Why must the temporary corn purchase and storage policy be reformed?

In September 2015, the National Development and Reform Commission, the State Administration of Grain, the Ministry of Finance, the Agricultural Development Bank of China and other departments jointly issued the "Notice on Issues Concerning the State Temporary Storage and Purchase of Corn in Northeast China in 2015". In 2015, the state will continue to implement the temporary corn purchase and storage policy in the three northeastern provinces and the Inner Mongolia Autonomous Region, with the listed purchase price for corn storage set at 1 yuan per market catty (national third-grade quality standard), a decline of more than 10% on average compared with 2014, marking the first cut since the state introduced the temporary corn storage purchase price in 2008. On October 18, 2015, the state formally issued the "Several Opinions of the Central Committee of the Communist Party of China and the State Council on Promoting the Reform of the Price Mechanism", proposing to improve the price formation mechanism for agricultural products, to focus on giving play to the role of the market in price formation, and to reform and improve the corn storage and purchase system.

The cut in the temporary storage price is a return to market laws

Since the implementation of the temporary corn storage policy in 2008, over 8 years, farmers have gradually developed path dependence on the state temporary purchase and storage policy, going further and further under the shelter of the high purchase price of the state temporary corn storage without considering market demand, and the trend of "policyization" in the corn market has become prominent, with all market parties becoming increasingly dependent on the policy path. However, the long-term large price gap between domestic and international markets, the huge inventory and the shrinking corn production industry chain have made the temporary storage policy unsustainable.

According to the original intention of the policy design, the temporary purchase and storage policy needs to focus on reflecting the "temporary" aspect. Whether the state purchases and at what price should all be determined according to the market conditions of that year and should be adjusted flexibly accordingly. However, this policy, which was originally supposed to move with the market, has deviated from the original intention of the policy design in actual operation. Over 8 years, this "temporary" price rose steadily, climbing from 0.74-0.76 yuan in 2008 to 1.11-1.13 yuan in 2014, an increase of as much as 50%, with the expectation of "only rising, never falling" strengthening, and the quantity also changed from the limited purchase originally designed to open-ended purchase. This inevitably caused the failure of the market adjustment mechanism, leaving downstream enterprises, inventory pressure and fiscal funds unable to bear the burden.

Under the action of economic laws, no commodity can only rise and never fall. Objectively speaking, the ever-climbing temporary storage price has become a thorn stuck in the middle of the corn production and sales channel, making it difficult for market supply and demand to match, so all market participants need to re-understand the true meaning of the temporary storage price. "A policy is certainly not always optimal, but a policy must fully reflect the demands of all sides." The reduction, rather than cancellation, of the temporary corn storage price in 2015 was intended to balance the interests of all parties, fulfill its promise to "release marketization as soon as possible", reasonably guide market expectations, and bring the temporary storage price closer to the market, thereby gradually eliminating the risks accumulated in the corn market over many years. This is both a return to market laws and an inevitability of the policy keeping to its boundaries.

Reform is imperative

Against the background of deepening path dependence on the temporary corn storage policy among all market parties, the state comprehensively considered the interests of all parties, lowered the temporary storage price, and began with reducing market expectations to carry out gradual reform and adjustment, guiding the rational return of the market. The initially lowered temporary corn purchase and storage price is the state's most firm signal regarding the marketization of agricultural product prices. However, the reform of the temporary storage price is only one aspect of the market-oriented reform of agricultural product prices, and it is currently only at the initial stage. The reform and transformation of the price formation mechanism for agricultural products is the important task at this stage. The price formation mechanism is a major issue that directly affects grain production and security. Reform and transformation are imperative, yet the road is long and arduous.

