77367 D I S C U S S I O N P A P E R S SUSTAINABLE DEVELOPMENT – EAST ASIA AND PACIFIC THE ROLE OF AGRICULTURE IN A MODERNIZING SOCIETY FOOD, FARMS AND FIELDS IN CHINA 2030 Luc Christiaensen THE WORLD BANK This report is among the background study reports for the World Bank analytical and advisory product of “China 2030: Building a Modern, Harmonious, and Creative Society � in collaboration with the Development Research Center of the State Council of China. It was prepared by the Sustainable Development Department of the East Asia and Pacific Region of the World Bank. Food, farms and fields are the three evolving challenges of agriculture across the world. China has successfully addressed its “food problem� after adopting the reforms in 1978, but is increasingly faced with the “farm problem� in terms of earning a comparable living in farming, and the “field problem� , namely the long term sustainability of agricultural land. This report provides a vision of China’s modern and commercial small-holder agriculture in 2030, and outlined recommended actions to achieve the vision in six broad areas of the food security strategy, factor markets and empowerment of smallholders, provision of (rural) public goods, rural incomes, agricultural environmental management, and climate change mitigation. For more information and to view the full China 2030 report, please visit http://www.worldbank.org/en/news/2012/02/27/china-2030-executive-summary Sustainable Development Department East Asia and Pacific Region The World Bank Washington, D.C. May 2012 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. 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T h e R o l e o f A g r i c u lt u r e in a Modernizing Society F o o d , Fa r m s a n d F i e l d s in China 2030 M ay 2 0 1 2 C o n t e n ts Acknowledgements v Acronyms vii Executive Summary ix 1 Introduction 1 2 Towards a Vision for China’s Agriculture 2030 5 3 China’s Agriculture Anno 2010 – Challenges and Opportunities 11 3.1  The Structure of Agriculture 1978–2010 11 3.2  Drivers of Success 15 3.3 Agriculture At a Cross-Road 20 3.3.1  Rising Supply Constraints 20 3.3.2  Changing Demand Dynamics 31 3.4  The Outlook in Sum 34 4 Towards Modern Commercial Smallholder Farming 35 4.1  Revisit Food Security Objectives 35 4.2 Rationalize Factor Markets and Use Institutional Innovations 44 4.2.1 Rationalize Factor Markets to Facilitate Farm Consolidation 44 4.2.2  Make Producer Cooperatives Work More Effectively For Smallholders 49 4.3 Continue Strengthening the Provision of (Rural) Public Goods 50 4.3.1 Invest More and Better in Agricultural Technology 50 4.3.2  Target Investment in Rural Education and Infrastructure 53 4.3.3  Tackle Food Safety Issues More Effectively 55 4.4 Support Rural Incomes While Avoiding the Subsidy Trap 56 4.5 Improve Agricultural Water and Animal Waste Management 58 4.6  Manage Risks Better 59 References 61 iii List of Figures Figure 1: The divergence between average urban and rural income continues its exponential rise 6 Figure 2: Rice and wheat production peaked around 2000; maize production rising rapidly since 11 Figure 3: Small farms getting smaller till 2002, with some consolidation through renting thereafter 14 Figure 4: Share of villages with Farmer Producer Cooperatives increased dramatically since enactment of 2007 Farmers Professional Co-operative Law (FPCL) 15 Figure 5: Institutional change drove TFP growth between 1978–1984; technological change thereafter 16 Figure 6: Fertilizer use expanded rapidly to among the highest in the world 17 Figure 7: Irrigated land tripled between 1950 and 1978 to 45 million ha, increasing gradually to 60 million ha in 2009 18 Figure 8: China evolved from net food exporter to net food importer since WTO accession in 2001 19 Figure 9: Cultivated area declined (1997–2009); sown area slightly increased thru multiple cropping 21 Figure 10: Rural daily wages have risen sharply since 2003 25 Figure 11: Mechanization accelerates as agricultural labor/land ratio declines (negative growth) 26 Figure 12: Chinese cereal production vulnerable to appreciation of Renminbi 29 Figure 13: Fruit and vegetable production not so vulnerable to appreciation of Renminbi 29 Figure 14: Income elasticity of demand (in 2006) for rice and wheat is low and in urban areas negative; income elasticity of demand for high value crops is positive, and almost one for dairy 31 Figure 15: Grains (especially soybeans) have much higher crop water requirements than fruits and vegetables and much lower net return; cash crops and oil seeds are in between 41 Figure 16: The share of agricultural land being rented is rising rapidly 46 Figure 17: Support to agricultural producers rising rapidly in China, most recently thru price support 57 List of Tables Table 1: The annual growth rates (%) of agricultural commodities, 1970–2010 12 Table 2: Changes in structure (%) of China’s agricultural economy, 1970–2005 13 Table 3: Excess nutrient supply1) is substantial, especially for nitrogen, with little decline in sight 33 Table 4: Rapid increase in subsidization of agriculture 2002–2010 57 List of Boxes Box 1: For development, the nature of inequality is as important as its degree 8 Box 2: Cultivated land loss in China – What do the numbers really say? 22 Box 3: Pressure on farm consolidation from rising off-farm wages – Some rudimentary arithmetic 27 Box 4: Rising rural labor costs raise subsidization and protection – The Post-War experience in Japan 28 Box 5: Balancing land uses between agriculture and non-agriculture 37 Box 6: Qualitative perspective on a moderate, gradual expansion of maize imports by China 39 Box 7: Opportunities and challenges of farming abroad – Emerging experiences from Latin America 41 Box 8: Farm size rises in line with non-agricultural wages – Insights from the US experience 45 Box 9: Part-time farming – An important path out of poverty in Latin America. 48 iv The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 A c k n o w l e d g e m e n ts L uc Christiaensen was the primary author of this report. This prospective review of agri- culture in China 2030 was initiated as background to the Green Growth pillar of the stra- tegic document “China’s 2030 Challenge: Building a Modern, Harmonious, and Creative High-income Society�, a joint effort by teams of the Government of China and the World Bank. The Green Growth pillar was led by Carter Brandon (EASCS). The review benefited tre- mendously from a background paper by Professors Jikun Huang (Center for Chinese Agricultural Policy of the Chinese Academy of Sciences) and Scott Rozelle (Stanford University). It also bene- fited from comments by three reviewers, Derek Byerlee (co-Director World Development Report 2008), Sari Soderstrom (Sector Manager, ENV), Xiaobo Zhang (Sr. Research Fellow, IFPRI); in- puts by Jun Zhao (EASCS) on cooperatives, Ulrich Schmitt (EASCS) on land, and Chris Sall (EASSCS) on GMOs; penetrating feedback by Kei Otsuka (DECVP); and insightful discussions with Carter Brandon, Wendao Cao, and Andrew Goodland (EASCS), Patrick Labaste and Alan Piazza (EASER), Iain Shuker (AFTAR), Robert Townsend and Joergen Voegele (ARD), Susanne Scheierling (TWIWA), Shenggen Fan (IFPRI) and Professors Pei Guo and Zhihao Zheng (China Agricultural University). v A c r o n y ms CGIAR Consultative Group on International Agricultural Research ET Evapo Transpiration FAO Food and Agriculture Organization FIP Farmland Improvement Project FPA Farmer Professional Association FPCL Farmers Professional Co-operative Law GDP Gross Domestic Product GM Genetically Modified GMO Genetically Modified Organism GTAP Global Trade Analysis Project IFPRI International Food Policy Research Institute NDRC National Development and Reform Commission PSE Producer Support Estimate OECD Organization for Economic Cooperation and Development RCCs Rural Credit Cooperatives TFP Total Factor Productivity WTO World Trade Organization mmt million metric ton 1 US$ = 6.3 RMB (or Yuan) (Sept 2011) vii E x e c u t i v e S u mmar y E x e c u t i v e S u mmar y F ood, farms and fields—the three (evolving) challenges of agriculture. Across the world, feeding the country, generating decent and comparable livelihoods for its farmers, and sustainably managing the natural resource base are the three quintessential functions of agriculture. They are here dubbed agriculture’s food, farm and field problems. China’s success in addressing its “food problem� after adopting the reforms in 1978 has been nothing less than remarkable. Grain output (rice, wheat and maize) has almost doubled and most hunger has been eliminated. But earning a comparable living in farming has become increasingly challenging (the “farm problem�). Average rural incomes rose substantially—from 952  Yuan per capita in 1980  to 5,919 in 2010 (in constant 2010 Yuan). But urban incomes rose even faster, with the real income gap between average urban and rural income rising exponentially (Figure A). This has been un- dermining social cohesion and has instigated China to shift from taxing agriculture to subsidiz- ing it. Similar policy shifts have historically been observed across developed countries in an at- tempt to stem the rising rural-urban divide. Finally, the long-term sustainability of agricultural land (the “field problem�) is increasingly be- ing questioned. Countries’ resolve to address first the food and then also the farm problem, have often led them to overexploit their natural resource base. But, as they develop and competition over land and water increases, pressure on agriculture to reduce its environmental footprint, usually goes up, giving prominence to tackling agriculture’s “field problem�. The relative importance of agriculture’s three problems in policymaking