BOFIT Viikkokatsaus / BOFIT Weekly Review 2017/35

The summer harvest this year was about 1 % larger than last year's harvest, which was about 1 % smaller than the record 2015 harvest. The summer harvest, which typically accounts for less than a quarter of China's annual crop harvest, consists largely of rice, maize, wheat, beans and root vegetables such as potatoes. The summer harvest was larger than in 2016 even with the smallest area of land under cultivation since 2009. Accordingly, yields per hectare hit an all-time high.

China began to increase subsidies to domestic farm production in 2003. Yields of summer crops have since increased by nearly 40 % per hectare and the size of the annual harvest by about 45 %. Besides increased use of fertilisers and irrigation, the government set guaranteed support prices at which it promised to purchase crops for its reserve stocks to assure national food security. The price guarantees were originally intended to stabilise producer incomes, but reserve stock purchases gradually evolved into the main sales channel for selling agricultural produce. As world commodity prices have declined in recent years, China's higher guaranteed prices have caused reserve stocks to balloon at great cost to the state, especially when those stocks eventually spoil or have to be sold at a loss. High support prices erode production competitiveness. For example, the price floor for maize led to lower consumption of domestic maize and increased imports.

First efforts to address the problem included the phasing out of the support price for cotton, soybeans and maize during 2014–16. Price guarantees still apply to wheat and rice, despite speculation this summer that these guarantees might also end. Wheat is a particularly thorny issue. Forecasts suggest that ratio of wheat reserves, which includes the portion unusable due to spoilage, to China's annual consumption should climb next year to around 110 % (the global average is about 20 %). China's wheat supply (reserve stock and production) accounts for about half of the wheat available on global markets. Other countries are concerned that China's decision to end price guarantees will cause more of China's overproduction to flood onto the world market, inducing sharp price declines. For the time being, however, China's decision to deregulate prices of maize and cotton has had barely any impact on their exports, which remain minuscule on a global scale.

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