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China Economy

Rural China will gain if Beijing cultivates change in farm support schemes

Wusheng Yu says direct payments and more open farm trade can help China to reduce agricultural support costs and so free up resources for rural development needs

PUBLISHED : Tuesday, 30 May, 2017, 3:46pm
UPDATED : Tuesday, 30 May, 2017, 7:44pm

China’s farm support schemes have heightened tensions on trade with the US and other countries. Policy reforms are ongoing, but more could still be done to increase farm trade and curb excessive high-cost production, while easing burdens on taxpayers and consumers at home, tackling rural poverty and raising farm incomes, as well as ensuring long-term sustainability.

With the government setting high minimum prices for its procurement programmes for key commodities, stockpiles have ballooned, as global prices fell from their peaks six years ago. In 2015, prices in China for soybeans, maize, rice, and wheat were all at least double world market rates.

With domestic support prices high, and restrictive import quotas and high over-quota tariffs limiting competition from cheaper imported goods, farm output for these has continued to expand. In the decade up to 2015, total production of rice, wheat and maize grew by 38 per cent.

China producing more grain than ever

Government stocks for many products now exceed the amount China consumes over several months. The domestic stocks to consumption ratio in 2015 is estimated to have risen to 166 per cent for cotton, 87 per cent for wheat, 51 per cent for maize and 44 per cent for rice.

Recent reforms have sought to reduce the fiscal burden of current policies, disconnect the role of farm subsidies from price formation, and begin improving the market orientation of domestic agriculture. At the same time, the authorities want to safeguard rural livelihoods and food security.

For cotton and maize, the government’s compensatory payments now go directly to producers whenever prices fall below a pre-set target – instead of a minimum price floor backed by government stockpiling. However, the wheat and rice markets are still regulated through the minimum price system.

Beijing also consolidated several existing direct payments to farmers, but little has been done formally to increase openness for farm imports, despite a stated aim of utilising both domestic and international markets to achieve food security goals.

Moving from supported wheat and rice prices to a system of direct payments and further steps to delink existing direct payments from production decisions could allow the government to support farm incomes at lower cost, and mitigate environmental pressures associated with intensive input use. These steps, combined with more open farm trade, would not only allow Beijing to improve troubled relationships with trading partners, they could also free up scarce resources to tackle poverty and other rural development challenges.

Wusheng Yu is an associate professor at the University of Copenhagen, Denmark. This analysis is based on a study for the International Centre for Trade and Sustainable Development