China Regional Revew: Grain Policy at a Crossroads
August 01, 2004
by Emily Buckley
Whether China continues its policy of food protectionism or shifts to market governance, a shift in its grain policy could alter the tides of the global grain trade
China is the world’s number one producer of wheat and rice, and second in maize after the U.S. Its total grain output at 435 million tonnes is, like its population, just over 20% of the world’s total. These facts alone mean that even incremental changes in China’s grain economy can cause major swings in the world grain trade.
Developments in the Asian giant’s cereal production have been far from incremental in recent times. In 2003 the country experienced its fifth consecutive year of declining production. Grain output has fallen 15.7% or roughly 80 million tonnes from the peak in 1997, and is now below consumption by 50 million tonnes. The deficit is spread among all three of the major crops. Thanks to better weather and such measures as lifting of ceiling prices, reduced taxes and more subsidies to farmers, this year’s winter wheat harvest is up 3% on the year but still well short of consumption. The U.S. Department of Agriculture forecasts rice production will stage a recovery, but still fall 10 million tonnes short of consumption. Maize is expected to decline again, but at a slower rate.
So far abundant state grain reserves, accumulated in a period of surplus production in the late 1990s, have been drawn down to make up for these deficits. Consequently the effect of China’s half-decade of grain deficits has yet to be fully felt on world markets. In fact, China’s leaders apparently experienced a change of heart about the usefulness of these huge reserves of deteriorating quality, and chose to accelerate their reduction by encouraging exports at the same time as the country’s wheat and rice production began falling well below internal demand.
With its inventories depleted, China now seems to be at a crossroads in its grain policy. On the one hand, it can use massive subsidies and other measures to attempt to continue the previously sacrosanct practice of food security, which dictated that the nation should be self-sufficient for at least 95% of its grain needs. Or it can follow a new route, determined by its comparative advantages and the principals of a market economy. This route would eventually lead to much higher grain imports and make it a more fully integrated member of the international grain economy. The latter course would be more in the spirit of China’s accession to the World Trade Organization in 2001, and would likely produce the greatest economic benefit for the country overall.
The question may not be whether China should, but rather if it can reasonably maintain the level of grain self-sufficiency of its recent past, indeed of its long history. It is true that the Middle Kingdom accomplished the remarkable feat of quadrupling grain production from 100 million tonnes in 1960 to more than 400 million tonnes in 2000. China’s average per hectare yields of 3.8 tonnes for wheat and 6.2 tonnes for rice are well above the world averages of 2.7 tonnes and 3.9 tonnes respectively, though China’s figures may be somewhat inflated by under-reporting of planted area.
It is also true that worldwide alarms were raised once before when Chinese wheat imports spiked to 10 million tonnes in 1994, to make up for lower harvests at a time when both per capita grain consumption and total population were climbing more rapidly than now. That year Lester Brown’s book, "Who Will Feed China," used straight-line projections to predict that China would need to import more than 200 million tonnes of grain early in the next century. However even before the book appeared, policies had been put in place that quickly raised production to such levels that within just a few years, excessive amounts of grain were being put in reserve.
This time around, the obstacles to a recovery of grain self-sufficiency are more daunting.
First of all, China’s breakneck economic development has taken much prime agricultural land out of production. Grain sown area has declined from 90 million ha in 1998 to 76 million ha in 2003. This year all kinds of measures have been announced by the central government to halt the rapid shrinkage of agricultural land. In the case of wheat, the problems have to do as much with falling water tables from increased use and long-term drought.
RURAL POPULATION AND COMPARATIVE ADVANTAGE
Another problem for the Chinese government is that promoting grain production can detract from the more critical goal of improving the livelihoods of China’s 800 million rural residents.
The rural/urban income gap in China is among the largest in the world, and is widening. In 1997 the ratio was 2.47: 1.0, but by 2003 had risen to 3.24:1.
To help raise their incomes, China’s skillful farmers have been given more and more freedom to grow what they choose. Large numbers have been switching from wheat, corn and rice to more labor intensive and higher-value crops such as cotton, oilseeds, fruits and vegetables, and even landscape plants.
To counter such trends the central government has had to provide extra incentives to make grain growing more attractive to peasants. This includes lowering Value Added Taxes (VAT) on grain production and subsidizing some inputs.
The government has other conflicting policy goals as well when it comes to grain. The country announced in 2000 that tree cover should be increased from 7% to 15% of the country’s land area. Much of this is to be accomplished by requiring that any field on land above a certain slope should be planted with trees, whether for fruit and nut production, forestry, or some other use. Cooperating peasants are compensated with wheat flour or rice from government stores.
Now with widening grain deficits, this policy seems to have been sidelined. In 2002 there were 44 million ha returned to forest, but only 3.3 million in 2003 and just 660,000 ha in the first half of this year.
In taking these marginal, terraced lands out of grain production, China has stated its faith that its large investments in biotechnology research — second only to the U.S. — will enable it to continue raising grain yields on good crop lands.
China’s biggest impact on world grain markets in the last five years has been through corn exports. By rapidly drawing down its maize reserves, China vaulted into the position
of number two corn exporter after the U.S. In the process, more easily financed Chinese shipments, in smaller vessels over shorter distances, were able to shut out U.S. shipments from many traditional markets in East and Southeast Asia for a number of years.
This year China suddenly called a halt to most of its maize exports. A recovery of the feed industry, devastated in preceeding years by the SARS outbreak and the avian flu, has increased demand.
Over 66% of maize is for feed use. While 13% is for human consumption, more and more corn in China is going to industrial uses as well, ranging from fuel ethanol to starch and MSG. The industrial share is already nearly 12%.
