The healthy Operation of Grain Market needs Policy Reform

This year's domestic grain harvest, but farmers are not happy, because the sharp drop in grain prices may lead to a sharp drop in farmers 'income. Since autumn, corn and wheat prices in the main grain producing areas have fallen to varying degrees. Corn prices fell significantly, farmers 'prices fell by more than 20% on average, with the highest drop of 30% compared with last year, while wheat also experienced a cliff-like decline before the National Day. At present, the rice purchase price is generally stable, but some areas also have a small decline compared with previous years. Falling food prices have had a big impact on food trade links. According to media reports, some regional markets have fallen into a serious panic atmosphere.

Some market analysts said that the decline of the three staple foods was rare in previous years, and international low food prices and domestic inventory backlog were regarded as the main reasons for this round of food price decline. The phenomenon of "increasing production but not increasing income" and "low grain prices hurting farmers" that have reappeared in the grain market this year will bring about impacts in many aspects and deserve special attention.

First of all, the sharp drop in grain prices has directly affected the income of hundreds of millions of farmers. It is estimated that this year's sharp drop in grain prices may lead to negative income growth of hundreds of billions, which has a direct impact on China's realization of a comprehensive well-off society. Second, the reduction in farmers 'income caused by the sharp drop in food prices will not only affect the consumer market. Third, a sharp drop in food prices will lead to a decline in farmers 'enthusiasm for growing food and may trigger fluctuations in food prices the following year.

In this situation, China's grain price policy as, need to be cautious. In our research team's view, this year's sharp drop in food prices hit the market, although there are international low food prices and domestic inventory backlog "accidental factors", but the defects of domestic food price purchase and subsidy policy system may be mechanism reasons that cannot be ignored.

Since 2004, China has fully liberalized the grain purchase market and purchase prices, and grain prices are formed by the market. After grain prices were liberalized, in order to protect farmers 'interests and enthusiasm for growing grain, the state implemented the minimum purchase price policy (i.e.,"market price support") for two key grain varieties in the main producing areas since 2004 and 2006. Every year, the state determines the minimum purchase price level for wheat and rice varieties by comprehensively considering such factors as grain costs and returns, supply and demand, market prices and macro-control, and releases it to the public before planting crops to guide farmers in planting and promote grain production. After the new grain is listed, farmers sell grain on the market. When the market price in the main producing area falls more than the minimum purchase price, the state-designated enterprise (China Grain Storage Company) enters the market to purchase according to the minimum purchase price, so as to guide the market grain price to rise reasonably. Since 2008, the state has raised the minimum purchase price of grain for six consecutive years. In 2013, the minimum purchase price of rice and wheat was raised to 1.39 yuan and 1.12 yuan per catty respectively, increasing by 92% and 57% respectively in six years.

From the actual implementation point of view, although the market-supporting purchase policy protects farmers 'interests, it needs to pay subsidies (indirect subsidies from the government to state-owned purchasing enterprises). The direct result of this disguised price subsidy policy is to raise the market price of grain sales and distort the market-determined price. Under this kind of price distortion, firstly, the subsidy cost is high, and a large number of state financial subsidies enter the acquisition enterprises and reserve links, and farmers do not benefit much directly; secondly, the processing cost of the middle and lower reaches of the grain industry is raised, and the resource allocation cannot be optimized through marketization. The whole middle and lower reaches of the industry are dragged down, which directly blocks the smooth flow of the whole agricultural industry chain and affects the healthy operation of the agricultural industry.

For example, due to the chaos of grain subsidies in Heilongjiang Province, thousands of unsubsidized grain enterprises have stopped production this year. A large amount of grain has been continuously collected from farmers at high subsidized prices by state-owned enterprises. However, processing enterprises cannot get raw grain at reasonable prices. The warehouses in which grain is stored are full of grain, and the grain in the warehouses cannot enter the production and consumption links for a long time. Of the 88 soybean processing enterprises above Heilongjiang scale, more than 90% have stopped production. In Jilin Province, a big corn province, Dacheng Biochemical, a leading private corn processing enterprise, was recently forced to stop production and had to be taken over by local state-owned enterprises with government background. There are also reasons for the price subsidy policy.

Both the United States and the European Union have huge subsidies for agriculture and farmers, but their subsidies are market-tight and systematic. EU subsidy policies are divided into price support and direct subsidies. Price support refers to the use of uniform agricultural prices within the EU. Market prices can be freely set within the range defined by the common price. Once they exceed this range, the Community will intervene to return them to the set range. The price mechanism of CAP consists of three parts: target price, intervention price and threshold price. Direct agricultural subsidies are direct monetary subsidies provided according to the production volume per unit in different regions.

The United States began to use agricultural subsidies in 1933. Over the past 80 years, agricultural subsidies have evolved continuously. On the one hand, they bypass WTO rules, on the other hand, they balance domestic and foreign price relations, and ensure that the price advantage of American agricultural products in international trade is maximized. Specifically speaking, the agricultural subsidy policy of the United States can be divided into five categories: loan balance subsidy, direct income subsidy, countercyclical subsidy, resource conservation subsidy and agricultural product trade subsidy. Agricultural subsidies in the United States amounted to $25 billion in 2005, an increase of 68 per cent over 2001.

If you compare the amount of subsidies, China spends a lot of money on grain subsidies and reserves. Statistics say that the central government now subsidizes agriculture by more than 1 trillion yuan (including grain price subsidies) every year, while the cost of grain storage and storage reaches several hundred billion yuan a year. Such a high financial investment, but not in exchange for farmers engaged in agricultural income significantly increased, and a smooth operation of the agricultural market, why? How should it be reformed? These questions cannot be avoided.

Generally speaking, for the decline in grain prices leading to a reduction in farmers' income, we can no longer simply adjust subsidies in the way we did in the past, but should carry out systematic reform based on the price mechanism. In our view, the core is to give full play to the role of the market mechanism, adjust the object of subsidies, increase direct subsidies to farmers and increase farmers' income. In view of the serious distortion of grain market prices brought about by the purchase of supporting the market in our country, it is necessary to promote the reform that the grain price formation mechanism is decoupled from government subsidies, and on the premise of protecting the interests of farmers, we will promote the gradual transformation of the minimum purchase price, temporary acquisition and storage, and agricultural subsidy policies to the target price system of agricultural products.

The sharp drop in grain prices affecting farmers' income and consumption is only a manifestation of China's grain price policy. Around the grain price formation mechanism, China needs to push forward the reform cautiously, systematically but resolutely, and finally realize the healthy operation and normal development of the grain market by means of financial subsidies.

(the writer is a senior researcher at Anbang Consulting)