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By Ye Xingqing, Qin Zhongchun & Jin Sanlin,Research Department of Rural Economy of DRC

Research Report Vol.17 No.6, 2015

The price support policy for agricultural products, featuring minimum grain purchase prices and temporary purchase and storage of major agricultural products, is a key part of China’s policy to support and protect agriculture since 2004. The reform of the policy is of vital significance to transform agricultural development mode, optimize production structure, and improve the efficiency of resource allocation. It is therefore crucial to promote the reform of price support policy for agricultural products during the 13th Five-Year Plan period in an overall way, based on national strategies, stage of development, resources endowment and the WTO rules.

I. Evaluation of Price Support Policy Reform for Agricultural Products Over the Last Two Years

During the last two years, China has adopted a series of measures to address problems brought by price support policy for agricultural products. With the reform in sugar purchase and storage, the government no longer purchases and stores sugar, and the task is passed to sugar-making enterprises which should be responsible for their own profits and losses. The former only subsidizes the latter a half-year interest payment. The policy of unified temporary purchase and storage of rapeseed is changed to local decision-making with some subsidies from the central government. These reforms strengthen the flexibility of price support policy for agricultural products on the one hand, and on the other hand weaken the constraint and support from the central government.

What attracts the most attention is the reform of target price subsidy for cotton and soybean. The No.1 Document in 2014 announced the start of reforming target price subsidy for soybean in Inner Mongolia and Northeast China as well as cotton in Xinjiang. Moreover, the No.1 Document in 2015 further stressed the importance of “summarizing the experience of these reforms so as to perfect the ways of subsidizing and to reduce costs”. Here is why China implements such reforms. Farmers will consider it reasonable to expand production, should the government purchases agricultural products with prices higher than market equilibrium prices. The inventory costs are high and the purchased products are difficult to sell at favorable prices, which not only increases inventories and latent losses, but increases the material cost of down-stream enterprises and even adds the cheaply-imported agricultural products into national inventories. Therefore, the reform of target price subsidy for agricultural products is successful should it meets the three requirements as follows. First, prices of agricultural products at home and abroad are on the same track. Second, farmers adjust product mix according to the market. Third, “amber box” subsidies are within the approved range. In terms of reforming target price subsidy for cotton in Xinjiang in 2014, the first requirement is met and there is little difference between domestic cotton price and after-tax CIF price. However, the reform fails to meet the second requirement. Subsidies are still coupled with planted area and/or hand-in volume, preventing farmers from allocating resources based on market price. Besides, the third requirement is yet to be met. “Amber box” subsidy is likely to exceed the upper limit of 8.5%, if calculated based on the price spread between target price and fixed reference price abroad as well as cotton yield in pilot areas.

The target price system of agricultural products includes a range of practices, like target price purchase, subsidy, mortgage, insurance and so on. The No.1 Documents in 2014 and 2015 encourage the development of target price insurance for agricultural products, while no detailed state policies are unveiled and only local governments have taken related measures in recent years. For example, Beijing Shunyi District has implemented insurance for pig price index; Shanghai, Zhejiang, Jiangsu and other places have carried out vegetable price insurance. The coverage and role of agricultural products price insurance are limited because of several factors, including lack of local fiscal resources, as well as the difficulty of collecting data about planting area and market prices.

II. Price Support Policy for Agricultural Products Must be Reformed Subject to Some Binding Conditions During the 13th Five-Year Plan Period

1. Determine the priority areas of price support policy for agricultural products during the 13th Five-Year Plan period based on the national food security strategy

Price support policy for agricultural products is implemented with public resources as the foundation. So the policy should comply with and serve the objectives of the public policies of the country. When it comes to agriculture, the price support policy should comply with and serve national food security strategy. At the Central Economic Work Conference and the Central Rural Work Conference at the end of 2013, General Secretary Xi Jinping proposed the new national food security strategy based on domestic supply and moderate imports, aimed at ensuring production capacity and speeding up the development of agricultural science and technology. He further emphasized the new requirements of the national food security work which includes rational resource allocation, prioritizing the fundamental field, and basically ensuring self-sufficiency and absolute security of grain. The No.1 Document in 2014 emphasizes the importance of utilizing international agricultural markets and resources more proactively, effectively regulating and supplementing domestic food supplies. In addition, it is urgent to formulate international trade strategy for major agricultural products, strengthen the planning and guidance for agricultural products import, optimize the sources of imports, and establish stable trade relations. In the No.1 Document in 2015, more importance is attached to scientifically determining the self-sufficiency level of main agricultural products as well as the priority areas of agricultural development. These policies show that, under the dual pressure of growing demand and binding constraint of resources and environment, China has to adjust its policies to treat agricultural products differently, and utilize both domestic and overseas markets and resources more proactively. Facing the future challenges, China should not solve the issue of feeding its population with enough food by pursuing self-sufficiency of all grain products. Instead, China should moderately import agricultural products and scientifically determine the self-sufficient level of agricultural products. China should not pursue self-sufficiency of all agricultural products or advance industrialization and urbanization by itself. In fact, agricultural products differ in the sensitivity and relative importance of self-sufficiency. During the 13th Five-Year Plan period, price support policy for agricultural products will place the priority on rice and wheat, and public resources and “amber box” policies will be utilized.

2. Determine how fast the support for agricultural products is adjusted based on the development trend of price spread between agricultural products at home and abroad

Over the past decade, China has promoted the growth of agricultural production and farmers’ income by continuously increasing the minimum purchasing price of grain and the temporary purchasing and storing price of major agricultural products. The underlying reason is that prices of domestic agricultural products are lower than after-tax CIF prices of imported grain, so there is room to increase the former. In recent years, however, the former have gradually exceeded the latter and reached the “ceiling” of international prices. Before accession to the WTO, China has been committed to imposing single tariff on most products, such as soybean and vegetable oil. What’s more, some agricultural products are subject to tariff-quota administration. Those in-quota products enjoy low tariffs, while the others endure high tariffs. Thus, there are two “ceilings” of international prices. The first one is the after-tax CIF price calculated with low tariff for in-quota imports, and the second is after-tax CIF price calculated with high or single tariff for out-of-quota imports. From the current situation of price inversion between domestic and international markets, and the development trend of the price spread between domestic and imported food during the 13th Five-Year Plan period, there are three circumstances as follows.

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