The cotton target price reform is about ensuring farmers earn a profit from growing cotton
In early 2014, the state launched a pilot target price subsidy program for cotton in Xinjiang and soybeans in Northeast China and Inner Mongolia. With the approval of the State Council, the National Development and Reform Commission, together with the Ministry of Finance and the Ministry of Agriculture, publicly announced the 2014 target price levels for cotton and soybeans on April 5 and May 17 respectively: 19,800 yuan per ton for cotton and 4,800 yuan per ton for soybeans. With the new cotton crop about to reach the market, the Xinjiang Department of Agriculture answered questions from a Tianshan Net reporter on issues related to the cotton target price reform.
Reporter: What are the main contents of the pilot reform of target prices for cotton and soybeans?
Department of Agriculture:
The target price policy is an agricultural support policy that, on the basis of agricultural product prices being formed by the market, releases price signals to guide market expectations and protects producers' interests through a price-difference subsidy. The main contents of the target price reform pilot are as follows: First, the temporary purchase and storage policy for cotton and soybeans is abolished nationwide. The government does not intervene in market prices; prices are determined by the market, and producers sell cotton and soybeans at market prices. Second, target price subsidies are implemented for cotton in Xinjiang and soybeans in Northeast China and Inner Mongolia. The target prices for cotton and soybeans are announced before planting. When the market price is lower than the target price, the state grants subsidies to producers in the pilot areas based on the difference between the target price and the market price; when the market price is higher than the target price, no subsidy is paid. Third, the subsidy method is improved, with the target price subsidy amount linked to planted area, output or sales volume.
Reporter: Why carry out the target price reform pilot?
Department of Agriculture:
Since the reform and opening up, China has persisted in advancing the market-oriented reform of agricultural products, gradually liberalizing the prices of most agricultural products, and in 2004 fully liberalized the grain market and prices. After liberalizing agricultural product prices, in order to protect farmers' interests and stabilize agricultural production, since 2004 the state has implemented a minimum purchase price policy for rice and wheat in main producing areas, and since 2007 has successively implemented a temporary purchase and storage policy for corn, soybeans, rapeseed, cotton, sugar and others in main producing areas. When the market price in main producing areas is lower than the minimum purchase price or temporary storage price, enterprises designated by the state directly enter the market to purchase, guiding the market price to recover.
Since the implementation of the minimum purchase price and temporary purchase and storage policies, domestic grain prices have risen steadily, and the prices of cotton, oilseeds and sugar have generally remained at high levels, effectively mobilizing farmers' enthusiasm for planting, maintaining the basic stability of production of major agricultural products, achieving “ten consecutive years of increase” in grain output, and achieving steady and relatively rapid growth in farmers' incomes, playing an important supporting role in stabilizing the general price level and maintaining sustained and relatively rapid development of the national economy.
The minimum purchase price and temporary purchase and storage policies include the state's subsidies to farmers within the price; they are a direct price support policy that “combines price and subsidy.” The precondition for the effective implementation of such a policy is that the domestic market price is lower than the international market price. Over the past two years, on the one hand, international market prices of agricultural products have fallen sharply; on the other hand, domestic prices of major agricultural products have remained high under the support of the minimum purchase price and temporary purchase and storage policies, and domestic prices have shifted from being lower than the international market to being higher than import costs. Due to changes in the above preconditions, the implementation of a direct price support policy faces new difficulties and challenges, especially for agricultural products such as cotton and soybeans that have long industrial chains and are greatly affected by the international market. In 2013, China's temporary purchase and storage prices for cotton and soybeans were 20,400 yuan and 4,600 yuan per ton respectively, while the duty-paid import costs were about 15,580 yuan and 4,060 yuan per ton respectively, 4,420 yuan and 540 yuan lower than the domestic temporary storage prices. Because domestic prices were substantially higher than import costs, market entities were unwilling to enter the market to purchase, and the state's storage pressure increased sharply; cotton purchases for storage exceeded 90% of total output, the price relationship between upstream and downstream was distorted, and market vitality weakened, which was not conducive to the sustained and healthy development of the entire industrial chain.
The purpose of carrying out the target price reform pilot and exploring reform to decouple the agricultural product price formation mechanism from government subsidies is to give full play to the decisive role of the market in resource allocation on the premise of safeguarding farmers' interests, leave price formation to the market, and promote coordinated development of the upstream and downstream of the industry. First, the government does not intervene in market prices and enterprises purchase at market prices, which helps restore the market vitality of the domestic industry and improve the market competitiveness of domestic agricultural products. Second, the government's subsidy method for producers is changed from a “hidden subsidy” included in the price to a directly paid “explicit subsidy,” allowing producers to clearly receive government subsidies, which helps reduce intermediate links and improve subsidy efficiency. Third, it gives full play to the role of the market in regulating the production structure, which helps efficient and competitive producers stand out, improves the level of organization and scale of agricultural production, incentivizes agricultural technological progress, and controls production costs.
Of course, carrying out the target price pilot will also bring challenges to some enterprises. For example, during the temporary purchase and storage period, cotton purchased and processed by ginning mills could be sold directly to the state, guaranteeing returns regardless of drought or flood and without bearing market risks, but under the new situation these enterprises need to face the market directly, find downstream users on their own and bear the risks of market price fluctuations, but this is also a normal situation under market economy conditions.
Reporter: How is the target price determined?
Department of Agriculture:
During the pilot stage, the method of production cost plus basic income is adopted to determine the target price level. The reason for adopting this method is that, based on the current reality of agricultural production, it is determined by taking into overall account factors such as protecting farmers' interests and giving greater play to the role of the market. First, it can better protect farmers' interests. The method of production cost plus basic income can better adapt to the actual situation of rigidly rising production costs of China's agricultural products at the current stage. No matter how market prices and production costs change, it can ensure that farmers do not lose money and earn a profit from planting, preventing a sharp decline in production. Second, it helps give play to the role of the market mechanism. Market activity is naturally risky. Farmers are the main entities of the market economy, and while obtaining income through the market, they must also bear the risks of market fluctuations. In most industries, market risks are fully borne by market entities. Considering the particularity of agricultural production, the state should give appropriate protection to the production of a small number of important agricultural products, but the state cannot bear all market risks either. Therefore, the target price only ensures that farmers obtain basic income rather than all income. When market prices fall, farmers must also bear part of the risk of income decline, truly giving play to the role of the market mechanism, guiding farmers to rationally adjust their planting structure, and improving the competitiveness and risk resistance of agricultural production.