Proliferation of subsidies in China: Helpful or Harmful?

Fred Gale

China’s spending on agricultural support has been rising rapidly

2004 2005 2006 2007 2008 2009 2010 2011 20120

5

10

15

20

25

30

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China expenditures on major agricultural subsidy programs, 2004-12

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General inputsubsidy for grain producers

AgriculturalmachineryImproved seed Direct payment tograin producers

Agricultural insurance

County "awards"

Source: ERS analysis of data from China Ministry of Finance.

Since 2009, officials have also been raising support prices

Source: ERS analysis of data from China National Development and Reform Commission

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

20

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60

80

100

120

140

160

China support prices for wheat and rice, 2004-2014

Yuan

per

50

kg

Rice

Wheat

China and U.S. Agriculture: More in common than we might think

1976 Chinese poster: “Reap an abundantHarvest; store grain everywhere.”

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0.20

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U.S. corn prices, 1910-33

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In the 1930s, USDA Secretary Henry Wallace advocated creation of an “ever normal granary”—a buffer stock to stabilize prices.…This idea was borrowed from the Chinese

Stabilizing prices was a big concern for U.S. policymakers in the early 20th century.

Source: USDA, ERS analysis of data from National Agricultural Statistics Service.

1910191819271936194519531962197119801988199720060.00

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U.S. corn prices, 1910-2013Do

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1933AgriculturalAdjustment

Act

However, the United States never found a satisfactory means of achievinglong-term stability in prices without unintended side effects.

Source: USDA, ERS analysis of data from National Agricultural Statistics Service.

2000200120032004200620072009201120120

2

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China-U.S. corn prices--a yawning gapDo

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China

U.S. Gulf price

Decline in global prices has disrupted a Chinese strategy ofengineering ever-rising prices

Source: USDA, China National Grain and Oils Information Center, China Ministry of Agriculture

1 2 3 4 5 6 7 8 9 10 11 12 13

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10,000

20,000

30,000

40,000

50,000

60,000

China cotton consumption declined as stockpiling elevated price

Ending Stocks

Domestic Consumption

28% decline inChina cotton use

High Chinese soybean pricesMade imported soybeans more attractive

Chinese authorities announced plans to move away from price supportsfor soybeans and cotton

Source: USDA production, supply and distribution estimates

Chinese cartoon depicts a foreignerFilling the “Chinese market” with “importedSoybeans.” Farmer holds a small bag of “domestic soybeans.”

China’s “target price” experimentChinese policymakers envision a system that alternates between subsidies to farmers and consumers, depending on market prices.

Chinese policymakers envision this: …but will market prices evolve like this?

Subsidies are a sign of weakness, not strength19

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1996

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5000000

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China's agricultural imports from major supplying countries; Imports rise despite increasing domestic support

From United StatesBrazilSoutheast AsiaAustraliaCanadaNew ZealandArgentina

ChinajoinedWTO

Chinabegansubsidyprograms

Beganraisingprice supports

Raising productivity is the key toimproved returns for farmers and food security

“High standard field” project Using drones to spray wheat fields

However, China’s institutional problems undermine sustained productivity improvements

With vague property rights and weak rural banking systems, fixedasset investment in Chinese agriculture relies heavily on Government campaigns.Investments often are unprofitableand fall into disrepair after the initialcampaign is completed.

Abandoned greenhouse structures from past investment campaigns are common in the Chinese countryside.

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Aging farm population: common during urbanization

Age of farmers

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United States, 1950 China, 2006

China is concerned about its aging population of farmers…very similar to concerns in the United States during the last century

Source: Agricultural censuses, U.S. 1950 and China 2006

Challenges to building a sustained relationship with China in agriculture

• Opacity of Chinese policy-making and implementation

• Conflicts over how agricultural prices are determined

• Technology cannot replace efficient mechanisms for allocating land, capital and human resources

Growth and Evolution in China’s Agricultural Support Policies by Fred GaleEconomic Research Report No. 153, August 2013http://www.ers.usda.gov/publications/err-economic-research-report/err153.aspx

“U.S. Exports Surge as China Supports Agricultural Prices” by Fred GaleAmber Waves (ERS online magazine), October 2013

For more information on China’s agricultural support…