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An Analysis of the Current Agricultural and Rural Economic Situation and Related Policy Suggestions

Feb 11,2005

Li Jiange & Han Jun, Development Research Center of the State Council

Research Report No.203, 2004

The State has visibly strengthened policy support for agriculture, peasants and the rural areas since the beginning of 2004. As a result, grain production has improved greatly and the rise in peasant incomes has clearly accelerated. But we must realize that the basis for these increases is not so solid. Next year, the work on agriculture and the rural areas should strive for the realization of "two ensures, one intensification and one acceleration". That is, they must ensure a balance in grain supply and demand and stable grain prices, ensure a steady growth in peasant income, intensify support for social undertakings in the rural areas, and accelerate rural reform.

I. The Grain Regulatory Policy Should Emphasize Two Points: While Overall Grain Production Capacity Should Be Protected and Stabilized and a Basic Balance in Grain Supply and DemandEnsured, Equal Attention Should Be Given to Keeping Grain Prices at a Reasonable Level

The total grain output in 2004 was estimated at 938.9 billion jin, 77.5 billion jin or 9% higher than in the previous year. While this large increase is directly attributable to favorable weather, it has more to do with State support for grain production. One major experience of 2004 was that facing a comprehensive upturn in grain prices, the decision-making departments have not deliberately suppressed grain prices. Instead, they have complied with the rules governing market supply and demand and treated the rise in grain prices in a rational manner. They mainly used economic tools to regulate grain supply and demand.

At present, total domestic grain demand is about 970 billion jin, growing at an annual rate of 0.8%. As long as grain output in the next two or three years can reach 950 billion jin, this, coupled with soybean import and some wheat import, can entirely guarantee the basic balance of grain supply and demand. Whether the goal of restoring total grain output to 950 billion jin can be achieved depends on the weather and if the policies supporting grain production can be maintained and improved. Achieving this goal is difficult, but entirely possible as long as regulatory policies are proper.

How long can the hiked grain prices stay at that level? Will they stay for just two or three years? These are the greatest concerns among the peasants and the leading grain-producing regions. The situation in the past 10 years was that grain prices went up for three years from the end of 1993 to 1996 and then dropped down and remained sluggish for nearly seven years from 1997 to 2003. Right now, the grain prices in the leading producing regions are falling visibly. Due to complex factors, certain fluctuations in grain prices are inevitable. But efforts should be made to prevent a drastic fall in grain prices for two to three years after this round of price hikes. In the next two or three years, grain prices will be more likely to fall, instead of rising. A drastic fall in grain prices will plunge the entire agricultural and rural work into an extremely difficult situation.

We have the following suggestions with regard to grain policies in 2005.

1. Grain-growing acreage must be ensured

This is a basic guarantee for stabilizing and increasing grain output. The Ministry of Agriculture estimates that grain-growing land in 2004 covered 1.53 billion mu, 40 million mu more than in the previous year. In the next two to three years, the acreage should return to 1.55 billion mu.

2. All the policies supporting grain production must be stabilized

The funds for direct grain subsidy must be appropriately expanded, and agricultural tax reduction and exemption should be further intensified. It is preferable that the floor prices for grain purchase should be limited to rice and should not be extended to other crops. Both Chinese and foreign experiences indicate that although floor purchase prices or the minimum protective prices are indispensable, their policy costs are generally high. If adopted, these policies should be handled with care, and the floor purchase prices should be set at a reasonable level. Fiscal resources should be pooled to ensure price protection for rice production.

3. A compensation mechanism for leading grain-producing regions should be established

Currently, the grain risk fund is made up of two parts, those from central and regional governments. Transferring grain from a province to a leading marketing region is in fact transferring part of the grain risk fund to the grain-receiving province. This creates a situation in which "poor provinces"are subsidizing"rich provinces". In the past when there was a grain surplus, the leading grain-producing regions felt they were at a disadvantaged position. This abnormal subsidy has seriously dampened the motivation for production of the leading grain-producing regions. Food security is not merely a matter for the leading grain-producing regions. More importantly, it is a matter for the grain-receiving provinces. It is intolerable to let the relatively backward grain-producing regions assume this responsibility, and a mechanism must be established to balance their interests. We suggest that the proportion of the grain risk fund for the leading grain-producing regions, which is raised by these regions with local finance, should be properly reduced. In the meantime, a food security fund should be established by charging a compensation fund from the developed provinces based on the quantity of the grains they receive or the acreage of farmland that should be used. Besides, part of the land royalty may also be transferred to the central authorities as a source of the food security fund. Central finance can then give appropriate subsidies to the grain-sending provinces based on the quantity of grain sent out.

4. The policies on grain import and export should be in harmony with those on domestic grains so as to prevent an"adverse regulation"and avoid weakening China’s"big power effect"on grain imports

Past experience indicates that there were times when grains were massively imported while domestic supply was relatively balanced and when grains were massively exported while domestic supply was tight due to a drop in output. The policies on internal and external grain trade should be coherent so as to raise the operational efficiency of grain import and export, prevent a serious divorce of the orientations of grain import and export from the actual domestic supply and demand, and reduce "adverse regulation". In 2005, maize exports may be expanded in a proper manner. The wheat imported in 2004 was all used to replenish the State wheat reserve. After a bumper wheat harvest, the quantity and rhythm of wheat import in 2005 should be properly contained. Past experience indicates that once grain-exporting countries believed that China would have a grain shortage, China’s grain import would trigger a rise in grain prices on the international market. China’s grain import truly has a "big power effect". Therefore, it is necessary to further reform the mechanism for grain import and to choose right opportunities for grain import so as to weaken the "big power effect".

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