thus evolves during the course of development away from the food to the farm and field problems. This shift has however recently been compounded by a resurgence of the “food problem�, as global supplies struggle to keep up with demand. Against this background, the following vision for China’s ag- riculture is advanced. China’s agriculture anno 2030 – A Vision. China’s agriculture anno 2030  will be pre- dominantly a modern commercial smallholder agriculture that ensures self sufficiency in cere- al food (rice and wheat), but not in cereal feed (maize and soybeans). The sector will maximize ix Figure A The divergence between average per capita urban and rural income continues its exponential rise 14,000 3.5 12,000 3.0 Ratioo of urban to rural income RMB (constant year 2010) 10,000 2.5 8,000 2.0 6,000 1.5 4,000 1.0 2,000 0.5 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Difference in urban and rural income (left) Ratio of urban to rural income (right) Source: NBS (2010 and 2011). rural employment opportunities in labor in- of this massive amount of agricultural out- tensive high value agricultural products and put takes mostly place on fragmented plots on act as a diligent custodian of its precious nat- small smallholder farms, which until the early ural resources. 2000s were still declining in size. Land saving technological change (improved seeds, chem- Achieving this will be no small feat. Rising ical fertilizer) coupled with expansion of irri- demand for feed grains and high value agri- gation has been driving output growth, aid- cultural products following dietary change, ed by liberalized input and output markets. rapidly evolving production cost structures However, with food supply constraints grow- and shifting international, ecological, and ing and demand rising, China’s current food agro-climatic environments are introducing policies, smallholder farm structure, and in- new economies of scale, international com- tensified production model are being tested. petition and uncertainty that pose important challenges to grain production and the cur- Cereal self sufficiency model challenged. rent smallholder farm model. But, they bring Rising scarcity and degradation of water and also new opportunities. land, growing competition for labor, and a changing climatic environment are pushing Drivers of past success. Over the past up domestic production costs and risks, at the three decades China’s agricultural sector has same time as the demand for land and wa- expanded substantially and diversified be- ter intensive feed cereals (maize and soybeans) yond grains. Its gross value of output (in con- is also growing rapidly. This strong demand, stant prices) quadrupled. Livestock and aquat- linked to China’s shift toward a more protein- ic products now contribute about two fifths rich diet, in the face of growing constraints of the gross value of output, compared with on supply, has resulted in upward pressures less than one fifth in 1978. The production on domestic food prices. The food problem x The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Box A China’s agriculture in numbers – successes, challenges and prospects The following striking statistics help paint the emerging new reality for China’s agriculture. 1. For the past three decades (1978–2009), China’s agricultural GDP has been growing annually at an unparalleled 4.5 percent on average. This has been a most important, though still widely underappreciated contributor to reduc- ing China’s number of $1-day poor people by half a billion between 1978 and 2004. 2. Growth in total factor productivity, advancing at about 2 percent/year, has been driving agricultural growth, first through institutional reforms (the household production system), later through land saving technologies. 3. In the process, China’s agriculture diversified substantially, in line with dietary change. Livestock and fishery and aquaculture production made up almost half of agricultural GDP in 2005 (35 and 10 percent respectively). In 1978, 82 percent of agricultural GDP came from crops. 4. Looking forward, the demand for grains will be increasingly driven by the demand for cereal feed (maize, soybeans) for China’s growing dairy and meat production. Annual meat consumption per capita is expected to increase from 53 kg in 2010 to 73 kg in 2030, up from 25 kg in 1990. Income elasticities for vegetables and fruits (0.3–0.5) are also positive. In contrast, those for rice and wheat are negative in urban, and close to zero in rural settings. Growth in overall rice and wheat demand is expected to level off between 2025 and 2030. 5. China has about 20 percent of the world’s population, 35 percent of the world’s agricultural labor force, but only 11 percent of the world’s agricultural land, and less than 6 percent of its water resources. Its international compet- itive advantage thus lies in the production of labor intensive high value products (fruits and vegetables, meat, dairy) and not in land and water intensive grain production. 