Sustained efforts needed to boost competitiveness of Chinese grain
"The issue of food security is no longer simply a matter of securing adequate supply, but rather an issue of industrial security for Chinese agriculture and an issue of employment and livelihood security for Chinese farmers. Therefore, on the one hand, we must improve the efficiency and competitiveness of agricultural production; on the other hand, we must also make full use of the protective provisions permitted for domestic agriculture under WTO rules, and build an agricultural support and protection system that both conforms to international rules and suits China's specific conditions." At a doctoral forum recently held by the China Institute for Rural Studies at Tsinghua University, Chen Xiwen, former deputy head and director of the Office of the Central Rural Work Leading Group and dean of the China Institute for Rural Studies at Tsinghua University, provided an in-depth analysis of the problems facing China's food security.
Lack of price competitiveness is the weak spot
Since the end of 2012, China's grain production has faced this problem: output has risen continuously, yet prices have remained persistently higher than international market prices.
"The causes of this phenomenon are quite complex." Chen Xiwen explained that, first, in recent years China's land rents, labor wages, input costs and agricultural service costs, among other grain production costs, have continued to rise. The minimum purchase prices and temporary storage prices for grain in major producing areas have also continued to increase. Second, the RMB exchange rate has remained strong. Compared with 2005, the RMB has appreciated by about 25% against the US dollar, meaning that grain from the international market, settled in US dollars, has entered the Chinese market at lower prices. Third, the impact of the international financial crisis has continued to play out, and deflation caused global commodity prices to plunge. By the end of 2015, the international market prices of rice, wheat, corn and soybeans denominated in US dollars had fallen by 32.3%, 32.2%, 44.8% and 34.9% respectively. Fourth, global shipping prices plunged; the freight rate for bulk grain from the US Gulf of Mexico to China's Huangpu Port in Guangdong is now only about one-third of what it was in 2008. International grain prices fell, shipping prices fell, and the US dollar-to-RMB exchange rate fell. The "three declines combined" ultimately manifested as a sharp drop in the prices of international grain entering China's grain market.
"But this does not mean that China's grain production has fallen into difficulty. The resource endowments of countries around the world differ greatly, and this also leads to differing grain production costs across countries." Chen Xiwen said that, in accordance with WTO rules, China has established a management system for opening its agricultural product market to the international market, mainly the tariff quota system. Under this system, the Chinese government has committed to applying tariff quota management to major imported grain varieties (wheat, corn and rice), that is, imposing a 1% tariff on grain imported within the quota amount, and a 65% tariff on grain imported beyond the quota. China has committed to an annual import quota ceiling of 9.636 million tons of wheat, 7.2 million tons of corn and 5.32 million tons of rice. To date, the imported quantities of the above three major grains have all remained below the quota levels China committed to. Because of the tariff quota system, the quantity of the three major grains that can be imported into China is controllable, not exceeding 4% of China's current total grain output.
From 2009 to 2011, China gradually became a net importer of the three major grains: wheat, corn and rice. If domestic grain prices continue to rise at the pace of recent years, it is expected that within 5 to 7 years China's grain prices will be comprehensively higher than the landed cost of imported grain after the 65% tariff is levied, which would mean the defensive line of the tariff quota system would be completely breached. In addition, in recent years, imports of some varieties not subject to tariff quota management have surged, such as soybeans, barley, sorghum, corn, distillers' grains and cassava. These varieties, used in the feed industry as substitutes for corn, have dealt a severe blow to China's corn market. In 2015, these substitutes entering the Chinese market reached as much as 39.27 million tons, and together with about 4.73 million tons of corn imported within the quota, the total approached 20% of China's corn output that year.
"This forced a corresponding quantity of domestically produced corn out of the market and into warehouses. This is a major reason for the 'simultaneous increase in three quantities' of grain output, inventories and imports." Chen Xiwen said.
Promoting reform of the grain price formation mechanism
Grain prices are the topic farmers care about most. In 2004, in order to mobilize farmers' enthusiasm for growing grain, the state explicitly proposed fully opening the grain purchasing and sales market. Thereafter, to avoid the situation of "low grain prices hurting farmers," the State Council also formulated a policy of implementing minimum purchase prices in major producing areas. From 2008 to 2014, the state appropriately raised the minimum purchase price level every year. During these 7 years, the minimum purchase price of wheat increased by 63.9%, and the minimum purchase price of rice increased by more than 90%. In 2007 and 2008, the state successively implemented temporary storage policies for corn and soybeans in the three northeastern provinces and Inner Mongolia. By 2014, the temporary storage prices for corn and soybeans announced by the state had increased by 60% and 29.7% respectively compared with when they were first implemented.
"The original intention of these two policies was to provide support for market prices, but in the course of implementation they also produced some side effects, namely interference with the market mechanism." Chen Xiwen believes.
One prominent manifestation is that the minimum price and temporary storage price gradually evolved into the market's maximum price. In Northeast China and Inner Mongolia, the share of corn purchased by the Sinograin system kept rising along with the increase in the corn temporary storage price. In major producing areas, the grain purchasing and sales market became a "policy market," and a grain purchasing and storage market with multiple operators and multi-channel circulation effectively no longer existed.
Another manifestation is that grain processing enterprises fell into operational difficulty. If they could not purchase grain at the market equilibrium price, and buying grain released from storage at Sinograin auction prices yielded too little profit, phenomena such as "strong wheat but weak flour" and "strong rice but weak milled rice" emerged.
For this reason, this year's No. 1 Central Document proposed: "In accordance with the principles of market pricing and the separation of price and subsidy, actively and steadily advance the reform of the corn purchase and storage system."
Chen Xiwen stated that it is necessary to accelerate reform of the corn price formation mechanism, let the corn price be determined by market supply and demand, and use this to guide the adjustment of the regional layout of agricultural production and the structure of varieties, and promote supply-side structural reform of grain. At the same time, it is necessary to activate diverse market entities in corn purchasing and sales, adopt relevant policy measures that both help mobilize the enthusiasm of processing enterprises and help reduce corn inventories, and expand processing enterprises' demand for domestic corn. In addition, it is necessary to safeguard the reasonable returns of corn producers, and to study and introduce a corn producer subsidy system that conforms to national conditions and relevant WTO rules, so that farmers can ride out severe market fluctuations smoothly.