Three-in-one agricultural subsidy policy officially launched nationwide
Caijing reporter Zhou Zhe/Text
Before June 30, 2016, farmers across the country will receive an "agricultural support and protection subsidy," rather than the previous three separate subsidies: "direct subsidies to grain farmers," "crop improved seed subsidies," and "comprehensive agricultural input subsidies."
This is the result of the "three subsidies" reform pilot being rolled out nationwide. In April 2016, the Ministry of Finance and the Ministry of Agriculture issued the "Notice on Comprehensively Rolling Out the Reform of the Agricultural 'Three Subsidies'" (hereinafter referred to as "Cainong Document No. 31"), deciding to merge the three subsidies of "direct subsidies to grain farmers," "crop improved seed subsidies," and "comprehensive agricultural input subsidies" into an agricultural support and protection subsidy, with the policy goal adjusted to support the protection of cultivated land fertility and moderately scaled grain operations.
This move is both due to the constraints of WTO rules and aimed at adjusting the policy intent of agricultural subsidies, that is, shifting from stimulating production to protecting cultivated land, promoting moderately scaled operations, and advancing the development of rural finance. This adjustment signals a change in the specific approach of fiscal support for agriculture, which will gradually have a profound impact on farmers and the structure of agricultural production.
From amber box to green box
An important reason for the "three subsidies" reform is that the space for amber box policies, including improved seed subsidies and comprehensive agricultural input subsidies, is limited and approaching the "ceiling" set by the WTO, so there is a need to shift to unrestricted green box policies, from price subsidies to income subsidies.
This three subsidies reform is a comprehensive advancement based on the reform pilot launched in May 2015. The "three subsidies" reform began in 2015, adjusting 20% of comprehensive agricultural input subsidies nationwide, plus pilot funds for subsidies to large grain growers and incremental funds from the agricultural "three subsidies," pooled to support moderately scaled grain operations. In addition, five provinces were selected as pilots to merge the "three subsidies" into "agricultural support and protection funds," using 80% of the existing comprehensive agricultural input subsidy funds, plus direct subsidies to grain farmers and crop improved seed subsidies, for the protection of cultivated land fertility.
In 2016, on the basis of summarizing pilot experience, the agricultural "three subsidies" reform was comprehensively rolled out nationwide, that is, nationwide the agricultural "three subsidies" were merged into an agricultural support and protection subsidy, with the policy goal adjusted to support the protection of cultivated land fertility and moderately scaled grain operations.
Cainong Document No. 31 requires that all localities promptly formulate implementation plans and must distribute the subsidy funds that need to be delivered to farmers by June 30.
Xu Xiaoqing, a researcher at the Development Research Center of the State Council, observed that in past practice all localities had already distributed the three subsidies to farmers together. The "direct subsidies to grain farmers," "crop improved seed subsidies," and "comprehensive agricultural input subsidies" were all issued to farming households, all in cash, so in actual operation all localities had long merged them together, often distributing them to farmers at a certain amount per mu. Among the four major subsidies, the agricultural machinery purchase subsidy is different: when farmers buy large agricultural machinery, they receive a certain proportion of subsidy based on documentation, which differs from the above three subsidy methods and will not be merged for distribution.
It is understood that after the abolition of the agricultural tax, China gradually established an agricultural subsidy system centered on the above four major subsidies. Merging three of them this time can be described as a major adjustment to the agricultural subsidy system.
When discussing the necessity of the "three subsidies" reform, multiple experts mentioned the WTO's constraints on amber box policies. Li Guoxiang, a researcher at the Rural Development Institute of the Chinese Academy of Social Sciences, introduced that when China joined the WTO, it was initially not allowed to provide subsidies to agriculture, but after difficult negotiations it ultimately achieved "de minimis" treatment, that is, the total amber box support subsidy cannot exceed 8.5% of output value.
According to a research report by the Development Research Center of the State Council, amber box support for grain has gradually approached the 8.5% amber box "ceiling," among which soybean in 2012 had amber box support policy accounting for 7.2% of soybean output value.
Green box policies are not restricted, and China is committed to transforming amber box subsidy policies into green box policies. The most critical difference between amber box policies and green box policies lies in whether they distort production and prices.
Crop improved seed subsidies are directly linked to certain agricultural products, stimulating the production of those agricultural products and affecting their prices; comprehensive agricultural input subsidies are subsidies for chemical fertilizers, pesticides, and diesel, reducing production costs and stimulating production. These two belong to amber box policies.
After being merged into the agricultural support and protection subsidy, the funds used for the protection of cultivated land fertility are given to farmers according to area. Even if farmers do not farm the land, they can still receive the subsidy, which will not distort production and belongs to green box policies.
