Why should agricultural subsidies be decoupled from prices?

"If we still respond to the current 'three rural issues' in the traditional agricultural way, there is no way out." Ke Bingsheng, a member of the National Committee of the Chinese People's Political Consultative Conference and president of China Agricultural University, who has long studied agricultural economics, believes that China should abandon the use of price support measures to subsidize agriculture, and except for retaining the subsidy for the purchase of agricultural machinery and tools, all other subsidies should be adjusted and consolidated into subsidies based on land area.

All countries subsidize agriculture, and China is no exception. Ke Bingsheng introduced that starting in 2003, China established a policy system of four types of subsidies for agricultural products and support prices. In earlier years, this policy system better protected farmers' interests, mobilized farmers' enthusiasm for production, and played an important supporting role in China's grain production achieving "eleven consecutive increases." But times have changed. With the continuous increase in income from working outside the home, the role of subsidies in mobilizing farmers' enthusiasm has weakened significantly; at the same time, the prices of China's major agricultural products are comprehensively higher than the prices of imported products. "The direct consequence is a large volume of imports, while domestic products become difficult to sell, and national stocks increase substantially, reaching the highest level in history. This in turn leads to a substantial increase in national stock subsidies, which is an unbearable burden." He said.

In 2014, China again began reforming the method of price subsidies, piloting a target price system for soybeans and cotton. The government no longer directly purchased, letting prices follow the market, and then subsidized the price difference to farmers. But Ke Bingsheng's research found that trying to escape the predicament caused by market-support purchases through target prices is also unworkable. The cost of state fiscal subsidies is enormous, while the effect of solving the problem is not obvious, and may even be counterproductive.

"Whether it is market-support purchases, which are now the main policy, or target price subsidies, which are the direction of reform, both change price relationships through administrative means, making resource allocation unreasonable. Such a policy is in fact a replica of the planned economy and cannot achieve rational resource allocation." Ke Bingsheng believes that to fundamentally resolve the current predicament, the key is to follow the reform requirements of the Third Plenary Session of the CPC Central Committee, "let the market play a decisive role in resource allocation," and "improve the price formation mechanism for agricultural products, focusing on giving play to the role of the market in forming prices."

"This is like a bridge going back to being a bridge and a road going back to being a road, letting subsidies be separated from prices." Ke Bingsheng specifically suggested: retain the subsidy for the purchase of agricultural machinery and tools, while merging all other subsidies together to establish a land area subsidy, that is, the subsidy each farming household receives is linked only to the area of contracted land management, and has nothing to do with the product planted or the price. Such a subsidy policy provides income support to farmers, does not distort the market, conforms to WTO rules, and is extremely simple and easy to operate.

Ke Bingsheng said that subsidies based on land area not only have high subsidy efficiency, but can also allow market price signals to guide farmers, realize regional comparative advantages and international comparative advantages, and while reducing agricultural production costs, adjust the trade structure of agricultural products in a more scientific and reasonable way. China's land area is scarce, and a reasonable trade structure for agricultural products is to import land-intensive products, such as soybeans, rapeseed, and cotton, and produce other products with high per-mu yields or high added value, such as corn, vegetables, and fruits. "Under the role of the market mechanism, such a trade structure will automatically form." He said optimistically that using land subsidies to replace the various existing market-distorting subsidies can better give play to the role of the market in allocating land resources and maximize the use of limited agricultural land.