Economic Analysis of China's Agricultural Subsidies and Interpretation of the Current State of Agricultural Income Subsidy Policy

Agricultural subsidies are the most important and most commonly used policy tool in a country's support and protection system for its agriculture, and are transfer payments made by the government to agricultural production, circulation and trade. Their purpose is to ensure national agricultural security, maintain stable prices for agricultural products and protect farmers' incomes. From the perspective of how farmers benefit, agricultural subsidies can be further subdivided into two approaches: price support (indirect subsidies) and direct subsidies.

The assessment of the pros and cons of agricultural product price support policies and direct subsidy policies for farmers includes the following two aspects: first, from both short-term and long-term perspectives, the quantity and distribution of the related economic benefits and costs; second, the degree of convenience in terms of funding support and implementation of these policies.

Comparison of price support and income subsidy policies

Agricultural product price support and direct payments to growers, as two approaches to agricultural subsidy policy, have different economic benefits and costs, and their respective financing channels and policy operability also differ. All of these carry important policy implications.

In the short term, when a country's government adopts an agricultural product price support policy, it can raise farmers' incomes without increasing the government's fiscal burden, but the cost is that the welfare losses inflicted on domestic consumers are far greater than the income subsidies that agricultural producers receive from the government. The social cost expenditure of direct payments to agricultural product growers may account for only half of the total social cost of an agricultural product price support policy. However, the above two alternative agricultural subsidy policies are not omnipotent; only when a temporary reduction in demand, rather than an abnormal increase in supply, causes a sustained decline in agricultural product prices can an agricultural product price support policy or a direct payment arrangement for growers play its greatest role and increase the incomes of agricultural product growers.

In the long term, when a country's government adopts an agricultural product price support policy, it will be unable to achieve the short-term fiscal funding “leverage” effect, and will greatly increase the government's fiscal expenditure, thereby further leading to agricultural product surpluses and misallocation of resources. The long-term effect of a price support policy is far worse than directly subsidising growers; at the very least, a direct subsidy policy will not cause losses in consumer welfare or misallocation of economic resources. But in the long term, the implementation effect of a direct subsidy policy must also be further subdivided into two cases: first, if government direct subsidies are unrelated to agricultural product output, then the long-term effect of a direct payment arrangement for agricultural product growers has no impact on economic efficiency or agricultural product market prices, and its policy effect is merely equivalent to a “bonus”; second, if government direct subsidies are based on agricultural product output, then the long-term effect of implementing a direct payment arrangement is equivalent to reducing farmers' cost inputs and will cause the supply curve to shift to the right, with the result that, on the one hand, agricultural product market prices fall, and on the other hand, the government's fiscal burden continuously increases. Ultimately, a long-term government direct subsidy arrangement based on agricultural product output will result in farmers still obtaining only the average profit from agricultural product cultivation, while the actual benefits of the government's fiscal subsidies are distributed among all consumers.

Problems with China's agricultural price support policy

From the perspective of actual implementation effects, as China's agricultural price support policy has been implemented, while achieving its originally designed policy objectives, the negative effects of the policy have gradually emerged.

First, distortion of the market mechanism. Excessive purchasing and storage volumes have affected the functioning of the market mechanism and are not conducive to the healthy development of the industrial chain. The unlimited purchasing and storage policy has caused reserves of grain, cotton and oil to far exceed normal-year reserves, deviating from the original policy intent of “bottom-line purchasing”; at the same time, the normal operating enthusiasm of various market entities in circulation and processing has declined, and selling to the state reserves has become the sole goal, forming a de facto state monopoly purchasing and marketing system, which has hindered the development of diverse market entities and the healthy development of the industrial chain. Taking the textile industry as an example, domestic cotton prices ran at a high level under the support of the temporary storage policy, causing domestic cotton prices to even exceed the prices of imported cotton yarn; the international competitiveness of textile enterprises was weakened, market share continued to decline, enterprise operating rates were generally insufficient, profits fell, the entire industry struggled, and business remained persistently sluggish.

