Import incentive

Business, Economy | Fri 6 Nov | Author – Business & Finance
Asia View

The failure of China’s agricultural subsidies system opens doors for imports, writes Mark Godfrey.

Much was made in recent months of China’s mountains of moulding grain. This is down to an outmoded state system of prioritising continuous increases in grain yields – a system which has done much to increase the quantity of Chinese grain output at the expense of the quality.

A consecutive annual increase in grain yields has become a mantra and a raison d’etre of China’s government but such a goal belongs more to Soviet style planned agricultural production than to the modern, efficient agricultural system which China also says it wants.

To increase volumes, China has handed out huge sums in subsidies – RMB155bn was announced this year – to grain and oil seeds producers while minimum prices have been guaranteed to farmers from the state-run grain buying monopoly, SinoGrain.

Subsidies have helped pay for the massive input of fertilisers and subsidies which have helped make China a leading producer of grain in global league tables. But China has maxxed out many of the productivity gains possible with heavy use of fertilisers and chemicals. It now needs to reduce the subsidies and focus instead on its natural competitiveness.

China is a world leading exporter of many forms of fruit and vegetables. It’s also the world’s biggest exporter of farmed seafood. It got to its position of dominance in both sectors because growing garlic, apples and tilapia (a freshwater fish breed) or shrimp requires a great deal of manpower.

Abundant manpower gave China a natural advantage and one it’s likely to maintain. Yet rather than funding the training and productivity of profitable commodities like fruit, vegetables and seafood – where it can maintain a leading global market share – the country has continued to pour funds into seeking to maintain artificially high yields in grain.

FOOD SECURITY

Achieving the magical consecutive annual increases in yields in grain is important for Communist Party planners, it’s also pointed to as a guarantor of food security. This is less the reality in a world where grain and other commodities are traded globally.

While continuing its dominance in commodities where it has an advantage, China would be better placed to invest in increasing grain yields in friendly developing countries where land is more plentiful and cheaper to acquire. Chinese attempts to acquire or rent vast swathes of Kazakhstan steppe for grain production met with much local opposition precisely because the manoeuvre wasn’t presented as an effort to help local authorities to modernise and improve productivity of the local grain and agricultural sector.

Vast potential remains in numerous developing countries – Kazakhstan along with several large African and Latin American states spring to mind – to increase agricultural productivity. And while some aspects of China’s ‘green revolution’ – particular an over-dependence on fertilizers – remains questionable, there is also much know-how in irrigation, multi-cropping and seed management which China can share.

There is also much know-how in irrigation, multi-cropping and seed management which China can share

This would be money better spent than cash lavished by China on programmes at home which produce questionable gains in grain output and at a level that’s ultimately not sustainable. The result is that China is left with mountains of moulding grain while subsidies and price floors set by government to encourage increases in production are making Chinese grain much more expensive than better-quality imported grain.

China risks repeating the mistakes of the EU which in earlier decades subsidised its farmers to produce vast quantities of beef and butter which had to be sold off cheaply – indeed some of it dumped on developing countries. Given China’s growing need for grain it is unlikely to be shipping its grain piles overseas but there is nonetheless a lesson to be learnt.

SUSTAINABILITY

Today, EU farm subsidies have become linked less to volume and more to sustainability and farmers’ stewardship of the environment. European farm payments have also been linked to farmers’ skills – requiring farmers to present evidence of formal training in modern farming practices. This is something that China’s agricultural authorities would do well to replicate.

Subsidies need to be directed to promote quality produce and skilled farmers, not to achieving a goal of continuous increase in yields.

China could rely on imports to supply the grain it needs – it has already conceded that it will rely on imports to satisfy its massive soybean demands. Funds previously lavished on increasing yields could be switched to increasing China’s capacity and skills in areas of agriculture where it has established real competitive advantages – like vegetables and seafood.

However well intended they were, Chinese grain quotas, goals and subsidies belong to another era. As a global producer and consumer of grains and other agricultural commodities, China need not be afraid of relying on the market and seeking supply in countries where it can share its considerable agricultural expertise.  

BEEFING IT UP FOR IRELAND

In February 2015, the Chinese government approved access for Irish beef, creating opportunities in one of the largest and fastest growing markets.

Following impressive growth rates in Chinese beef imports over the past three years, Business Monitor International (BMI) forecasts official 2015 volumes to increase 12% compared with 2014 levels. As the shortage of beef in China is believed to be structural, and to remain until at least 2018, demand for imported beef will continue to be strong.

In 2014, official China frozen beef imports reached over 295,000 tons, a slight increase over 2013. At present, only six countries are permitted to export beef to China with varied levels of access: Australia, Uruguay, New Zealand, Argentina, Canada and Costa Rica. Australia remained the largest official imported beef supplier to China in 2014, with 45% market share. Uruguay maintained the second largest imported beef market share in China, at 30%. New Zealand beef continued to benefit from a preferential tariff compared to Australia’s, as Chinese imports of New Zealand beef increased 14%, which also represents a 14% share of the official imported beef market. Over time, Australian exporters will gain a boost from the recently signed FTA between the two countries.

The potential for the beef market in China is huge as beef demand keeps rising. The demand for beef will not be matched by Chinese supplies, and given that Chinese agriculture is fighting for resources (feed, land and water), one solution is to allow more beef imports.