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Government to Provide Support for Grain Sector

News, page 3
Issue 484, August 30
Translated by Tang Xiangyang
Original article:

The volatility of grain prices and potential concerns about the volume of grain production and storage has prompted a reaction from the Chinese central government.

The issue was discussed at the 16th meeting of the Standing Committee of the National People's Congress. An anonymous source who attended the meeting told the EO, that in the “12th Five-Year Plan” the government will “give more financial support to the grain sector.”

Additionally, the Chinese Grain Economics Association and the China National Association of Grain Sector have joint-released a report stating that a period of fluctuation will soon take place. The State Council sees the report as a valuable tool and stated that its contents will be included in the 12th Five-Year Plan.

Call for Financial Support

The above source told the EO that the special meeting was attended by officials from the Ministry of Finance, the Ministry of Land and Resources, the Ministry of Water Resources and the Ministry of Agriculture, and also by a deputy chairman from the China Banking Regulatory Commission, and assistants of both the president of the central bank and the chairman of the China Insurance Regulatory Commission.

The meeting focused on China’s grain safety. The report suggests that China should establish a diversified investment mechanism based on public fiscal revenue, implement preferential policies for grain production, and encourage the flow of social capital into the grain sector.

The report also states that China should develop small loans and help establish suitable micro-financing services for the grain sector. Further measures suggested in the report include the creation of new credit for grain loans, the completion of system for agricultural insurance and reinsurance, building mechanisms to reduce the risk and impact of large disasters, and the steady development of the agricultural futures market.

Giving more financial support to the grain sector would help prevent periodic fluctuations of this industry.

The report filed by the two grain associations has labeled periodic fluctuations as one of the main threats to stability in the grain sector. This fluctuation is reflected in output, supply and demand, and prices, with prices being the most important.

Ten experts from the Chinese Grain Economics Association and the National Association of Grain Sector conducted an investigation into the periodic fluctuations of this field. The investigation lasted from 2008 until April this year; the report was completed in June and then passed over to the State Council, the National Development and Reform Commission, and the State Administration of Grain.

The report projects based on the 60 years since the founding of the PRC that there will be large fluctuations in the grain sector every 15 years and small fluctuations every 5 years. Different varieties of grain fluctuate differently; rice is the most sensitive variety. It takes 15 years for the grain output to increase by 100 million tons and every time it has reached that increment, a relatively long fluctuation has occurred.

According to the above report, periodic fluctuations in the grain sector can mainly be attributed to changes in national policy. Every 1 percent increase in grain prices corresponds to a 0.2 percent change in grain output; a 1 percent increase in fiscal revenue invested in the gain sector results in a 2 percent rise in grain output.

Hidden Worries Behind High Grain Yields

Grain output in China has been increasing since 2004. As predicted by the Ministry of Agriculture, it will continue to increase this year.

With an increase in grain output, it is hard to understand why the Chinese Grain Economics Association and the National Association of Grain Sector have predicted that there will soon be another fluctuation in the grain sector.

The above source with the Chinese Grain Economics Association told an EO reporter that, although the output of China’s grain sector has been increasing for six years consecutively, factors causing fluctuations still exist. “Based on China’s previous experiences, the year with the highest grain output is always the beginning of a periodic decrease in grain.”

There were large decreases of grain output in 1985 and 2003. In 1985, China’s total area of grain cultivation was reduced by 16.62 million mu (1.108 million hectares), it was China’s greatest grain decrease in the 1980s and resulted in a drop of grain output of 28.20 million tons. In 2003, the area of grain cultivation fell to a historical low since the founding of the People’s Republic of China, and grain output was 26.36 million tons less than that of the previous year.

A possible reason for the dips in grain cultivation area and output is that during the two instances in question, the numbers of young village laborers fell as numerous farmers migrated to work in the cities. Only senior citizens, children and women were left in villages. The core reason young farmers migrated to cities was the huge gap between income earned by city workers and village laborers.

What worries experts is that almost all rural residents who were born after the 80s have become migrant workers and as most of the farmers that remain are seniors, women and children, China’s grain output is jeopardized. But this problem does not attract enough government scrutiny.

Yunnan and Guizhou provinces are suffering a grain shortage due to the major drought which spread through southwest China this past spring. Meanwhile, the prices of corn, wheat and rice have risen continuously this summer and many provinces are facing heavy floods, leading experts to worry about China’s grain supply.

Some experts think that the large rise in the prices of agricultural products, including grain, has exposed weaknesses in government regulation in the grain sector. Due to concerns surrounding inflation forecasts, many people are seeing parallels with 1988 and 1993 when the effects of price fluctuation combined with inflation, causing crowds of people to rush out and buy grain and resulting in economic turbulence.

Bai Meiqing, chairman of the Chinese Grain Economics Association and the National Association of Grain Sector, expressed the same worry; at the 13th China Grain Forum held this summer he said: “If China’s structural inflation coincides with inflation caused by the international market, it will be a great shock to our economy. Since symptoms of inflation have begun to emerge at home and since the storm of the international financial crisis has not ebbed, we should take preventive measures in advance in order to stabilize our economy as well as our overall situation.

Time to Provide Direct Subsidies to Farmers

Experts say a periodic fluctuation in the grain sector is a regular market pattern which cannot be eliminated. The government can only prevent and reduce the negative impact of the fluctuation. It is predicted that the next round of periodic fluctuations will take place in the near future, and we have to prepare to fight it.

On preventing and mitigating the impact of periodic fluctuation, said Bai Meiqing, the key focus should be establishing a long-term mechanism to encourage farmers to stabilize grain output and the size of cultivation areas, lift the output rate per unit, and improve the ability of farmers to face farming disasters. To encourage farmers to plant crops, experts recommend that the central government allow farmers to contract the land permanently, encourage farmers to plant more when output is insufficient and subsidize farmers when there is a surplus in the grain market. Experts also suggest that the government reduce the use of administrative methods to influence grain prices and instead control prices through market mechanisms.

According to China’s current household contract responsibility system, farmers contract the right to use land, but land is still collectively-owned. The government only encourages farmers to produce more grain, but never urges them to produce less when there is a surplus in the grain sector by providing them with a subsidy. Additionally, no subsidies are provided when a natural disaster occurs.

Experts said “collective ownership” of land was too “empty” and suggested changing the system to a system of personal ownership of land for farmers.

They also advised that the government provide subsidies or preferential policies regardless of existing surpluses or shortages brought about by disasters.

Currently, the Chinese government has been instrumental in setting grain prices. Some experts believe this distorts supply and demand and gives wrong signals to the market. The expanding price gap between agricultural materials and industrial products is detrimental to grain production.

According to expert suggestions, the market should play a fundamental role in setting the prices of grain. Meanwhile, the government should adjust CPI calculation methods. “At the very least, we should make sure there will be no new ‘price gaps’ between agricultural and industrial products,” Bai Meiqing said.

This article was edited by Rose Scobie and Ruoji Tang



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