February 17, 2004

 

 

China Adopts Measures To Raise Domestic Grain Output

 

China announced a string of measures last week aimed at increasing domestic farm incomes through supportive policies such as direct subsidies to grain farmers, a reduction in agricultural income tax by one percentage point, and the scrapping of the special tax on farm goods except tobacco leaves.

 

Analysts feel that the move to provide incentives to farmers is a step in the right direction but is not likely to have a significant impact on production figures in the near term.

 

The announcement containing the measures was described by the local media as a milestone in China's farm sector reforms. It was the sixth such effort in 26 years since Beijing initiated rural reforms in 1978.

 

Analysts believe the new measures will help the country's grains output gradually recover from the downward trend seen in recent years.

 

"The document aimed to protect farmers' interests...(Therefore), the declining trend in grains output in the past few years will probably be reversed," said Ding Haijiang, an analyst at Zhejiang Nanhua Futures.

 

China's grains output, which mainly consists of wheat, corn, rice and soybeans, fell continuously in the past four years amid a steady decline in the area under cultivation.

 

But the government "has sent a strong signal of support to local farmers...So these policies will definitely lead to (more) planting (in the future)," said Han Jun, director of the rural department at the Development and Research Center, a government think-tank affiliated with the powerful State Council in Beijing.

 

Just a few days before the incentives were announced, the Chinese government said it planned to allocate 10 billion yuan ($1=CNY8.28) to subsidize grains farmers and CNY500 million separately to subsidize growing high-quality wheat, corn and high-oil-content soybeans in 2004.

 

Chinese farmers are expected increase acreage under grains cultivation this year as well as in the next couple of years if their incomes are indeed lifted after the preferential measures are applied, analysts said.

 

Despite the increase in acreage, analysts don't expect a sharp increase in output in the near term, as China's farm sector is still burdened with high taxes that the government has promised to cut in stages.

 

State Council analyst Han said the government had set a target for this year's grains output at 455 million metric tons, up 5.7% from a 14-year low of 430.6 million tons in 2003.

 

That is a modest target, considering the average production in the last few years was around the same amount.

 

Han estimated China will be able to produce a total of 512 million tons of grains a year if the acreage is substantially increased, a difficult prospect for the near term.

 

As the farm sector in general is burdened with high taxes and low returns, many are leaving their farms and migrating to cities in search of employment, and this will limit the ability of the government to boost farm output substantially, he said.

 

According to Yu Junli, senior grains analyst at Green Futures in Beijing, low farm incomes that put negative pressure on grains output in the past will continue to do so in the foreseeable future.

 

"It will be a long way to go," said Yu. "Farmers' income will be increased gradually on government support, not immediately."

 

"For the moment, farmers still have to pay land usage fees as well as various fees levied by local government," Yu added.

 

Another Shanghai-based analyst at Dalu Futures agreed, saying lifting farm income and the nation's grains output should be done "step by step".

 

"The declining trend will be curbed by the central government's effort, but it takes time to see a substantial increase," said Ma Mingchao, a veteran grains analyst at Juheng Investment Co. in Shanghai, adding it would take at least two to three years to realize a substantial recovery of grains output.

 

The overall condition of the winter wheat crop in major producing regions in China is poorer than in the last season because of lower soil moisture and crop diseases, local traders said.

 

China's winter crop is mostly past dormancy and is moving into the greening stage this week, added the traders.

 

According to the latest reports, in Henan province, the top wheat producing region in China, the condition of the wheat crop this year is poorer than in the previous year, they said.

 

Late planting, less organic fertilizers, and lower than average soil moisture have all contributed to the lower crop conditions.

 

Henan's total winter wheat acreage in the June 2004 to May 2005 marketing year is pegged at 4.85 million hectares, according to figures from a local agricultural statistic agency in Henan.

 

An earlier than usual outbreak of crop diseases also made growing conditions worse, traders said. Some cases of wheat stripe rust, or puccinia striiformis, were discovered in Henan as early as last November, traders said.

 

Crop conditions in other major producing regions in the Northern China Plain and Yellow River Basin are also less than ideal, traders said. Snow and rainfall were below average in the past winter.

 

China's winter wheat acreage in 2004-05 is pegged at 19.50 million hectares, about 5% below acreage last season, and production is forecast at only 78.11 million metric tons, down 4% from production last season, traders said, citing the forecast from a government-backed grain think tank last week.

 

China's wheat production has been falling consistently in the last four years. If the current forecast for production in 2004-05 is realized, it would be the lowest production since 1984, traders said.

 

The government-set procurement prices of normal quality winter wheat this year are also expected to rise by nearly a quarter to 1,300-1,400 yuan ($1=CNY8.277) a metric ton from an average procurement price of CNY1,100/ton last season, traders said.