Market-support purchasing in a quandary, grain circulation urgently needs a breakthrough

Grain prices do not always rise or fall in a fixed pattern, yet the market-support price has kept climbing all the way, distorting grain market prices and weighing state-owned enterprises down more and more heavily. The current wheat “market-support quandary” is a textbook case, and reform of the grain circulation system urgently needs upgrading.

In response to the purchasing and storage situation after an “eleventh consecutive increase” in the summer grain harvest, reporters from Outlook Weekly conducted research interviews in major grain-producing provinces including Shandong, Henan, Anhui, Shaanxi and Hubei. The market-support policy of many years has stabilized farmers' returns and been an important driver of consecutive annual grain output increases in China. But common problems in some places cannot be ignored: successive policy-driven purchasing and storage have pushed large volumes of grain into state reserves, causing warehouse capacity shortages in certain areas; and the ever-rising market-support price has triggered a “ceiling” effect, creating multiple forms of “grain price inversion”.

Agricultural experts say that, in a sense, the current wheat “market-support quandary” is a textbook case, and relevant departments should take a coordinated approach, using the building of a target price system as the entry point, to better let the market play its role and advance reform of the grain circulation system.

Warehouse capacity shortages increasingly prominent

In Yongqiao District, Suzhou City, Anhui, a major wheat-producing area, Song Changsheng, deputy director of the district grain bureau, told reporters, “Since Anhui launched market-support purchasing of wheat on May 30, some grain processing enterprises made scattered purchases early on, but after that it has mostly been market-support purchasing by state grain purchasing and storage enterprises. As of now, 90% of wheat purchases are policy-driven market-support purchases.” He said that against the backdrop of a sluggish flour industry, many grain processing enterprises are operating at a standstill, which has caused large volumes of grain to flow into state grain reserves, putting great pressure on warehouse capacity, and some farmers may face difficulties selling grain in the future.

Similar “worries” brought by a bumper harvest also exist in Hubei Province. Fei Renping, deputy director of the provincial grain bureau, said that state grain warehouses across the province are currently full to bursting, warehouse capacity is tight, and if effective measures are not taken promptly to respond, there will likely be nowhere to put the autumn grain when it comes onto the market before long.

It is understood that Hubei Province is currently stepping up repairs to dilapidated and old warehouses, and is expected to add 1.1 billion jin of warehouse capacity; together with capacity freed up through promotional grain sales, a total of about 2 billion jin of warehouse capacity can be freed up. But given the scale of 6 billion jin for autumn grain market-support purchasing, there will still be a gap of three to four billion jin.

In Henan, a traditionally major grain-producing province, wheat purchasing and sales are proceeding smoothly. Reporters learned from multiple departments that although the province has not yet seen tight warehouse capacity, hidden worries about future capacity gaps remain as grain production capacity strengthens.

A relevant official from Sinograin's Henan company said that Henan's total grain output has exceeded 100 billion jin for 8 consecutive years, and is expected to remain stable above 110 billion jin in 2014. According to the “Goals of the Construction Plan for Henan's Core Grain Production Area”, by 2020 the province's total grain output will reach 130 billion jin, commercial grain will exceed 90 billion jin, and 100 billion jin of effective warehouse capacity will be needed.

“In terms of purchasing and storage capacity, the province's local grain enterprises currently have only 42.1 billion jin of effective warehouse capacity, and Sinograin enterprises have 25.4 billion jin, leaving a capacity gap as high as 32.5 billion jin. Given the current momentum of policy-driven purchasing and storage, this is bound to adversely affect future grain storage security and may lead to difficulties in selling grain.” the official said.

Market-support purchasing increasingly “unable to keep going”

Besides the warehouse capacity strain caused by massive purchasing and storage, the long-running market-support policy has also run into a “ceiling effect” in other respects, making implementation of this pro-farmer policy increasingly difficult.

First, grain brokers “intercept” the dividends of the market-support policy. At a state grain purchasing point in Suzhou City, reporters met local farmer Liu Hongjun, who had come to sell grain. He told reporters that he sold 17,000 jin of wheat that day and received more than 20,000 yuan in cash.

However, unlike an ordinary farmer, Liu Hongjun's identity at that moment was that of a grain broker. Since market-support purchasing began, he and his family had started buying grain in surrounding townships, averaging more than 40,000 jin per day. In total, they purchased about 1 million jin of wheat. At a purchase price 3 fen lower than the market-support price, after deducting fuel, travel and various other costs, he earned about 1 fen per jin.

At multiple grain purchasing points in Anhui, reporters saw many grain brokers like Liu Hongjun. Data provided by Sinograin's Suzhou directly affiliated depot show that the city currently has more than 1,000 grain brokers; the bigger ones have 2 to 3 farm vehicles, the smaller ones transport by three-wheeled cart, and their purchases account for 60% to 70% of total grain purchases, while farmers coming to purchasing points to sell grain themselves account for only about 30%.

Reporters learned that the large emergence of grain brokers is closely tied to the shortage of young and middle-aged rural labor and the popularity in many rural areas of selling “grain at the field edge”. In Henan, a major wheat province, Shang Shemin, deputy party secretary of Sinograin's Anyang directly affiliated depot, said that about 40% of local people currently sell “grain at the field edge”, and in recent years this proportion has still been growing.

Zhang Dengyun, a large grain grower in Wangzhuang Town, Hua County, Henan, said that the original intent of the state's market-support price was to guarantee farmers' grain-growing returns, but now, for various reasons, grain traders have locked up the “last mile” from farmers to state grain depots and built a business that is guaranteed a profit whether there is drought or flood. “The state has not spent less money, yet grain-growing farmers have not fully enjoyed the benefits they deserve.”

Second, long-term grain price inversion affects the healthy development of the grain market. Multiple market players, including grain processing enterprises, point out that since the market-support policy was implemented in 2006, the wheat market-support purchase price has risen all the way, in the first few years even climbing by 0.1 yuan per year. This one-sided pattern of only rising and never falling has distorted the normal price formation mechanism and created multiple “price inversions” between domestic and international markets, producing and sales areas, and raw grain and finished grain. It is reported that since 2012, domestic wheat prices have been higher than international wheat prices. As of now, imported wheat is priced at 2,100 yuan/ton to 2,300 yuan/ton, while domestic wheat arriving at southern ports is priced at 2,600 yuan/ton, more than 300 yuan per ton higher than imported wheat.

An official from the Hubei Provincial Grain Bureau said that the current market-support price will definitely not work in the long run. “By rights, grain prices do not always rise or fall in a fixed pattern, yet the market-support price has kept rising. This approach has distorted the grain market, put a heavy burden on state-owned enterprises, and is becoming increasingly unsustainable.”

Third, large volumes of grain “stagnate” in state grain depots, causing a waste of state funds. Jiao Shanwei, an analyst at China Grain Network, said that as policy purchasing and storage volumes increase year by year, grain storage also generates substantial costs. “Take Henan as an example: at the peak, the purchase rate reached 71%. From grain entering the depot to leaving it, the purchase subsidies, storage fees, and Agricultural Development Bank loan interest generated in between add up to more than 2 jiao per jin of wheat in ‘silent costs’. If only this money could be subsidized to farmers.”