A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Christian Pèes.
It brings together, managers from the agricultural world and important people from external perspectives,
such as health, development, strategy and defense. Its objective is to promote regulation
of agricultural markets by creating new evaluation tools, such as economic models and indicators,
and by drawing up proposals for an agricultural and international food policy.
Focus on issues

China’s corn policy reform: Adjustment or dismantling?



Frédéric Courleux and Anh Lai, Momagri



As it is the case for other grains, corn production is moving toward an all-time high for the 2016/17 harvest. These new production records are further distressing international grain markets which, akin to many other products, are marked by the end of the commodity “super-cycle”. In this con-text, the implementation of the Chinese corn support reform is all the more scrutinized since the Middle Kingdom is the leading grain consumer, as well as the world’s leading producing and stock-piling country.

Announced since 2004, the reform includes lower domestic prices, the implementation of direct subsidies and a reduction of the stocks built up since several years. By drawing a parallel with the 1992 reform of the Common Agricultural Policy (CAP), some observers consider this reform as the onset of a dismantling of the Chinese agricultural policy. On the contrary, others estimate that it is a pragmatic adjustement to reabsorb the corn surpluses while increasing the competitiveness of Chinese livestock farming. After restating the key tools of the corn support policy, our report pro-poses an overview of the various measures shaping this reform and concludes by favoring the sec-ond body of thought.


A booming corn production

Corn production in China has posted remarkable progress since the 1980s, with a significant accel-eration since the 2000s (see Figure 1). The increase of areas and especially yield explain this devel-opment, with yield already reaching close to six tons per hectare. In fact, corn has become, in the past few years, the most planted and produced grain in China, currently accounting for almost 20 percent of arable land. With over 200Mt, Chinese corn production is higher than the volume of corn traded on international markets that is roughly as much as 130Mt. As a large exporter of soybeans, China imports only a small amount of grain and barely attains its reduced-duty (1%) import quota of 7.2Mt.

Figure 1 : Corn areas, production and consumption in China

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A highly effective support policy

Until 2004, grain production was subject to a system of delivery quota per province and admin-istrered prices that were progressively increased to catch up with international levels
1. Since then, trade has been fostered and administered prices have been replaced by minimum prices, which trigger purchases for stockpiling at Sinograin, the public firm established in 2000. At the same time, direct subsidies are paid to producers, most of them as support for inputs, but there is also an area-based support of €20 to €30/hectare. Progressively increased after 2004, all these subsidies ac-counted for €24 billion in 2014. Lastly, beyond the reduced-duty (1%) import quota, corn imports are taxed at 65%.

This set of measures had a strong impact on grain production, especially corn production––respectively +35% and +72% since 2004––which enabled China to meet consumption hikes without expanding grain imports. Such stimulus was all the stronger since minimum prices were progres-sively raised to reach 2,260CNY/ton, or $367/t in 2014 (see Figure 2).

Figure 2 : Corn quotations and support prices in China

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An agricultural policy confronted to declining international prices

High grain prices have indeed boosted local production but also drove buyers to look into other commodities, such as barley, cassava, sorghum or distillers dried grains (DDGs), whose imports are far less regulated. Imports of such commodities have grown even more as international prices have been collapsing, amounting to 37.6Mt in 2015 (see Figure 3).

Figure 3 : Chinese imports of corn and substitutes

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In spite of a buoyant demand, the growth in both production of grain and imports of substitutes has also led the Government, via Sinograin, to procure a significant share of production at minimum prices to build up important stocks that are increasingly difficult to sell off during harvests. Being one of the major grain stockpiling countries, China has marked its growing influence in end-of-harvest results. Between 2008 and 2015, China’s share in global ending stocks rose to 52.7% from 35.7%. The Chinese government indicates that public stockholding volumes may reach 250Mt.

Concerned by the consequences of declining international prices on their agricultural policy, and implicated in maintaining the support level for an agricultural community that stays at the heart of its key issues regarding the socio-economic balance between urban and rural areas, the Chinese authorities announced their plan to alter the corn support measures as early as 2004. The first measure consists in lowering the minimum price to $318/t for the 2015 harvest (see Figure 4). As shown in Figure 2, this drop in minimum price allowed China to maintain its corn policy’s core elements without having to raise its 65% customs duties. Indeed, the graph presents a recon-structed series of import prices based on the American FOB price augmented with freight costs, the VAT and customs duties. It is shown that, in the absence of a domestic price reduction amid de-pressed international prices, it would have been advantageous to import corn, even with a 65% border tax.

Figure 4 : Grain minimum prices in China

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The second measure was taken in 2016 to dispose of a portion of corn stocks in some provinces. Since the end of May 2016, over 16Mt have been auctioned off, if the Chinese authorities’ an-nouncements to the International Grain Agreement are all-inclusive. The following Figure 5 repre-sents each auction with a bi-colored bar showing the volumes tendered and the volumes actually auctioned off. The average bidding rate is quite low (22%) and the unsold tendered volumes (in orange) are significant. It is yet observed that price levels are contained in a relatively low range of $210/t--$240/t; those are auctions with withdrawal prices.

