How to improve the price formation mechanism for agricultural products
[Separating price from subsidy, and separating out the income-support function that was previously implicit in prices so that the subsidy system can share it, is the basic approach of agricultural product price reform]
For three consecutive years starting in 2014, the Central Document No. 1 specially emphasized the need to improve the price formation mechanism for grain and other important agricultural products, gradually establish a target price system, and simultaneously reform the purchasing system. Further improving the price formation mechanism for agricultural products is both the highlight of current efforts to deepen rural reform and an urgent task. If the price formation mechanism for important agricultural products is not straightened out, the role of the market mechanism cannot be discussed, farmers will have no solid foundation for increasing income, and national food security will lose its foundation.
Why reform and improve the price formation system for important agricultural products
In 2004, the State Council issued Document No. 17, namely the guiding opinions on further deepening reform of the grain circulation system, marking the full liberalization of both purchase and sale of Chinese agricultural products and the formation of a new agricultural product market regulation system. The new regulation system for the agricultural product purchasing market has three pillars: the first pillar is the abolition of the previous protective price purchasing and the liberalization of the market, with the state implementing the minimum purchase price and temporary storage policies when necessary; the second pillar is the four subsidies for agricultural producers after the abolition of the agricultural tax, and by 2015 the total amount of the four subsidies had reached more than 160 billion yuan; the third pillar is the establishment, in the context of WTO accession, of an import and export regulation mechanism based mainly on tariff quotas. These three pillars formed the basic framework for agricultural product regulation in the new period.
Overall, over the past decade or more, the operation of this framework system has generally been effective. It promoted 12 consecutive years of increased grain production and output in China, also brought 12 years of rapid income growth for farmers, and at the same time provided a solid foundation for national economic development during this period.
But on the other hand, and this is something we especially need to note, due to operational problems or lack of experience, some deviations appeared in the actual operation of this regulation system, causing some contradictions to gradually accumulate, so now we must carry out reform.
The existing regulation system for the agricultural product purchasing market mainly has four problems.
The first problem is that policy-based storage purchase prices rose rigidly, that is, they only went up and not down, leading to an expansion of the price gap at home and abroad and increased import pressure. We collectively refer to minimum protective price purchasing and temporary storage as policy-based storage purchase. China began implementing the minimum purchase price policy for rice and wheat in 2004, and began implementing the temporary storage policy for corn, soybeans, cotton, sugar, and rapeseed in 2007. There is not much difference between these two policies, except that the minimum purchase price must be announced before sowing, while the temporary storage price is announced when the crop comes to market for purchase. In the first few years, the implementation of these two policies was relatively stable, and the minimum purchase price and temporary storage price basically did not change much each year. But starting in 2008, agricultural production costs rose rapidly (increasing by 8%-10% on average each year), among which the most important were land costs and labor prices, which rose too quickly. In order to compensate for the rapid rise in farmers' grain production costs, starting in 2009 the state raised the minimum purchase price and temporary storage price by a relatively large margin for four consecutive years. The domestic average prices of rice, wheat, and soybeans began to exceed the free-on-board prices of the international market in 2010, and by 2013 they had comprehensively exceeded the duty-paid prices of imported agricultural products within quota. At present, domestic prices of wheat, rice, and corn are 34.2%, 39%, and 43.8% higher than duty-paid prices respectively. In addition, a 65% tariff is also levied outside quota, which means that the current domestic prices of the three grains still have about a 20%-30% firewall distance from the high-tariff price outside quota. If domestic agricultural product prices continue to rise, once they exceed the tariff price of imports outside quota, this barrier will be broken.
Now we have encountered a dilemma. Under the original regulation system, in order to respond to rising farmers' production costs, purchase prices had to be raised; otherwise farmers would have no returns from growing grain and no enthusiasm for growing grain. But once domestic agricultural product prices exceed the import cost price, namely the ceiling price (we call the duty-paid price within quota and the tariff price outside quota the ceiling price), large imports of foreign agricultural products become unavoidable.
The space in which the original regulation system could operate effectively was between the two prices of agricultural production cost (that is, the floor price) and import cost (that is, the ceiling price). But as the floor price kept rising and the ceiling price kept pressing downward, the regulatory space was gradually squeezed, and this is the most prominent problem currently facing the agricultural product price system.
The second problem is that policy-based storage purchase prices occupy a dominant position, affecting the role of the market mechanism. Policy-based storage purchase prices are in fact higher than market prices, which leads to only Sinograin and Sinocot purchasing according to state requirements, and they have no choice but to purchase, while other market entities have no enthusiasm to enter the market. This forms the so-called policy market, completely blocking the role of the market mechanism, with only one entity in the entire circulation link.
The third problem is a large backlog of inventory. Because storage purchase prices are higher than market prices, according to state requirements, the entire purchase, storage, and outbound release process is financially subsidized, so sales must be made at a price that covers cost. But because the cost-covering sales price is higher than the market price, the goods simply cannot be sold. This leads to a large increase in grain production after every price increase, and after the large increase the grain enters state grain depots, and once in it cannot get out, piling up in the depots and causing backlogs.
The fourth problem is that subsidy pressure is growing. As purchase volume increases, and since grain cannot get out after entering the depots, the amount of subsidies also increases accordingly. The storage fees and preservation fees incurred after entering the depot, plus the financial subsidies for purchase costs, and if high-price purchases are followed by low-price outbound releases, losses occur, thus creating enormous pressure on public finances. Against the background of public finances entering a period of low growth, the previous agricultural product price regulation system had to be reformed.
The basic approach to reforming and improving the price formation mechanism for important agricultural products
Starting in 2013, the State Council instructed the National Development and Reform Commission to take the lead in studying reform of the agricultural product price formation mechanism. Our research shows that the fundamental reason why the current price formation mechanism and storage purchase system have the above problems is that in actual operation, too many policy functions of "supporting income" were assigned to the minimum purchase price and temporary storage system. Policy practice in recent years has already proven that policy-based storage purchase indeed should not bear too many income-support functions, and should mainly smooth market price fluctuations and protect farmers' basic returns from growing grain. Protecting farmers' income should not be undertaken by grain storage purchase prices, but should be completed by the subsidy system. Prices should reflect supply and demand relations, and should not regulate income, nor should they participate in distribution. Facts have already proven that using prices to protect income cannot protect it, and it also affects the functioning of the market price mechanism.
The approach to solving this problem is to realize the separation of price and subsidy - separating out the income-support function previously implicit in prices so that the subsidy system can share it, and letting agricultural product prices be determined by supply and demand and play a regulatory role in supply and demand - this is the basic approach of agricultural product price reform.
There are still several points here that need special explanation. First, regulating the market formation mechanism of agricultural product prices is ultimately for the purpose of ensuring national food security, so when reforming the agricultural product price system, special attention must be paid not to forget the regulatory goals. Food security includes three aspects: first, the foundation of food security should be production capacity security, not necessarily output security; second, the ability to control international resources; third, the necessary reserve and adjustment capacity. Second, the goals of market regulation must be clarified, namely basic overall balance, controllable market fluctuations, protection of farmers' interests, and promotion of market development. In particular, it must be emphasized that market fluctuations should be controllable. In the past we were overly sensitive to market fluctuations. Now it seems that as long as a range is set well, if prices fluctuate normally within this range, there should be no intervention. In addition, there must be means to regulate prices and ensure that agricultural product prices generally fluctuate within a reasonable range. At the same time, different agricultural product varieties should be prioritized and ranked, clarifying what is regulated by the central government and what the central government can leave directly to the market, so that the entire regulation system can be made more precise and stable.