6. WTO accession and Renminbi appreciation are aligning China’s international trading patterns with its comparative advantage, with especially imports of land and water intensive grains increasing rapidly, somewhat compensated by rising exports of labor intensive horticulture. Soybeans imports rose from 10 mmt in 2001 to more than 50 mmt in 2008–2010. 7. The agrarian structure has been dominated by small fragmented family farms, with farm sizes averaging only 0.6 ha, divided across 4 to 6 non-contiguous plots. Equal land distribution has been an important factor in agricul- ture’s success in reducing China’s poverty. But, the viability of smallholder agriculture is increasingly challenged, as rural wages, international competition and climatic uncertainty are rising fast. 8. China’s objective of being (95 percent) self sufficient in rice, wheat and maize is being challenged, as reflected in food price inflation and the emerging import of maize after many years of being a maize exporter. It also raises the prospects of a subsidy trap. Input subsidies have risen sevenfold between 2006–2010 and producer support in 2010 was estimated at 17 percent of gross farm receipts. This is the highest ever in China since 1978, even though it is considered mainly non-distortive and still only slightly above half the OECD average. 9. The potential of being able to reduce fertilizer use by 30 percent without reducing output provides important cost saving prospects to resolve the food, farm and field problems. There is also vast potential to improve the low effi- ciency of current water use, which in grain production is only half of that in the developed world. 10. China is betting largely on biotech to keep its TFP growth in agriculture up, with its massive past investments being supplemented by the 2009–2020 Special Program of 26 Billion Yuan. It has further expanded investment in rural education and roads to stem the rural-urban and regional divide. is resurfacing with the domestic (95%) grain cereal imports more competitive. Bridging self sufficiency model increasingly being the domestic feed grain gap through trade, as challenged, especially as WTO accession already practiced through the rapid expansion and Renminbi appreciation are also making of soybean imports, provides one alternative. Executive Summary xi The dramatic increase in its imports has also Urbanization also provides opportuni- helped mitigate the “field problem�, as soy- ties. Urban diets are more diversified and bean is a rather water intensive crop. Whether much less intensive in food grains (rice and to relax the grain self sufficiency objective wheat). This alleviates some of the supply side also for other land and water intensive feed pressures on maintaining cereal self sufficien- (and/or food) grains such as maize, presents an cy. The rising demand for high value agri- important policy choice. cultural products (fruits and vegetables) fur- ther opens up opportunities for smallholders. The smallholder model under pressure. High value products are more labor intensive The rapid decline in the agricultural and rural to produce and generate a much higher re- labor force, following the ageing of the rural turn per ha. This helps in addressing the farm demographic and urban migration, especial- problem (in addition to migration and social ly of young males, is pushing up rural wag- safety nets), provided appropriate institutions es (Figure B). This challenges the smallhold- are developed to link smallholders into the er farm model. Smallholders must expand to increasingly demanding value chains. The generate earnings comparable with off-farm latter have arisen to capture the economies employment as well as to capture the econo- of scale in processing and marketing and to mies of scale from mechanization following address rising demands for quality and food the substitution of capital for labor. These pres- safety. sures are even larger in the mountainous area, where many of the poor live and where oppor- Towards a modernized commercial tunities for mechanization and land consolida- smallholder farming system. To achieve tion are more limited. They exacerbate the ex- the vision of China’s agriculture anno 2030 and isting farm (income) problem, while the field create a modern, commercial smallholder ag- problem lurks in the background as over use of riculture that adequately addresses the food, chemicals is polluting waters and reducing soil farm and field problems, requires actions in six fertility, especially in China’s grain baskets. broad areas: Figure B Rural daily wages (real Yuan) have risen sharply since 2003 60 50 Daily wage (real RMB) 40 30 20 10 0 1993 1995 1997 1999 2001 2003 2005 2007 Gansu Sichuan Jilin Jiangsu Shaanxi Hebei Source: Zhang, Yang and Wang (2011). xii The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 1. revisit China’s food security objectives— of about 850 m3/ton output, maize is also a in particular, self sufficiency targets for large user of water (Figure C), like soybeans, maize; which requires about 3200  m 3  of water per 2. rationalize factor markets and use insti- ton output.1 Importing soybeans and maize tutional innovations to empower small- thus equates with importing vast amounts of holders; water, giving rise to a virtual trade in water. 