farmer income. The changes in agriculture and the rural economy under the new normal affect farmer income mainly in four aspects.

First, household business income remains stable. On the one hand, land transfer and the development of new types of operating entities, as well as the application of technologies for saving costs and reducing consumption, will be conducive to the growth of household business income, bringing income from economies of scale, income from structural adjustment, and income from cost reduction; on the other hand, as the economic growth rate under the new normal falls back to the medium-to-high growth range, demand in the agricultural product market weakens, and the role of prices in driving farmer income has somewhat diminished. Squeezed by both the cost "floor" and the price "ceiling," farmers' returns from farming and grain growing are limited, and the problem of relatively low comparative returns remains prominent.

Second, the growth rate of wage income is slowing. Under the new normal, the growth rate of the number of farmers working as migrant workers is slowing, and the rate of wage increases is being lowered. In terms of quantity growth, from 2011 to 2014, the number of migrant workers going out increased by 10.55 million, 9.83 million, 6.33 million and 5.01 million respectively, with the growth rate declining year by year; in terms of wage increases, the decline in recent years has been even more obvious, with nominal growth in wage income at 16.3% and 16.8% in 2012 and 2013 respectively, and only 9.8% in 2014. In the future, as the transfer of surplus agricultural labor further slows, and under the influence of multiple factors such as slowing economic growth, structural adjustment and industrial transfer, migrant workers' employment and wage growth will also be affected to some extent.

Third, growth in transfer income faces challenges. From 2004 to 2013, transfer income received by rural residents increased from 96.8 yuan to 784.3 yuan, and its share of farmer income rose from 3.7% to 8.8%, playing an important role in driving up the growth rate of per capita net income. But we must also see that under the new normal, the growth rate of the national economy, especially fiscal revenue, has somewhat slowed. Against this background, continuing to increase farmers' transfer income through forms such as direct subsidies faces considerable pressure, and how to further improve direct support for farmer income is also a major policy issue we face.

Fourth, property income has relatively large growth potential. In recent years, influenced by factors such as higher compensation levels for rural land expropriation, increased land transfer and house rental by farmers, and a growing number of people participating in shareholding investment dividends, farmers' property income has continued to grow and has become an important growth source of farmer income, especially in certain regions. In the long run, as the rural property rights market continues to improve, there is still great room for growth in farmers' property income.

The National Economy and Global Agricultural Integration Have a Profound Impact on Farmer Income

After economic development entered the new normal, both the external environment and internal mechanisms affecting farmer income have undergone major changes, and farmer income is increasingly affected by the macroeconomic environment and the international market environment. To observe farmer income under the new normal, we must deeply understand the impact of national economic development and global integration, and grasp the driving forces and focal points of farmer income growth.

(1) National economic development is closely linked to farmer income

A large number of empirical studies have shown that farmer income growth has a significant positive correlation with economic growth. When economic growth is fast, farmer income grows quickly; conversely, farmer income slows accordingly. From 1986 to 1990, real GDP grew at an average annual rate of 7.9%, while farmer income grew at an average annual rate of 2.7%; from 1997 to 2002, real GDP grew at an average annual rate of 8.4%, while farmer income grew at an average annual rate of only 3.9%. In recent years, the good momentum of sustained and relatively rapid growth in farmer income, and the continuous narrowing of the urban-rural income gap for 5 years, cannot be separated from the sustained and stable growth of the national economy.

But we must also see that under the new normal, national economic development is undergoing profound adjustment, and the economic growth rate has fallen back to the medium-to-high range. According to National Bureau of Statistics data, China's GDP growth rate in 2014 was 7.4%, lower than the 7.7% growth rate in 2013, and even lower than the average growth rate of 9.8% from 1979 to 2013; fiscal revenue was 14.0 trillion yuan, an increase of 8.6% over 2013, with the growth rate hitting a new low since 1992 and remaining below the average growth rate of 14.5% from 1979 to 2013 for 3 consecutive years. Therefore, on the issue of farmer income growth, we must have historical patience, pay close attention to the impact of the national economy on farmer income growth, resolve to adopt more effective policy measures, continue to maintain the good momentum of farmer income growth, gradually narrow the urban-rural income gap, and ultimately achieve balanced urban and rural resident income.

(2) Global agricultural integration has a profound impact on farmer income

Globalization brings ever-greater challenges to agricultural industry development and farmer income growth. In the process of joining the WTO, China's agriculture made major commitments, eliminating all non-tariff measures such as quantitative quotas and licenses; tariffs and tariff quota systems became the only means of regulating agricultural product trade; the average tariff level for agricultural products is only 15.2%, only 1/4 of the world average; tariff forms are single, with applied rates identical to bound rates; and the highest out-of-quota tariff for grain, cotton and sugar is only 65%. Apart from some island countries and a few countries with large-scale agriculture and very strong competitiveness, other countries have higher tariff levels on agricultural products than China. Overall, China is already one of the countries with the highest degree of openness in agricultural product trade in the world, and the competitive pressure it faces is constantly increasing.

Regarding agricultural product prices, taking into comprehensive consideration factors such as international and domestic supply and demand conditions, it is expected that out-of-quota import after-tax landed prices may be breached in 6-8 years. For import-sensitive products such as soybeans, sugar crops, pork, beef and mutton, the price gap problem is even more prominent. Large imports of low-priced foreign agricultural products mean that domestic prices can neither rise correspondingly with demand nor rise correspondingly with production costs, and import prices form a "ceiling" for domestic agricultural product price increases. The comparative returns of some industries are therefore continuously declining, and the income farmers obtain through prices is affected.

Regarding agricultural subsidies, when joining the WTO we promised that the upper limit for "amber box" subsidies would not exceed 8.5% of agricultural output value, and now specific subsidies for products such as cotton have approached the amber line. We also face constraints from the "two floors" of resources, environment and production costs. Agricultural production costs are rising, resources and the environment are under great pressure, and the space for development relying on inputs is becoming smaller and smaller. As agricultural production factors, especially land transfer fees and labor costs, continue to rise, China's agriculture has fully entered an era of high costs. According to data from the Market Department of the Ministry of Agriculture, from 2006 to 2013 the average annual growth rates of production costs for rice, wheat, corn, cotton and soybeans in China were 11.0%, 11.6%, 11.6%, 13.1% and 12.0% respectively. At the same time, resource and environmental constraints are also tightening. Per capita arable land and freshwater resources are only 1/3 and 1/4 of the world average, respectively. Squeezed by both the "ceiling" and the "floor," the space for agricultural industry development and farmer income growth is being compressed, and this is the real challenge we face.

(3) Grasp the driving sources of farmer income growth

From a broad historical perspective, the internal and external causes affecting farmer income can be roughly divided into three major stages. From the beginning of reform and opening up to the first half of the 1980s (1978-1985), farmer income grew rapidly during this period, mainly due to increases in household business income. In terms of growth drivers, the main reason was that institutional reform centered on the household contract responsibility system greatly mobilized farmers' enthusiasm for production. At the same time, the state substantially raised the unified purchase prices of agricultural products, driving farmer income growth. From the late 1980s onward (1986-2009), this period was one of rapid development in China's industrialization process. Along with the rapid development of township and village enterprises and labor-intensive industries in the southeast coastal areas, a large amount of surplus rural labor achieved transferred employment, and wage income played an increasingly dominant role in the composition of farmer income. Since the global financial crisis (2009-), the impact of economic globalization has continued to deepen, and agricultural development and farmer income growth are increasingly influenced and constrained by both international and domestic resources and markets. All four major sources in the composition of farmer income must play a role, and farmer income growth has entered a period of "multi-wheel drive."