February 7, 2005

 

 

China's grain production recovers sharply in 2004

 

China's grain production recovered sharply in 2004 from 2003's poor harvest because of high prices and yields. Yields for corn and wheat set records in Marketing Year (MY) 04/05. Although area planted and production should grow again in 2005, China will continue to be a net importer of wheat and rice in MY05/06. For MY 05/06, wheat imports are forecast at 6 MMT. The government will continue to expand policies to encourage grain production and will continue to support corn exports to its neighbors. Food grain demand is declining, but feed grain demand will continue to grow, although not as fast as the overall livestock sector. Barley output will not keep pace with demand from breweries.

 

Grain farmers have been very responsive to government support policies and higher prices in 2004. Post believes that grain area and production will continue to rise in MY05/06. Higher prices are the key factor in boosting area and production. Grain prices rose 26 percent year-on-year in 2004, according to the National Statistics Bureau (NSB). Per capita farmer net income, fueled by higher grain prices, rose 7 percent year-on-year to RMB2,936 (US$=8.265RMB), the highest growth rate since 1997. Rural income nevertheless continued to fall behind urban income.

 

Over the long term, government target of raising farmers' income will conflict with the goal of maintaining high rate of grain self-reliance, as China's small farms are relatively inefficient producers of grain compared to higher-value labor-intensive products.

 

There have been exceptional developments in China's grain and feed situation in the past year. The net effect will be an increase in overall production, but imports of wheat will continue.

 

Grain consumption has exceeded production for some time, and the state reserve's enormous stocks have been drawn down to their lowest levels in years. A short crop in 2003 drew considerable attention and led late in the year to the first grain price increases in a decade. Farmers responded to the higher grain prices, increasing 2004 area planted for all grains. Nearly perfect weather in most of the country allowed record or near-record yields.

 

At the same time, the government implemented two significant new policy initiatives: The announcement of elimination of the agricultural tax; and the introduction of a system of direct payments to farmers. Increasing rural income is a stated goal of China's leadership; grain is an important component.

 

A tax of 5 percent on agricultural production has been in place for decades. In March 2004, the government announced elimination of the tax over five years, but gave the provinces the option of moving faster if they chose. As of January 2005, 25 provinces, municipalities, and autonomous regions already have eliminated the tax entirely.

 

The effect of the tax reduction on actual production is more political than economic, and its biggest effect may be on how much production is reported, rather than on actual production.

 

With a tax to pay, both farmers and local officials have had an incentive to under-report area planted to avoid tax. Elimination of the tax could increase reporting of land planted in grain.

 

In 2004 the government also introduced a program of direct payments to grain growers, also to be implemented at the discretion of the provinces. The payment program, where active, worked out to about US$18/ha, or less than $9 per average farm household in 2004. Some analysts believe a payment on planted area also could have more impact on area reported than on actual production. The payment program will be expanded in 2005.

 

Although the tax reduction and the direct payment program in theory would encourage planting, their impact is very small in percentage terms. The increase in area planted and presumed increase in inputs is a result of the substantial price increases that began in fall 2003. Plantings in 2005 will depend on grain prices, not government programs. If prices remain strong, area planted should continue to increase.

 

Nevertheless, the government's commitment to "putting its money where its mouth is" on support for rural income is a significant step in agricultural policy. When China joined the WTO, it negotiated a cap on agricultural support payments of 8.5 percent of the value of production, a compromise between the 5 percent cap for developed countries and the 10 percent cap for developing countries. Last year's direct payments program was budgeted at $1.4 billion, less than 2 percent of the estimated value of total grain production.

 

Various government and academic research units, as well as private analysts, have been trying to make projections on China's long-term grain situation (Note: this analysis generally also includes oilseeds). It is generally accepted that food security remains a primary concern, but that a subtle shift from targeting "self-sufficiency" to targeting "self-reliance" has taken place. Official sources indicate that the goal is no longer 100 percent self-sufficiency, rather 90 or even 85 percent, as policymakers recognize that a target of 100 percent can create surpluses that depress prices. One analytic model by a respected institute suggests that, given continued rapid economic growth and substantial additional investment in agricultural productivity, China could be self-sufficient in food grains (wheat and rice) within the decade, but would have a shortfall in feed grains exceeding 10 million tons. This is an academic model, not a forecast of what will actually happen. The government apparently has come to accept the need to import significant amounts of soybeans, and a limited amount of wheat, but still appears to find corn imports politically unacceptable, except when matched with equal exports.

 

In 2004, government set a floor price for rice. State owned grain companies' will purchase rice when market price falls below the floor price. However, during 2004, market price has been higher than the floor price. State media reports that government will set the support price for rice again in 2005, and also for wheat and corn.

 

According to state media, besides the increased fund for direct payment and seed subsidy, MOA will make it a priority to increase the subsidy on purchase of agricultural machinery for farmers in 2005.

 

From autumn 2003, grain prices started to rise for the first time in a decade. The 2004 average price for corn, wheat and rice were respectively 20, 36 and 40 percent higher than in 2003. At their peak, rice prices were nearly twice the 2003 level. Responding to the sudden price rise, farmer increased planted area for all cereals in MY04/05. In MY05/06, planted area for wheat, rice and corn will continue to rise.