Xu Xiaoqing told reporters that most countries, mainly developed countries, have experienced the process of shifting from agricultural product price subsidies to farmer income subsidies. Especially since the late 1990s, the trend of agricultural subsidy policies turning toward farmer income subsidies has been obvious. Shifting from price subsidies to income subsidies is an important trend in developed countries such as the United States, the European Union, and Japan. In addition to productive subsidies such as price subsidies and income subsidies, countries are also increasing non-productive direct subsidies focusing on the environment, rural development, agricultural product quality, and animal living conditions.
China's reform of the three agricultural subsidies, shifting from amber box policies to green box policies, from price subsidies to income subsidies, and from stimulating production to protecting cultivated land, is precisely the result of learning from the experience of countries around the world under WTO rule constraints.
Protecting cultivated land fertility
The "three subsidies" adjusted their policy intent, shifting from stimulating grain production to protecting cultivated land, because grain supply exceeds demand.
The funds for protecting cultivated land fertility may come from 80% of comprehensive agricultural input subsidies, direct subsidies to grain farmers, and crop improved seed subsidies. Most of the existing funds from the three subsidies are used to protect cultivated land fertility, first to stabilize farming households with contractual rights and reduce resistance to reform; second, to compensate farming households with contractual rights for the obligation to protect cultivated land.
From stimulating production to protecting cultivated land, Li Guoxiang believes this is a change brought about by grain supply exceeding demand. At the current stage, there is no need for strong stimulus policies; it would be better to cultivate cultivated land fertility well and develop scaled operations, so that when grain is needed in the future there will be growth potential.
It is reported that China's grain currently shows the phenomenon of "three simultaneous increases": increased output, increased imports, and increased inventories. Industry observers believe that grain production is facing another overall situation of supply exceeding demand since reform and opening up, causing grain inventories to increase.
Zheng Fengtian, vice dean of the School of Agricultural Economics and Rural Development at Renmin University of China, said that past subsidies encouraged farmers to use chemical fertilizers and pesticides, but now the concept must be adjusted to emphasize the cultivation of land fertility and soil remediation.
After the "three subsidies" reform, the funds used for the protection of cultivated land fertility are distributed according to area to farming households with contractual rights. The subsidy basis can be the area of second-round contracted cultivated land, tax-assessed cultivated land area, confirmed-rights cultivated land area, or grain planting area, etc. The specific type or types of area shall be determined by the provincial people's government in light of local realities. Subsidies will no longer be given to cultivated land already used as livestock and poultry farms, forest land, contiguous grain fields converted to facility agriculture land, cultivated land requisitioned (occupied) for non-agricultural purposes, and other cultivated land whose use has changed, as well as long-abandoned land, and land in the "supplement" side of the balance of occupation and supplementation whose area and quality do not meet cultivation conditions.
Area has already become the basis and key for distributing cultivated land fertility protection funds. In order to achieve its original intention of protecting cultivated land fertility, all localities strictly verify subsidy area, and cultivated land whose use has changed or whose quality does not meet requirements will be excluded from subsidies. For example, Jiangxi Province verifies farmers' subsidized cultivated land area according to the procedures of "village group registration, two rounds of public announcement, township preliminary verification, county-level confirmation," with checks and confirmation at each level, to ensure that this subsidy achieves the goal of protecting cultivated land fertility.
Cainong Document No. 31 did not specify how much of the funds are for protecting cultivated land fertility and how much are for moderately scaled operations, but multiple experts believe that this fund arrangement may continue the principle from the 2015 pilot of "existing funds split 80/20, incremental funds used for scaled operations." That is, nationwide, 80% of existing comprehensive agricultural input subsidy funds, plus direct subsidies to grain farmers and crop improved seed subsidies, are used for the protection of cultivated land fertility; 20% of existing comprehensive agricultural input subsidies, plus pilot funds for subsidies to large grain growers and incremental funds from the agricultural "three subsidies," are pooled to support moderately scaled grain operations.
Li Guoxiang said bluntly that giving the bulk of existing funds to farmers with contractual rights is to ensure a smooth transition of reform and reduce resistance from contracted farmers and small farmers.
Farming households with contractual rights not only have the right to use the land but also bear the responsibility and obligation to protect cultivated land. Zhu Qizhen, director of the Institute of Farmer Studies at China Agricultural University, said that cultivated land is collectively owned, but the collective cannot effectively supervise land use and maintenance and improvement of cultivated land quality. Therefore, farmers with contractual rights have an obligation to protect cultivated land, and even if the land is transferred out they should exercise supervisory rights. Therefore, there is a basis for giving cultivated land protection subsidies to contracted households; it is compensation for their protection of cultivated land.