There is now speculation about when China might begin importing maize from the U.S. The consensus is that China’s domestic prices will have to go up, and international corn prices and bulk vessel rates will have to come down before such shipments become feasible.
Lifting the veil of secrecy surrounding its grain reserves is one major contribution that China could make to the transparency and stability of international markets. The government does not publish any official reserves data, supposedly for reasons of national security.
Many analysts question whether anyone in China really knows what grain stocks there are in the country.
During the previous campaign to raise production, which started almost 10 years ago, responsibility for grain self-sufficiency was delegated to the approximately 40 provincial-level governments. Grain reserves are held by the central, provincial and various levels of local government constituting thousands of reporting entities. All would have various motivations for either under- or over-reporting both the strategic and commercial reserves — or they simply may not know the real total.
In addition more and more of the grain sector is controlled by private companies, which may or may not give accurate figures to the government.
THE CASE FOR TRADE
In 2001 China was accepted into the World Trade Organization. At that time many analysts expected an immediate rise in the country’s grain imports and
a reduction of exports. China did after all have to agree to liberalize its grain trade by 2005.
Instead the opposite happened. In 2002, China’s first full year of membership, grain imports fell, and exports rose. By providing VAT rebates and authorizing special railway tariffs, China was able to sustain its corn exports.
In one important area, however, China has mostly abandoned its policy of food security and government intervention. In the briskly growing and volatile oilseeds trade, China has already integrated into world markets. China, the world’s number four producer of soybeans at 16 million tonnes, could supply most of its own needs up until 1994. Since then it has seen its imports of beans rise to a peak of over 20 million tonnes in 2003. (See related story in WG’s March issue, p26.)
China’s policymakers recognized early on that grain security could not be extended to include the soybeans needed to sustain rising meat consumption. Only the virgin farmlands of Brazil could fill that demand. But even here the country’s commitment to free trade has shown some limitations, as the government used sanitary rules to halt South American shipments in the spring of this year when the domestic crushing industry suddenly found itself overpurchased at high prices.
One thing is without doubt: despite 800 million rural dwellers, agriculture will account for a constantly shrinking part of China’s economic output. Last year for the first time, the value of imported food and agriculture products exceeded that of exported products.
And China certainly can afford to buy more grain from the outside. As agricultural economist Lester Brown likes to point out in his controversial and alarmist predictions about world food price inflation, China’s $120 billion trade surplus with the U.S. could buy the entire American wheat crop twice over.
By the same token, China’s bulging government coffers would allow it also to follow the route most often taken by richer countries, by increasingly subsidizing its farmers. In May a 25% increase to the Ministry of Agriculture’s budget was announced, raising it to 250 billion yuan (US$30 billion), with the extra funds earmarked to support grain growing.
Will China, thanks to its growing economic might, feel sufficiently at ease in the international order to open its door to more and more imported grain? This will depend in part on how quickly China’s farmers respond to the latest round of government incentives. If harvests continue to falter, China will be forced to buy increasing quantities of wheat, rice and even maize. World grain prices could hang in the balance. •
(The Regional Review continues in two related articles.)
China’s grain growing regions
Northeast: Jilin and Liaoning provinces are where China’s maize production is most heavily concentrated, creating huge surpluses and leading to exports, which peaked at 15 million tonnes in 2002-03. Livestock feedlots and conversion of maize to starch and fuel ethanol are being promoted. Further north in Heilongjiang province, in addition to corn, japonica rice is grown on large farms. The surplus is sometimes shipped by rail and boat to the heavily rice-consuming southern provinces, but the overburdened railways have caused bottlenecks.
North-central plain: Two-thirds of China’s 90-million-tonne wheat crop is produced on the north China plains in Hebei, Henan, Shandong and in parts of Anhui and Jiangsu provinces. This winter wheat requires irrigation in what has become a severely drought prone region threatened on its northern and western margins by desertification. Throughout this wheat zone, falling water tables are drying up wells and leading to water shortages and increased soil salinity. Higher value crops, such as cotton, are competing with wheat for irrigation water from already depleted aquifers.
South and southeast: The staple crop of all the provinces on or south of the Yangtze river is rice, making up most of China’s 120-million-tonne annual harvest. Wheat consumption in this region is only a few kilograms per person but is going up as wheat-based convenience foods make inroads on traditional diets. Especially in the booming coastal provinces of Guangdong, Fujian and Zhejiang, new industrial parks, housing developments, expanded road networks needed to accommodate China’s burgeoning car culture, and even golf courses and theme parks have contributed to the loss of more and more paddy land. Guangdong and Shanghai are major markets for corn from the north.
Sichuan province: This is China’s most populated province with 115 million residents. It covers a huge basin on the middle reaches of the Yangtze River and has for centuries been a net supplier of rice to the rest of the country. The Three Gorges dam has improved navigation, allowing easier transport of rice in larger vessels down river and feed grains and oilseeds upriver. The province is the birthplace of two of China’s top four feed milling companies.
West: China’s population density thins as one moves north and west from Shanxi, Shaanxi, Ningxia and Gansu to Inner Mongolia, Qinghai, Xinjiang and Tibet. Grain growing becomes more of a subsistence activity and livestock husbandry is the main rural livelihood. Mutton production has gone up 62% in just five years thanks to big increases in sheep (20%) and goat (32%) herds, now estimated at 136 million and 162 million head. This has led to severe overgrazing in this semi-arid region, contributing to desertification. To avert environmental catastrophe, livestock numbers will have to be reduced, or more feed grains will need to be used.
(Refer to the digital delivery edition to see the related map of China's grain growing regions.)
David McKee is a grain industry consultant providing market research and other services to companies seeking
to initiate business in new markets. He can be reached by e-mail at email@example.com.