3. continue to strengthen the provision of It can relieve pressures on the water tables in rural public goods—agricultural tech- the northern plains, where water scarcity is nology, rural education and infrastruc- felt most. More erratic weather patterns fol- ture, and food safety; lowing climate change also increases the need 4. support rural incomes while avoiding the for occasional reliance on the world mar- subsidy trap; ket. Finally, to keep farmers in grain farm- 5. improve agricultural water and animal ing, farm consolidation will be needed to en- waste management; able an income from grain farming compared 6. manage risks better—adapt to and miti- with other crops or off-farm activities. This gate the effects of climate change. will be a slow and protracted process giv- en the high transaction costs involved in ex- Recommended actions in each of these are changing land, even when factor markets are summarized below. completely undistorted. Feed grain imports would still enable domestic livestock produc- Revisit the food security 1.  tion, which is more labor intensive and remu- objectives—particularly nerative, providing an important opportuni- self sufficiency targets ty for addressing the farm income problem. for maize But can the markets be relied upon to China’s approach to food security deliver the necessary maize supply at should allow greater import reliance for relatively stable prices? Being primari- maize, thereby simultaneously address- ly an animal feed, the political sensitivity of ing rising water scarcity. Like many coun- maize is less than that of rice or wheat, the tries, China sets a premium on food sover- core staples. Alternatives to maize are avail- eignty, i.e. maintaining independent control able, such as domestic and imported non- over its food supply, typically sought through grain feeds (e.g. less water intensive pota- grain self sufficiency coupled with large buf- toes and cassava). Second, risks can also be fer stocks. Rising domestic supply constraints diversified through support to internation- and international competition render this in- al agricultural research centers and develop- creasingly challenging. Greater reliance on ment assistance, especially in Africa, but also the world markets for maize, in analogy with in other countries with under-utilized land soybeans, and combined with continued in- potential. vestment in TFP growth (e.g. GM maize), presents itself as a valid alternative to simulta- Third, from China’s perspective, the re- neously address agriculture’s food, farm and liability of world markets is somewhat en- field problems. There is little room for land dogenous, in that it results from coordina- expansion and with a crop water requirement tion failure among its major players, of which The net return per m 3 of crop water requirement is similar to the other core grains (rice, maize, wheat), but 1  only at most half this of the other vegetables/fruits (except citrus). Executive Summary xiii Figure C Grains (especially soybeans) have much higher crop water requirements than fruits & vegetables and much lower net return 0.8 Watermelon Net Return/crop water use (US$/m3) 0.6 Tomato Spinach Sesame Lettuce Cotton 0.4 Cabbage Apple Tobacco 0.2 Groundnut Sugarcane Maize Sorghum Potato Rapeseed Wheat Barley Millet Grape Rice Soybean Sugar Beet Citrus Sunflower Pepper 0 0 500 1000 1500 2000 2500 3000 3500 Crop, water, requirement/output, (m /ton)3 Grains Fruits and vegetables Cash and oil crops Source: Liu, Zehnder and Yang, 2007. Note: crop water requirement refers to crop evapotranspiration accumulated over the growing period of the respective crop (Chen et al., 1995). The water requirement for rice includes evapotranspiration and percolation. Net return refers to the difference between total revenue and material costs; labor cost is not included. Yield and pr ice data for grains are based on 1999–2001 averages from the National Bureau of Statistics and FAOSTAT for other crops. China is one. The typical response to com- Fourth, if maize export expansion was pur- modity price shocks has been for exporters sued gradually and transparently, it would to impose export restrictions, while import- provide the world’s production systems time ers lower import tariffs. These actions boost to adapt and avoid large