Second, the setting of state purchasing and storage prices is caught in a dilemma. At present, the prices of domestic production factors such as labour and land are rising, and the prices of China's three major grain varieties are generally more than 600 yuan per tonne higher than international market prices. If the floor price is raised further, it will inevitably further widen the gap with international bulk agricultural product prices and lead to a further surge in imports; if the floor price is not raised, it will dampen farmers' enthusiasm for production and endanger national strategic security. In 2014, China's grain imports amounted to 200.84 billion jin, an increase of 332% compared with 2003, before the implementation of the floor price policy. During 2011-2013, when the cotton temporary storage policy was implemented, China's cotton imports averaged 421.5 million tonnes, which was 61% of domestic cotton output, an increase of 48% compared with 2010 before the temporary storage policy. In 2013, cotton imports for the whole year totalled 4.15 million tonnes, of which 660,000 tonnes were imported at the full tariff outside quota, nearly doubling year on year, and the “firewall” function of the tariff quota was basically lost.

Third, excessive purchasing and storage has caused a sharp increase in pressures on all sides. Grain and cotton inventories, domestic and international price differences, import volumes, processing enterprise operating costs, fiscal subsidies, occupation of credit funds, potential risks and regulatory pressures have all remained high. In 2014, the state fiscal subsidy for interest and fees on temporarily stored grain and oil was 38.5 billion yuan, and the subsidy for interest and fees on grain and oil under the minimum purchase price was 21.8 billion yuan, a heavy fiscal burden. Based on the current inventory level of cotton, it is forecast that the state fiscal authority needs to invest more than 16 billion yuan per year in interest and storage costs; according to calculations based on the reserve floor price for competitive sales of state reserve cotton, latent losses have already exceeded 25 billion yuan. In addition, the losses from ageing and quality deterioration during long-term storage of grain and cotton must also be borne by the state fiscal authority.

The reality of agricultural income subsidy policy

The basic policy framework of China's existing agricultural subsidies takes the “four subsidies” as the main body, with other subsidies as supplements. That is, the “four subsidies” based on direct subsidies for grain cultivation, comprehensive direct subsidies for agricultural inputs, subsidies for the purchase of agricultural machinery, and subsidies for improved seeds, while new agricultural subsidies such as subsidies for agricultural insurance premiums, subsidies for key agricultural production links, and subsidies for major key technologies for disaster prevention and reduction, stable production and increased output have also been incorporated. An agricultural subsidy system framework suited to China's current national conditions has basically taken shape. After nearly 10 years of development, the scale of China's agricultural income subsidies has grown from 11.6 billion yuan in 2004 to 200 billion yuan in 2014.

Between 2004 and 2013, in order to ensure the strategic goal of basic self-sufficiency in bulk agricultural products, China adopted a policy of simultaneously increasing both agricultural price support and income subsidies, and achieved the remarkable result of “ten consecutive increases” in grain production. However, given that the agricultural product price support policy adopted for ten years could no longer achieve the short-term fiscal funding “leverage” effect, the government's fiscal burden became increasingly heavy, and this further led to agricultural product surpluses and misallocation of resources. Starting in 2014, the central government began piloting a “target price subsidy system” for two varieties, cotton and soybeans, that is, the “fifth subsidy policy”. According to the thinking behind the current policy design, if the “target price subsidy system” is successfully piloted on the two varieties of soybeans and cotton, it will be further extended to major grain crop varieties such as wheat, rice and corn, and replace the costly and obviously side-effect-laden “agricultural product price support system”. So, can “target price subsidies” replace the “price support” policy? Or can a “target price subsidy policy” both raise farmers' incomes and ensure stable, high yields of major grain varieties?

In fact, from 2004 to the present, China has gradually established an agricultural subsidy system in which “agricultural product price support policy” is the mainstay and the agricultural “four subsidies” are supplementary, among which the “agricultural product price support policy” mainly plays the role of guiding the prices of bulk agricultural products to rise steadily and stimulating farmers to increase output, while the agricultural “four subsidies” are decoupled from agricultural product output and do not change with production costs or market conditions, have no impact on economic efficiency or agricultural product market prices, and their policy effect is increasingly similar to a “bonus”. If, according to the thinking behind the current policy design, “target price subsidies” replace the “price support” policy, then in the short term, agricultural subsidies would merely add a “fifth subsidy”; in the long term, China's subsidy system linked to the output of bulk agricultural products would gradually transition to a subsidy system decoupled from output, and the policy implication behind this is to abandon stable increases in output and take raising farmers' incomes alone as the main objective, which is inconsistent with China's current basic national conditions and constitutes a policy adjustment with high input, low fairness and low efficiency.