Domestic Agricultural Product Profits Being Eroded, Imported Products Squeeze Market Space

Wan Baorui believes that the simultaneous purchasing and storage alongside imports of major agricultural products has caused excessively high policy costs; against the backdrop of consecutive years of domestic grain output growth and tight warehouse capacity, the surge in imports has further intensified the domestic “difficulty of selling grain” situation.

Foreign goods entering the market while domestic goods go into storage has been a market paradox that China's bulk agricultural products have been unable to escape in recent years.

Wan Baorui, former Executive Deputy Minister of Agriculture, is worried that the temporary storage policy for agricultural products has already caused hundreds of billions of yuan in hidden losses. Recently, he wrote in the People's Daily that in 2013-2014 China temporarily purchased and stored 69.19 million tons of corn and 6.29 million tons of cotton, with the annual interest and maintenance cost per ton of cotton inventory at around 2,000 yuan. Temporary stored rapeseed oil reached as high as 6 million tons; if sold at current market prices, the price difference loss would exceed 15 billion yuan. Temporary stored sugar inventory accumulated to around 5 million tons, with estimated hidden losses exceeding 20 billion yuan.

Wan Baorui believes that the simultaneous purchasing and storage alongside imports of major agricultural products has caused excessively high policy costs; against the backdrop of consecutive years of domestic grain output growth and tight warehouse capacity, the surge in imports has further intensified the domestic “difficulty of selling grain” situation.

Surging agricultural product costs have eroded most of the profit margin.

Wan Baorui believes that from 1995 to 2011, the per-mu output of China's 3 types of grains and soybeans increased by 29.1% and 32.8% respectively, but calculated at comparable prices, the total cost per mu during the same period increased by 110.2% and 91.8% respectively, with profit rates declining significantly. "Over the past decade, the factor costs of major agricultural production have basically all risen by more than 80%, some even doubled." Ma Wenfeng, an analyst at Aige Agriculture, told the Daily Economic News, "The costs of production factors such as land rent, chemical fertilizers, pesticides, agricultural film, mechanical operations, and labor are all increasing, and the continuous advancement of urbanization has played an indirect role in pushing them up further. Cumulatively, this has exceeded price increases, meaning the marginal output of factors is declining sharply."

Investment in grain cultivation is increasing, but profit margins are being squeezed, which has dampened farmers' enthusiasm for growing grain. Data shows that in 2011, the per-mu net profit from planting apples, vegetables, and peanuts was 4,612 yuan, 2,558 yuan, and 723 yuan respectively, while the average per-mu return from planting the 3 main grains was only 251 yuan. After new-type agricultural business entities took over transferred land, the phenomenon of "de-grainization" became relatively prominent. As of the end of 2013, in some major grain-producing provinces, the "non-grain" proportion increased by 20%-30% after land transfer.

According to the "Research Report on the Current Status and Development Trends of China's Agricultural Product Logistics Market (2014-2019)" released by Guanyan Tianxia, even under the premise of squeezing agricultural product profit margins, domestic agricultural product prices still rank among the highest globally. "According to our calculations, the prices of China's major agricultural products are the highest in the world." Ma Wenfeng told reporters, "Under a monopolistic mechanism, the market lacks elasticity."

Huge Hidden Losses in Temporary Storage

Agricultural product costs are rising, yet prices have been defeated under the offensive of "foreign goods." Agriculture and farmers are being squeezed from both sides, and agricultural products in storage warehouses are seeing even greater hidden losses.

Wan Baorui stated that in the first 5 months of 2014, the domestic and international price differences for rice, wheat, corn, soybeans, cotton, and sugar were 318 yuan, 451 yuan, 924 yuan, 1,484 yuan, 7,078 yuan, and 2,766 yuan per ton respectively. In fact, the huge price differences carrying attractive profits have brought a crowding-out effect on "domestic" agricultural products in the market.

Wan Baorui analyzed that simultaneous purchasing and storage alongside imports results in excessively high policy costs.

Zhang Hecheng, Director of the Market Department of the Ministry of Agriculture, previously told the media that the fundamental reason for the price inversion is that China's agricultural resources are scarce, labor productivity is low, and production costs are rigidly rising, leading to weak market competitiveness of agricultural products; the direct reason is insufficient agricultural support and protection measures such as tariffs and subsidies.

According to World Bank estimates, in 2013, China's agricultural value added per agricultural laborer was only 64% of the world average, but China's average tariff on agricultural product imports was only 15.2%, while the world average tariff level for agricultural products is 62%, and China has also given up the special safeguard mechanism for trade. Domestic agricultural subsidies still lag far behind those of developed countries.

With huge hidden losses on "domestic goods" going into storage, where should the temporary storage policy go?

An official from the Ministry of Agriculture told reporters that, on the whole, the target price reform system for soybeans and cotton that has already been implemented will be extended to most agricultural products, gradually replacing the temporary storage system. However, the sugar target price reform, which had the strongest support in 2014, was not written into the 2015 Central Document No. 1 as hoped. This can only indicate that since soybeans and cotton are still in the trial period, the reform is being advanced cautiously.