Agriculture historically has been regarded in China as the foundation on which its economy and social stability are based.
Agricultural policy. During the past several years, Chinese officials have shifted their emphasis regarding the country's agricultural goals. Gone are the days of a single-minded focus on how to feed the people. Today, thanks to significant increases in productivity, agricultural policy centers more on how to pay farmers enough to encourage production and how to maintain farm income without stimulating food price inflation in urban areas.
Although some economic sectors are moving away from government control, officials continue to believe that strong control over domestic grain marketing is necessary to meet policy objectives. The government tries to buy 70% to 80% of grain entering marketing channels each year.
Farmers in China are assigned quotas of grain they are obliged to sell to the government, and any surplus is supposed to be either consumed on farm or sold to the government through the provincial grain bureaus. Farmers are permitted to sell small amounts locally, and the grain bureaus may buy and sell grain for their own accounts, so a free market has developed.
In the past two years, declining market prices have caused officials to adjust grain pricing mechanisms in an effort to maintain farm incomes. The current pricing regime was adopted in 1997 and added a "protected price," in effect a price floor, to the official price structure.
This structure includes a quota price, or the price paid to farmers for grain they are obligated to sell each year. The quota price for wheat in 1997 was the equivalent of about U.S.$169 a tonne, the price for maize was U.S.$125, and for rice, the price was U.S.$181.
The negotiated price, which fluctuates with market conditions, is paid to farmers for any additional grain they sell to the government, and until 1996, negotiated prices generally were higher than quota prices. After market prices dropped, the "protected price" was set below the quota price to establish a minimum price for grain purchased by the government.
The government also controls China's grain import and export markets through the China National Cereals, Oils and Foodstuffs Import and Export Company, better known as COFCO. Although deregulation has occurred in the trade of other commodities, officials have given no indication that COFCO will relinquish control over grains.
With the increase in China's productivity, government policy also has shifted away from insistence on total self-sufficiency to greater acceptance of grain imports as necessary to supplement quality gaps and occasional quantity shortfalls, as well as for logistics purposes. China continues to import from different sources to avoid reliance on a single supplier.
Industry issues. A history of poor harvests and economic and political disorder has led Chinese farmers — as well as the government — to maintain supplies of surplus grain to provide insurance against unforeseen disruptions. China's grain stocks levels historically have been of great interest, not only to Chinese officials but to the international grain trade as an indicator of China's potential imports and exports. In the past year, China has begun to re-evaluate its system of managing stocks because changes over the years have blurred the issues of grain ownership and lines of authority.
In 1990, China established the State Administration for Grain Reserves (S.A.G.R.) to serve as the managerial board for controlling strategic grain reserves. Responsibilities for managing grain in commercial pipelines remained with the local grain bureaus.
In 1992, the S.A.G.R. assumed theoretical oversight of commercial supplies, although the grain bureaus continued to buy, store and distribute the stocks. In 1995, oversight of commercial stocks passed back to the local bureaus.
When the local bureaus were allowed to buy and sell grain for their own accounts, stocks management began to spin out of control. In 1994, for example, the central government instructed the bureaus to release grain supplies to the market only to discover that the bureaus already had sold the stocks.
Grain processing. Market and trade liberalization has helped pave the way for the modernization of China's flour milling industry. Rising incomes and consumerism also have led to the rediscovery of flour quality and value in the milling process. But progress has been extremely slow.
In the decades before liberalization began, central planners required mills to grind to a minimum extraction rate of 85% to meet high production quotas. The milling process consisted of only three breaks, with every passage using corrugated rolls, because the only priority was assuring the delivery of essential calories to the population.
By the late 1970s, economic liberalization and increased wheat production led to a relaxation of the minimum extraction rate. By the 1980s, capacity expansion was under way, and mills, still under government control, were expected at least to generate income if not show a profit. By the 1990s, millers were permitted to make so-called "special flours," or higher-quality flours.
At that point, the move to mill renovation and modernization began to evolve, but slowly. Investment capital was scarce, and millers, skeptical about future flour policies, were reluctant to make big changes, especially as the industry remained under central oversight. The pace of change has increased some as the government began to encourage joint ventures with overseas investors, both for mills and for the manufacture of milling equipment.
The actual number of mills in China today is extremely hard to determine. Estimates range from 6,000 to as many as 9,000 units. Most are thought to have capacities of fewer than 50 tonnes per day. Recent indications are that the number of modernized mills is fewer than 300.
A problem currently facing domestic wheat millers is protein levels. Domestic wheat typically is too low in protein to be used for hard crust bakery products and too high in protein to be considered for use in soft dough products. As a result, China, despite increasing wheat production figures, is importing wheat to satisfy these markets.