disruptions. To world prices higher than the initial shock it- help the global production system respond, self would do, leaving everyone worse off. China could also invest in international ag- This should provide enough motivation to ricultural research centers and African ag- WTO members to negotiate a collective riculture more broadly. Most recent sim- agreement to limit the extent of price-insu- ulations using the computative general lating policies, benefiting exporters and im- equilibrium model Chinagro II suggest that porters alike. As a 10-year member of the world feed prices (including maize) would WTO, and the second-largest economy in increase by only 5 percent by 2030 if China the world, this presents an opportunity for were to expand its imports of maize and China to exert a positive influence on global other animal feed according to the mod- economic governance. el’s predictions.2 Given the economic and 2 In this scenario, the increase in maize import is predicted at (only) 16 mmt, less than 10 percent of China’s 2010 maize consumption of 176 mmt, while rice exports would rise from almost nothing in 2005 to close to 3 mmt in 2030 and domestic wheat production would meet domestic demand. Put differently, the objective of 95 percent self sufficiency for rice, wheat and maize in the aggregate would actually still be reached in this scenario, even if not for each of the three cereals separately (Keyzer and van Veen, 2010). However, the sce- nario also predicts substantial imports of animal feed other than maize. Imports of other feed rich in carbo- hydrates (such as tubers and minor grains) would go up from 1 to14 million tons (in grain equivalents) and xiv The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 ecological cost pressures on China’s domes- 2. Rationalize factor tic cereal production, the option of a grad- markets and use ual, predictable and moderate increase in institutional innovations China’s maize imports should be explored to empower further, including through additional mod- smallholders eling and scenario analysis. Rationalization of factor markets (land, Continue providing income securi- labor and capital) will facilitate land ty to address remaining pockets of consolidation and the creation of a food insecurity and forcefully tack- commercially viable smallholder agri- le issues of micro nutrient deficiency. culture. Chinese farms must grow in size in Despite remarkable success in securing na- order to remain intersectorally and interna- tional supplies and a massive reduction in tionally competitive, as has been historical- poverty, still 36  million people were liv- ly observed in other high income countries. ing on less than US$ 0.57/day in 2009, i.e. Given current farm sizes, rising total factor struggling with the basic needs of food and productivity in agriculture alone is unlike- clothing. (When the poverty line was of- ly be sufficient to close the income gap with ficially raised in 2011  to about $1.8/day, non-agriculture. China’s WTO commit- the estimated number of poor increased to ments further limit the scope for raising farm over 150 million.) In addition, micro-nu- incomes through increased protection at the trient deficiencies rates (especially anemia) border. Creating commercially viable small- of up to 40  percent have been reported holder agriculture will entail institutional in- among rural elementary school children, novations in the land, labor and rural capi- substantially reducing their educational tal markets and an appropriate urbanization performance. Strengthening income gen- process. The balancing act is to accommo- erating activities in traditional poor area date land consolidation and labor movements development programs and continuing to so as to remain self sufficient in the core sta- expand social protection programs in lag- ples (rice and wheat) at internationally com- ging rural areas (including through the ru- petitive prices (the food problem), while at ral ‘dibao’ income transfer program to tar- the same time maintaining commercially vi- get those unable to work) are important able livelihoods for a sufficiently large group steps in tackling the deep seated pockets of smallholder farmers to stem the growing of food insecurity. But this effort also re- rural-urban divide and maximize poverty re- quires better household proxy targeting, duction (the farm income problem). Indeed, as many food insecure now also live out- given the current initial conditions, China’s side the western provinces and mountain- farming landscape will still be largely domi- ous and ethnic minority areas, where food nated by smaller holdings in 2030, by any in- insecurity and extreme poverty has tradi- ternational standard. And that does not have tionally been concentrated. Targeted nu- to pose an economic problem. tritional supplementation at school and nutritional