Figure 5 : 2016 auctions of corn public stocks in China

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The details of the third measure were divulged during this summer. A CNY30 billion ($4.5 billlion) package was adopted for 20162 to compensate farmers for the elimination of the corn minimum price, and the systematic stockpiling policy will be replaced by “market-driven” public purchases to uphold stockpiling objectives while curbing domestic market disruptions. Depending on recorded prices, a deficiency payment will be calculated annually based on support price objectives. As a result, corn producers in the four largest corn growing provinces––Heilongjiang, Jiling, Inner Mon-golia and Liaoning––will be eligible for counter-cyclical payments beside various input subsidies that will be merged. According to the China National Grain and Oils Information Center (CNGOIC), sub-sidies could amount up to CNY1,940/ha, or $292/ha3. The target price remains however unknown at this stage.

This whole set of measures aims to lower corn growing areas (by -10%), while bringing down im-ports, especially those of substitutes. Corn imports are already starting to decline and account for only 3Mt between January and August 2016, or -32% compared to same period of 2015. Barley and DDGS imports are also slowing down sharply: -59% and -44% compared to their levels during the first eight months of 2015
4. More importantly, a so-called anti-dumping tax of 33.8% is implement-ed on imported DDGS for the end of September 2016 and henceforth5.

In the medium term, the Chinese authorities have announced their objectives of redirecting the vacated areas by the corn growing decline within the “corn structural adjustment plan in 2020”. The goal is to return to the 2011 level, or 34 million hectares, by 2020. The vacated areas––3.3 million hectares––will permit to increase soybean areas (2.6 million hectares) and will be used to grow fodder (alfafa) for livestock farming. The following map (Figure 6) summarizes all the announce-ments
6 regarding the corn areas reduction in the “Lian Dao Wan” region that includes 13 provinces––among which Hebei, Shanxi, Inner Mongolia, Liaoning, Jilin and Heilongjiang––and covers most of China’s corn producing areas.

Figure 6 : Corn growing reduction plan in China

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A pragmatic adjustment to gain competitiveness

As it is currently taking shape, the reform of the corn support policy seems to be rather a marginal pragmatic adjustment than a revolution in the China’s approaches in terms of agricultural produc-tion and trade. The target price on which counter-cyclical support is calculated and the target level for domestic prices have not been announced. In early October 2016, the national average price of corn is $241/t
7, a level close to the average withdrawing price of auctions. It can be also noted that by moving toward a––even lightly––net importer status thanks to barriers to imports of substi-tutes, stabilizing Chinese domestic prices will be even easier.

By compiling the current price level, counter-cyclical support and input subsidies, it seems that sup-port to corn production will remain high, while adjusting the balance to increase the competitive-ness of animal husbandry and produce more soybeans locally, which are mostly used as food. Al-ready implementing direct support measures for grain and soybean producers, the Chinese author-ities appear to have sufficient trust in their administration to switch to a counter-cylical support system.

At present, nothing indicates that wheat and rice will follow the example of corn, but this possibility should not be excluded. The Chinese agricultural policy is quite prone to conduct experimentations that are then generalized, or not, with a certain degree of pragmatism. At the same time, the min-imum prices of rice and wheat––$420/t and $359/t in 2016––seem to be easier to stay at this high level as these products are essentially intended for human food, and thus do not raise the costs of livestock farming. In terms of economic development theories, it is worth noting the following par-adox: China, the world’s factory that just experienced an unprecedented industrialization process in history, is also the place where agricultural prices have been the highest for the last decade.

In conclusion, the recent and ongoing developments in the Chinese agricultural policy reflect the importance the Middle Kingdom gives to its agriculture. Confronted to declining international prices, China adjusts its policy by granting a greater role to counter-cyclical support together with a wide range of measures always in place. Following the United States and Canada, China uses counter-cyclical support as one of the tools of its support policy for grain. Let’s hope that these developments can fuel the debates for the upcoming CAP reform to get out of the decoupled support deadlock and move toward more intelligent and fully justified policy instruments, as pro-posed by Momagri in its White paper “A New Strategic Course for the CAP”.
8.


1 For a detailed presentation of China’s grain policy, refer to the article of Zhaoyu Li and Jean-Marc Chaumet, « Riz, Blé, Maïs : la politique d’autosuffisance au défi des réalités de marchés », in the 2017 Démeter.
2 IGC from China Ministry of Finances, August 11, 2016
3 IGC Market Focus GMR 469, August 25, 2016
4 IGC, September 22, 2016 from China customs
5 IGC, September 23, 2016
6 Li Ganqiong, 2016, « Policy developments of China maize production and stock holding », Communication at the 9th session of the AMIS Global Food Market Information Group, Rome, June 2016
7 China Economic Monitoring and Analysis Center and National bureau of statistics of China, October 14, 2016
8 Please find the White paper on our website
http://www.momagri.org/UK/momagri-home.html



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Paris, 14 December 2018