“Farmers should participate equally and enjoy the fruits of modernisation,”  communiqué from the third plenum of the 18^th Central Committee

That was all the Chinese Government has to say about the most important challenge facing the economy. John Clemmow at Barclays Research states that he for one is  not impressed.  In explanation the next two charts show the prices of corn and soybeans in China (yellow) compared to price in the US (white). The first chart is corn, the second soybeans. Note that whilst China has become a major importer of soybeans over the past few years, its corn imports are a tiny fraction of its overall consumption.

Corn

 Soybean

John Clemmow at Barclay’s Research found these charts, particularly the one for corn, remarkable. They show that despite the loss of 40m acres of prime US farmland to ethanol production and the impact of a critical drought last year,  US prices for basic agricultural products remain far lower than those in China and that the gap is widening. Which is odd because the Chinese authorities have both repeatedly prioritised food self-sufficiency as a central plank of public policy, whilst reporting ever increasing  harvest and stocks of food. For example in the latest World Agricultural Supply and Demand Estimates produced by the USDA on November 8 of this year,  China is reported to hold 34% of the entire world’s reserves of wheat, 40% of corn, 44% of rice and 17% of soybeans. And yet Chinese imports of all of these products are increasing. In this morning’s Resource daily I carried a comment from  Zhidong Zhang a senior analyst at the National Grain & Oilseeds Information Center. Speaking in Hong Kong on October 21 2013  he claimed that China’s imports of corn, rough rice and wheat are expected to jump 84% to 16m tons in 2013-2014 vs 8.7m tons last year. Zhang claimed that this would not be a problem as rice imports in 2012 accounted for just 6.1%, wheat imports, 5% and 2012 corn 5.2% of global trade.

So we are left with an apparent contradiction China has record, harvests, record stocks, record prices and yet is increasing imports at huge rate.  Clearly something odd is taking place. This is not a minor curiosity. Foreign Policy reported September 2013 (last month) that “China increasingly looks like it is following the examples of Japan and Taiwan, two Asian nations that became food importers as growing cities took land away from agricultural use, rising incomes allowed consumers to enjoy more diverse diets, and urbanization pulled people from farms and rural life. Another revolution in agricultural technology could mitigate these scarcities; however, this is very unlikely in the near term. The fruits of the Green Revolution, from which China benefited tremendously a generation ago, seem exhausted — not only in China, but globally. As economist Tyler Cowen noted in his 2012 book, U.S. farming productivity growth leveled off between 1990 and 2002. A similar dynamic may be at play in China, where burgeoning imports suggest agricultural productivity growth is stagnating. All these factors point to a harrowing decade ahead for Chinese food security. Just as the last three decades of catch-up economic growth created a wealthy middle class in China, the next decade could see catch-up consumption growth from hundreds of millions of Chinese who do not yet eat meat daily. The Chinese government is experimenting with rural land reforms and industrial farming to encourage higher efficiency and promote economies of scale. But between ideological opposition to allowing rural land to function as a form of productive capital and pragmatic concerns over the livelihoods of landless rural peasants, progress will likely be too slow to prevent Chinese food demand from outstripping supply. China will likely become a reluctant and ever-larger presence in global food markets. This will benefit economies like the United States that are major food exporters. But just as China’s industrial and property booms of the last decade buoyed prices of oil, coal, and iron ore, in this decade Chinese food demand growth could raise food prices in the United States and elsewhere. China already consumes 60 percent of the rest of the world’s soybean exports. And as it keeps growing, China could fundamentally alter global food supply and demand.

All of this has occurred whilst China has moved from taxing to subsidising agricultural production. Fred Gale, USDA  in a report called “Growth and Evolution in China’s Agricultural Support Policies” comments that “ China’s support for agriculture is now large and wide-ranging. In 2012, China’s Ministry of Finance reported budgeted spending for agricultural production rose to $75 billion, equal to $127 per metric ton of grain produced. The programs shown below  accounted for about half of that total. Other major expenditures included $9.8 billion for subsidized loans and storage of commodity reserves; $17.3 billion for irrigation and water projects and on farm infrastructure spending; and expenditures for agribusiness support, drought mitigation, and technical services.

