FBA Issue 32: May / June 2010
Government policies and their impact on China's feed & livestock sector
In 2007, the subprime mortgage crisis dragged the US economy into its worst recession since the Great Depression. A year later, the crisis reached shores on the other side of the Pacific Ocean, crippling even leading Asian economies with its brutal consequences. Even a rising economic superpower like China, was not spared.
Inevitably, the country's vast feed grain, livestock and meat processing sectors began to face intense downward pressure from this unprecedented global financial downturn. A set of policies were introduced which sought to leverage the supply-enhancing effect of earlier reforms. As we shall, while such programmes have achieved some of their goals, their side-effects bring to light some important long-term issues.
Policies to mechanise crop farming
By coincidence, the Lehman/AIG crisis came less than a year after feed grain shortages and swine price hyperinflation had shocked China's feed-to-meat supply chain. However, even before the economic crisis struck, China had already undertaken reforms designed to increase the output of feed grains, particularly corn.
Coinciding with the downturn's inception, 2008 saw the Chinese government announce a landmark rural reform land reform policy. For the first time, it permitted farmers to lease or transfer land-use rights, a move expected to raise the utilisation rate of arable land in China and thereafter increase grain and oil seed yields. By reducing the rural population, this should encourage mechanization and higher farm productivity while accelerating its agribusiness sector's consolidation.
Consequently, China's main agricultural output grew tremendously with assistance from the Chinese government, just a year after the eruption of the global food crisis. In response to supply subsidies, pork prices fell dramatically, as did corn's cost, thanks to 2008's record crop. When grain prices fell dramatically, to maintain farmers' corn planting interest, the government announced planting subsidies late that year.
Unfortunately, while these policies kept the country well fed, Chinese agribusiness was unable to increase its earnings at a time when all sectors were severely affected by the financial downturn. In order to remedy this situation and to maintain a high level of planting interest among farmers, the government appointed the national grain reserves corporation, Sinograin, to stock up on several agricultural products including corn, rice, soy, wheat and rapeseed in late 2008.
By February 2009, China had already procured 40 million tonnes of corn in state reserves. Compared to previous years, the storage amount and the minimum purchase price in this round were significantly higher. As a result, by early 2009, China's corn reserves, while below the record levels of ten years ago, had recovered well enough to see the country through this year's poor harvest.
Meanwhile, China continued to update its grain reserves policy. In 2009, so as to boost domestic corn procurement (and prevent imports from being smuggled in), the government offered a one-time subsidy of RMB70/tonne (US$10.25/tonne) to grain traders and feed mills located in the 16 southernmost provinces. In 2010 and a period after that, China is not expected to change its policy of stocking up domestically-produced agricultural products as it aims to achieve the double targets of increasing production and earnings for its agriculture industry as well as to protect the farmers' interest.
Machinery subsidies mechanise crop production
In addition, in order to accelerate the pace of farm mechanization, since 2004, China's government has provided agriculture machinery purchase subsidies in the major grain producing provinces. With these subsidies, farmers have a greater financial incentive to mechanise their crop production, with the increased efficiency translating into higher incomes for them. While this programme was not implemented nationwide in China at that time, its success motivated policymakers to expand it to all provinces within a few years.
By 2008, the government had handed out RMB4 billion (US$586 million) of crop machinery purchase subsidies to all the agricultural production regions across the country. This amount jumped to RMB13 billion (US$1.91 billion) in 2009, as China intensified its efforts to increase farmers' incomes and productivity.
Policies to stabilise swine sector
There also exists considerable government intervention further up the feed-to-meat supply chain. As pork accounts for more than 60% of the meat products consumed in China, the hog industry has a deep impact on the country's consumer price index, gross domestic product and purchasing power. Indeed, ad hoc responses to the swine supply challenges of recent years appear to be coalescing into a comprehensive, unified policy.
Starting in early 2007, the previous year's excessively large sow slaughter caused a serious swine shortage that made hog prices rise by over 100% in less than a year. To remedy these problems, the Chinese government introduced a series of policies to support the hog rearing industry. To ensure the stable development of the industry, China started providing sow rearing subsidies to the main hog production regions in mid 2007.
It introduced a range of measures, including offering subsidies for hog rearing, setting up of hog insurance and removing the minimum criteria for joining the hog industry. Consequently, a large number of so-called integrated farms, differing in terms of skills and technologies, were started up across China.
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