Zhu Qizhen also reminded that farming households with land management rights also have the obligation to protect cultivated land, and even a more direct responsibility. Therefore, subsidies for protecting cultivated land should also take into account land users and agricultural operators.
Promoting scaled operations
The third reason for the "three subsidies" reform is to promote land transfer and moderately scaled operations. All incremental funds from the "three subsidies" are used to promote moderately scaled operations, which helps increase the enthusiasm of transferring farmers and, in the long run, will effectively promote the development of scaled operations.
The establishment of a nationwide agricultural credit guarantee system is an important measure to support moderately scaled operations. For a long time, farming households with management rights have faced the difficulties of "hard loans and expensive loans." This system attempts to provide guarantees to farming households without collateral so that these households can obtain credit loans, while localities can also provide interest subsidies on loans.
The subsidy funds for promoting moderately scaled grain operations are targeted toward new types of business entities such as large grain growers, family farms, farmer cooperatives, and socialized service organizations. Subsidy methods encourage localities to adopt loan interest subsidies, major technology promotion and service subsidies, and other methods, and do not encourage direct cash subsidies to new types of business entities. Loan interest subsidies may be provided at no more than 50% of loan interest. For major technology promotion and service subsidies, methods such as "service first, subsidy later" and providing in-kind subsidies may be adopted.
In recent years, subsidy funds for moderately scaled grain operations have been required to focus on supporting the establishment and improvement of the agricultural credit guarantee system, striving to build within three years a policy-based, independent, agriculture-focused, nationwide agricultural credit guarantee system. In May 2016, the National Agricultural Credit Guarantee Alliance Co., Ltd. was established in Beijing, marking an important step forward in the nationwide policy-based agricultural guarantee system.
Loans have always been a constraint on the development of land transfer and scaled operations. Xu Xiaoqing analyzed for Caijing reporters that the root of the difficulty farmers face in obtaining loans lies in the lack of effective collateral, so the state considered establishing a credit loan system, letting provincial and city/county-level credit guarantee institutions provide guarantees for new types of business entities so that they can obtain credit loans. To address the problem of expensive loans, localities can use the subsidy funds for moderately scaled operations within the agricultural support and protection subsidy to provide interest subsidy support for loans, with the subsidized interest not exceeding 50% of loan interest.
If the arrangement for the merged agricultural support and protection funds during the pilot period is continued, 20% of comprehensive agricultural input subsidies, pilot funds for subsidies to large grain growers, and incremental funds from the agricultural "three subsidies" will be used to develop moderately scaled operations.
The reason for opening such a gap in the original subsidies and giving part of the subsidies to new types of business entities such as large grain growers with management rights, Zheng Fengtian revealed, is that every year some National People's Congress deputies proposed to the agricultural authorities that farmers who do not farm but have land contractual rights can receive subsidies, but farmers who obtain land management rights after transferring land do not receive subsidies. This cannot provide incentives to large grain growers and cannot effectively promote scaled operations.
A case investigation by Feng Feng, Du Jia, and Gao Mou in Shiqiao Town, Anhui Province, shows that for a household that does not engage in agricultural production and relies on renting out land, each person in the household can receive land rent of about 50 kg of rice and various subsidies of about 100 yuan, and a household can receive about 600 yuan in income each year. Large grain growers and scaled operators, apart from the 5 yuan per mu improved seed subsidy, cannot receive direct grain subsidies and comprehensive subsidies according to the actual cultivated area, and must also pay land rent, so the cost advantage of scaled operations is not obvious.
Multiple interviewed experts said that gradually tilting agricultural subsidies toward scaled operations is the direction of reform, but the original subsidies involve too many small farmers with contractual rights, and it is impossible to cancel all their subsidies at once. Therefore, 80% of the existing comprehensive agricultural input subsidy funds must be given to farming households with contractual rights.
Li Guoxiang also said that all incremental funds from the "three subsidies" will be used for moderately scaled operations, and in the future the "three subsidies" increased by the state as needed will all be used to develop moderately scaled operations.
"The bulk of existing funds going to farming households with contractual rights is to smoothly advance reform, while all incremental funds going to new types of business entities such as large grain growers with management rights is the direction of future reform and development, and this proportion will become larger and larger in the future," Li Guoxiang said.
Xu Xiaoqing reminded Caijing reporters that in the short term the "three subsidies" policy will not have much impact on contracted farmers and transferred farmers, because according to his research findings, if subsidies are given to transferred farmers, contracted farmers will make up for it through land rent, for example by raising land rent, so in the short term transferred farmers will not clearly benefit from it. In the long term, this is the direction and trend, and in the future the tilt toward new types of business entities such as large grain growers will gradually become more obvious.