China also raised support prices annually and used commodity reserves and trade measures to stabilize prices. From 2007 to 2012, China more than doubled price supports for rice, and the wheat support price was raised 70 percent. These increases in U.S.-dollar value reflect 42- to 86-percent increases in Chinese-currency prices plus the effects of a 20-percent appreciation in the currency against the U.S. dollar. China also added support price programs for corn, soybeans, rapeseed, and cotton. In 2009, China introduced a program to stabilize hog prices by triggering pork reserve purchases based on the ratio of hog and corn prices (Gale, Marti, and Hu 2012).  In short, China’s support for agriculture is broad-based and is clearly on the rise. China taxed agri­culture until the 1990s, but its $75-billion budgetary expenditure during 2012 was equal to 9 percent of agricultural output (as measured by “primary industry gross domestic product (GDP)”). China’s implicit support of farmers via increases in domestic prices compared to world prices also is rising.

While subsidies increased rapidly, they were outpaced by increases in production costs. According to China’s National Development and Reform Commission (NDRC) data, average cash expenses rose during 2003-11 by $190 to $220 per acre for corn, wheat, and long-grain rice, and expenses rose by nearly $400 per acre for short-grain rice These increases in production expenses far exceeded the increase in subsidy payments during that period.  Most discussion of farm support in China focuses on increases in cash expenses for inputs like fertil­izer and fuel, but the increase in production costs was more broadly based. NDRC’s estimates show that the implicit cost of unpaid family labour was the dominant component of farm production costs.

The imputed cost of family labour rose from $94 per acre to $244 per acre during 2003-11, a reflec­tion of rising wages and opportunity costs of farm labour (Other inputs that were the object  of subsidy programs—seeds and mechanized services—also contributed to increases in produc­tion costs. The increase in these implicit costs far exceeded the value of subsidy payments  Growth in off-farm work opportunities poses the biggest challenge to maintaining agricultural output. As prospective off-farm wages rise, farmers require higher net returns to induce them to continue planting crops or raising livestock. China’s National Bureau of Statistics reported that 262.6 million rural people were employed off-farm for at least 6 months in 2012, up from 225 million in 2008.”

The core problems for Chinese agriculture appears to be that productivity growth cannot keep pace with demand whilst cost push inflation, principally driven by wage competition means that the industry requires ever increasing prices, just to break even. The solutions are obvious; replace humans with machines and consolidate the patchwork of tiny peasant farms into large agribusiness units. However there is a problem. As the Economist pointed out, “Rural land, though no longer farmed collectively, as it was in Mao’s disastrous “people’s communes”, has stayed under collective ownership overseen by local party bosses. Farmers are not allowed to buy or sell the land they work or the homes they live in. That hobbles the rural economy.” Farmers  cannot generate enough capital from their plots to afford to purchase mechanised equipment, nor can they use their land as security for loans. Shuai Wang reports that a study in Inner Mongolia showed that this lack of capital meant that only 13% of local corn was harvested mechanically despite a 10 year sponsored state programme to induce farmers to mechanise.

The Chinese Communist Party realises that it has a problem but is severely conflicted over a solution. The Economist adds, “A plenum in 2008, also the third in a cycle, upheld the Maoist notion of collective ownership of rural land—but at the same time called for the “gradual” establishment of a “unified urban and rural market” for construction land, which includes land used for rural housing and factories. And the plenum declared that individual farmers’ rights to farmland, hitherto restrained by investment-inhibiting 30-year leases, could be extended indefinitely. Lawmakers have been arguing ever since over revisions to the all-important Land Administration Law that would put reforms into place. But bickering in the capital has not put a stop to tinkering in the provinces. Local governments worry that clearer property rights for farmers would make it far more difficult to appropriate land for building infrastructure, factories and urban housing. Selling requisitioned land to developers is a critical source of local-government revenue, and land serves as collateral for local governments’ borrowing Ideology aside, these governments resist any notion of changing a system that has done them so well.” Granting land ownership to farmers would boost agriculture but it would also destroy the cashflow of local government which in turn would trigger a wide spread loan default.

So the government is rather stuck. Food prices are going up, which is costing money in agricultural support packages, raising wages in the cities and encouraging a strong CNY policy. All of which is contributing to a less of competiveness for China’s manufacturing exports. Agricultural productivity is declining which means that  food imports are increasing which is eroding the trade surplus and increasing political risk (every successful revolution in China started with a food price riot). And finally the solution to the agricultural problem could cause a collapse of the banking system. The result is a mess. Land reform was widely flagged ahead of the plenum, but nothing concrete seems to have merged. It is possible that we will start to see some piecemeal reforms, but foreign analysts (Barclays amongst them) gather that they  are likely to be too little too late.

Barclays Research charts show what may be the  new world order. The next chart is familiar, but still important and is related to dairy and not grain.It shows the NZDAUD cross rate plotted against the price of milk powder divided by the price of copper.

Source Barclays Research