Policy evolves in effort to lift rural incomes and grain

by Mario Sequeira

In 2004, China reversed a centuries-old practice and began phasing out agricultural taxes. The government also announced that for the first time it would pay production subsidies directly to farmers, underwrite seed and machinery purchases and increase spending on rural infrastructure.

This is seen as the start of a new era in Chinese agriculture. Economic policy has been evolving since China initiated market reforms in the 1970s. But change in agriculture has happened especially rapidly and dramatically since the 21st century dawned.

Originally, the government planned to abolish the agricultural taxes within five years. Instead, during 2004, the government decided to speed up the process and announced in January 2005 that 25 of the 31 provinces would eliminate the tax within the year. These are the wealthier provinces and local newspapers referred to the move as "the end of a 2,600-year-old tax."

Viewing agriculture as a sector that needed help, the government decided not to tax but use subsidies, tax breaks, rural spending and new regulations to achieve several goals. Among them were boosting rural incomes, preserving social and political stability, increasing grain production, improving food safety, preventing environmental degradation and increasing agricultural productivity.

Other measures employed include establishing market infrastructure (wholesale, commodity and futures markets), investing in agricultural research, facilitating a farm credit provision and establishing safety standards.

Historically, China taxed its farmers to subsidize urban growth and industrialization, but rapid economic growth in the late 20th century created imbalances. Chief among the imbalances were the inequalities between urban and rural areas. The 2004 per capita rural income was U.S.$353 compared to the urban figure of U.S.$1,135.

The 2004 direct subsidies to farmers amounted to U.S.$1.4 billion. Subsidies for purchase of high-quality grain and soybean seeds will cost U.S.$193 million and the machinery subsidies U.S. $5 million. The total still amounts to less than 2% of the gross value of grain production and well within the 10% the WTO allows.

Agricultural tax elimination is estimated to cost U.S.$2.5 billion a year. The government planned to spend U.S. $18 billion in 2004 on rural infrastructure projects such as irrigation projects, roads, hydroelectric plants and research.

China is the world’s largest agricultural producer. China’s National Bureau of Statistics reported last month the country produced 484 million tonnes of grain in 2005, led by maize (130.3 million tonnes), rice (125.4 million tonnes) and wheat (91.9 million tonnes).

The Bureau said GDP grew by 9.9%, compared to 10.1% in 2004. Agriculture accounted for 12.4% of GDP, industry 47.3% and services 40.3%. The USDA estimates that China’s GDP will grow at an average rate of 7% annually this decade.

About 800 million of China’s 1.3 billion people, or 60%, live in the countryside. Farms are small and mostly cultivated by households. The average farm size is one hectare. The village owns the land and allocates land-use rights to households based on family size and labor availability. Farmers cannot sell their land but can lease plots.

As control increasingly devolves to markets, government intervention has diminished. Grain trading has been largely privatized, often by selling government grain marketing bureaus to local managers. Privatized companies have an edge, given their close government contact, in that they have easier access to credit, storage and processing facilities than private traders. However, early assessment indicates small private grain merchants are playing a greater role in grain procurement, stateowned enterprises are improving service and farmers have more alternatives.

The central purchasing agency, the China National Cereals, Oils and Foodstuffs Import Export Corporation (COFCO), is in charge of importing wheat, rice and edible oils. COFCO imports 90% of wheat under the tariff rate quota established as a condition of China’s admission to the WTO, leaving 10% for private traders and mills.

China continues to change. Its huge population effects world food demand. Among the changes expected to have a dramatic effect on food demand is urbanization. China actively encour- ages urbanization and observers expect the urban population to grow by 270 million by 2020, increasing demand for meat, processed foods and restaurant meals, and reducing demand for grain.

Since 1997-98, the area planted to wheat and rice in China has decreased. The 1997-98 harvested area for wheat was 30 million hectares and the harvested area for rice was 31.7 million hectares. In 2004-05, 21.5 million hectares of wheat and 29 million hectares of rice were planted. Many factors account for this drop. Among them is the government’s goal to increase the amount of higher quality grain, which it encouraged by offering higher support prices for new varieties. But many farmers shifted from low quality wheat to higher value crops like vegetables, rapeseed and fruit.

China has no specific grades and standards for wheat. Most wheat varieties contain medium protein and low gluten levels. In recent years, however, Chinese scientists have bred new high- and lowprotein and high-gluten varieties that are supposed to meet milling requirements.

Of the 120 high-quality wheat cultivars available, 10 are comparable to Western milling wheat. But Chinese farmers are new at growing these varieties and supply and quality have been inconsistent. To ensure supply, Chinese millers are now contracting farmers.

Still, 30% of the 2004-05 wheat crop is estimated to be of high quality (higher protein and gluten) and suitable for milling without blending, compared to zero five years ago.

Wheat consumption in China appears to be declining, particularly in cities, as incomes rise and diets change from wheat-based products to more meat, vegetables and fruit. The USDA estimates per-capita consumption has fallen from 85 kilograms (kg) in 1993 to 70 kg in 2003.

However, offsetting this drop somewhat is the growth for wheat-based bakery and processed convenience food, which the food industry estimates at 10% annually for several years.

Since the early 1980s, China’s flour industry has developed rapidly and there is now a huge capacity, estimated at 300 million tonnes.

There are reportedly more than 40,000 mills in the country. Most are small, with capacities of about 50 tonnes per day. COFCO has a flour division and runs seven mills having a combined grinding capacity of 1.3 million tonnes of wheat annually. Flour production is estimated at 1 million tonnes.

Most of the flour mills are located in the northern provinces of Shandong, Henan and Hebei. Southern mills are in Guangdong, Anhui and Jiangsu.

The average annual flour consumption is about 90 million tonnes. Wheat imports in 2004-05 are estimated at 4 million tonnes.

China is the world’s largest pork producer, accounting for nearly half of the world’s pork production. It is also the world’s second-largest poultry producer and third-largest beef producer. The poultry industry appears to be back on track after suffering the effects of the avian flu incidents in 2001.

Increasing urbanization in the country has resulted in a wealthier middle class and greater meat consumption. The per capita meat and egg consumption by urban Chinese increased an average of 1.5% annually from 1985 to 1999.

The meat industry is expected to continue growing to supply this demand. Meat production has been growing at 3% to 5% during the past five years.

Livestock production is shifting from small-scale household production to larger, more commercialized operations. The USDA quotes livestock industry sources as saying that industry consolidation will result in larger commercial farms emerging, using more commercial feed as they seek to increase their market share.

Most of the demand for livestock products is supplied by domestic producers, predominantly specialized household and commercial livestock operations. These farms rely on imported soybeans or soybean meal and maize for feed.

In 2004-05, the industry consumed 90 million tonnes of maize and 4 million tonnes of wheat.

Commercial feed production rose 6.8% to nearly 93 million tonnes in 2004, according to the China Feed Industry Office. Compound feed accounted for 68.2 million tonnes of the total, concentrates 20.8 million tonnes and premix feed 3.6 million tonnes.

The poultry industry took 52% of this feed and the swine industry 32%.