Plentiful supply means lower prices for farmers Return to work in a coastal city, or continue growing grain at home - that is the dilemma causing deep anxiety for Guizhou farmer Gao Song. Late last year, Mr Gao was lured away from his job in the city and back to the farm by high grain prices. But fate seems to have played a cruel joke on him as prices have since plummeted with the year's bumper harvest of grain and other crops, a downturn in global commodities prices, and weak domestic corn demand. From mid-year price peaks, wheat is down 53.3 per cent, corn is down 42.6 per cent and soyabean 57.9 per cent. Some analysts are forecasting that grain prices will fall by a further 30 per cent next year. National Development and Reform Commission deputy head Du Ying was quoted by Xinhua as saying that the mainland expected a fifth straight year of bumper harvests this year, with output at a record 525 million tonnes, up 5 per cent from last year. Inevitably, a large grain surplus will continue to put pressure on domestic prices and discourage farmers from planting crops next year. However, the central government and some state companies have said they would buy crops such as soyabean, corn and cotton to stabilise domestic farm product prices and increase the incomes of farmers. The authorities have decided to increase interim reserve grain purchases by 14 million tonnes, comprising 7.5 million tonnes of rice, 5 million tonnes of corn and 1.5 million tonnes of soyabean, in addition to previously planned purchases of 16.5 million tonnes. Cinda Securities agriculture analyst Kang Jingdong said the move would improve farmers' interest in producing grain crops as prices had already fallen close to the cost of production. Rural issues are at the heart of all of Beijing's policies and lifting farm incomes is a major priority in the drive to expand domestic demand. The agricultural sector only accounts for about one-tenth of mainland GDP, but it supports about three-quarters of the population. Since 2004, Beijing eliminated all taxes and levies on special agricultural products such as fruit, a total tax cut of about 50 billion yuan (HK$56.34 billion). The government is also rolling out additional subsidies for grain farmers and raising grain prices every year to narrow the widening income gap between urban and rural populations. To boost agricultural production and efficiency, the Communist Party has announced reforms that will allow for the reallocation of land by legalising the transfer of land-use rights to cooperatives or larger farms in the villages. On Monday, the government also lifted controls on prices of a wide range of food products, including meat, grain, cooking oil and dairy products, after having imposed caps in mid-January as part of efforts to curb inflation. The mainland has been struggling to become more self- sufficient, particularly in the production of corn and soyabean, because of rising demand for animal feed and edible oils. The country basically grows enough rice for itself and has a surplus of wheat. According to a report by the national programme for medium and long-term grain security, a strategy approved by the State Council in July, mainland grain supply is expected to remain tight for the foreseeable future. The report said the country's grain consumption was forecast to rise to 525 million tonnes by 2010, and to 572.5 million tonnes by 2020, staying just ahead of targeted production at or above current levels of 500 million tonnes next year, rising to 540 million tonnes by 2020. Corn supply is expected to be particularly tight in the long term, while the country remains more confident in its ability to supply wheat and rice, according to the report. Meanwhile, Beijing has announced a raft of food export tax rebates, including the elimination of a tax on grain exports effective from next month as weak demand and a bumper harvest risked a domestic glut. Last month, the finance ministry said on its website that the 5 per cent export tax on corn and soyabean and a 10 per cent tax on corn flour and starch would be scrapped from December 1. Just six months ago, the country pushed up tariffs on a range of commodities and abolished the 13 per cent export rebate on grain exports this year as it sought to lock in supply during an increase in international prices. Soaring grain prices and export curbs by the central government in the first half of this year encouraged grain smuggling activity. For the year to August, China Customs reported 314 cases worth an estimated 97.47 million yuan in unpaid taxes. Fortunately, government measures to shore up grain prices have reversed the tide of smuggled exports, with some companies, particularly soyabean processors, turning to cheap imports on higher prices, even in Heilongjiang, the country's top soyabean growing area. Essence Securities agriculture analyst You Hongye said the government had given the wrong signal to farmers by suggesting that it would buy all excess grain in the market while grain prices overseas were well below domestic levels. But Mr You said global grain prices might increase after 2010 if liquidity recovers and supply tightens. For Mr Gao, that could be a good time to begin planting. The only question is what should he do in the meantime?