Highlight key points, retain what should be retained and release what should be released, and proceed step by step. One point needs to be emphasized here: the market adjustment failure caused by the temporary storage policy should be a short-term phenomenon. In the long run, China's self-produced grain remains and will remain in a "tight balance" pattern for a relatively long period. Market-oriented reform must be advanced, but food security must be guaranteed, so the market-oriented reform of agricultural products must not be too radical or one-sided; it is necessary to highlight key points, retain what should be retained and release what should be released, and proceed step by step. The "Several Opinions of the Central Committee of the Communist Party of China and the State Council on Promoting the Reform of the Price Mechanism" clearly states that, in accordance with the principle of "highlighting key points, retaining what should be retained and releasing what should be released", differentiated support policies should be implemented for different varieties based on China's national conditions. Choosing corn as the breakthrough for reforming the temporary purchase and storage policy not only demonstrates the state's will to ensure food security and protect staple grains, but also highlights the development pattern of insisting on market-determined prices for varieties such as corn that have large demand elasticity, long industrial chains and a high degree of connection with domestic and international markets. On the one hand, it firmly continues to implement and improve the minimum purchase price policy for rice and wheat, ensuring the circulation, operation and management of grain needed for the state's strategic reserves and ensuring basic self-sufficiency in grains and absolute security of food rations; on the other hand, it reforms and improves the corn storage and purchase system, continues to implement the pilot reform of target prices for cotton and soybeans, focuses on giving play to the decisive role of the market in price formation in the production of such crops, guides production through market price signals, adjusts supply and demand, and promotes the sustained and healthy development of the industry. Differentiated support policies should be implemented and subsidy distribution methods should be improved. An unchanging price-support policy will cause farmers to form wrong expectations and ultimately affect the formation and functioning of the price mechanism, leading to market adjustment failure. "Highlighting key points, retaining what should be retained and releasing what should be released" in terms of support policies means implementing differentiated support policies for different varieties. First, the "amber box" support policy can be adjusted and improved, and the scale and scope of implementation of the "green box" support policy can be gradually expanded. Second, reference can be made to Japan's tax and subsidy policies featuring "differentiation by variety and multiple levels" to promote the precise reform of China's agricultural subsidy mechanism, support the adjustment of the agricultural industrial structure, protect farmers' enthusiasm for production, and promote the sustainable development of agricultural production. Third, make full use of the target price subsidy policy. Replacing the temporary purchase and storage policy with a target price subsidy policy can effectively guarantee producers' basic income, mobilize the enthusiasm of all market participants, allow the market to play a decisive role in resource allocation, reduce market distortions, and ease the government's storage pressure. Fourth, implement land subsidies. Research has found that direct subsidies to farmers based on planted area are significantly more efficient than subsidies based on specific products and delivery volume, and transfer payments can achieve relatively high effects. Therefore, implementing a subsidy policy linked to land, without excessive attention to the production structure of agricultural products and with subsidies given directly according to planted area, allows the market mechanism to fully play its role, thereby achieving a more scientific and reasonable adjustment of the production structure of agricultural products. Fifth, the government can directly purchase grain from producers at market prices through orders as needed, rather than promising price-support purchases. This not only achieves the purpose of maintaining a scientific and reasonable inventory quantity, but also protects agricultural producers, while at the same time not causing market distortion.

Strengthen information disclosure and reasonable policy guidance. Incomplete information and information asymmetry are important aspects restricting farmers' production decisions and risk management. Constrained by factors such as traditional information acquisition channels and low sensitivity to policy information, farmers cannot make timely, scientific and reasonable production decisions. To this end, the government should, through means such as science and technology extension and knowledge dissemination in rural areas, bring the benefits of informatization and scientific methods to the broad masses of farmers, guide farmers to make full use of traditional and modern information channels to obtain the latest agricultural science and technology information, and learn to analyze and use it for production decisions and participation in market-oriented production operations. In addition, strong support should be given to the development of farmers' professional cooperatives in terms of policy and financial resources, actively guiding the broad masses of farmers onto the path of large-scale production and professional cooperation, with resource sharing and scientific production.

Continuously strengthen policy support and lead rural financial reform. Corresponding preferential or subsidy policies should be formulated for agriculture-related financial institutions, and dynamic differentiated policies should be implemented to stimulate financial institutions to shift their attention to the rural financial market and continuously improve the level of competition and capital support in the modern agricultural financial market. Financial institutions should, in accordance with the development idea that credit products follow the rural market, innovate credit products, achieve effective alignment between financial product innovation and the development of new agricultural business entities, and, on the basis of sorting out and classifying existing credit products, further expand service targets and continuously meet the development needs of modern agriculture.