sensitization campaigns can re- Fostering land rental is the most practi- dress micro-nutrient deficiencies and im- cal way forward in the near and medium prove educational performance. term, while reforms in private land use imports of other protein rich feed (oilseed cakes, rice bran) would rise from 24 to 58 million tons (expressed in cake equivalents). The latter would make up 42 percent of China’s protein feed consumption. Executive Summary xv rights and their marketability proceed; requires increased investment in rural edu- voluntary exchange platforms can also cation, improved rural transportation to link help. The trend in land rental, from 7  per- towns with their rural hinterlands and farm- cent of agricultural land in 2000, to 19 per- ers with their off-farm jobs in rural towns, cent in 2008, is strongly positive. In the more often in related agro industries. Consistent developed eastern provinces such as Zhejiang, with the gradual reform approach, the next it even reaches as high as 40%. There are also reform phase of the hukou system should fo- reports of complete village reorganizations cus on facilitating migration to these small into large, company run farms whereby re- and medium towns. maining villagers give up their land in return for housing (and lifetime compensation) at the Finally, machine rental markets can go a long urban fringe. The scale of such consolidation way in helping smallholders capture the econ- initiatives is so far unknown, as are the longer omies of scale from mechanization necessary run welfare consequences. Overall, linger- to overcome rising labor costs. While remit- ing concerns about tenure security and sub- tances and informal credit largely sufficed to stantial coordination costs continue to ham- finance modern inputs in the past, mechani- per consolidation. These costs are even higher zation of (especially) grain cultivation will in mountainous areas, where plots are even require greater access to bank capital in ru- smaller and more scattered. Recent evidence ral areas. But credit market imperfections can underscores the singularity with which land also be mitigated through institutional inno- certification can increase productivity (by up vations such as machine rentals. The use of to 30 percent), not so much through increased machine renting has historically been prac- investment, but rather by fostering urban mi- ticed in many Asian (and other developed) gration and freeing up land for rental by those countries to capture economies of scale and is specializing in farming. also on the rise in China. If properly coordi- nated, machine rentals provide a practical and Enhancing rural social protection will convenient way to substitute capital for labor also help free up land for renting, as and overcome the indivisibility of machine will the removal of remaining barriers inputs when credit markets are absent or im- to labor mobility. When the latter is ac- perfect. They also facilitate part time farm- companied with small and medium town de- ing, which is often most in need of labor sav- velopment, part time farming could also be ing technology. The government has rightly promoted, especially in mountainous areas been supporting the development of such where opportunities for land consolidation machine service delivery organizations, are more limited. Such a strategy can build though credit for leasing might be more op- on the “leaving the village without leaving timal than direct subsidization of machinery. the country side� policy of the early 1990s, The pressure to mechanize underscores the which proved successful in generating ru- need to reform the rural finance sector, with ral nonfarm employment nearby through the the government focused on creating the in- development of small towns in coastal areas. frastructure and market environment for ru- The conditions are much more favorable now ral finance instead of direct public provision to absorb the next wave of urban migrants of financial services. by developing small and medium towns also in China’s interior provinces, as labor inten- Farmer cooperatives enable smallhold- sive industries are moving inland, following ers to capture the economies of scale in rapidly rising labor costs along the coast. It the processing and marketing of high xvi The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Figure D Growth in agricultural mechanization accelerates when the agricultural labor/land declines, as since the early 2000s; it decelerates when the agricultural labor/land ratio increases 30 Land; rapid increase in growth Increase in Decrease in of large mechanization labor/land; slow labor/land; increase 25 Annual growth (3yr moving average) down in in small, and small/decline large especially large 20 mechanization mechanization 15 10 5 0 –5 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Large tractor Small tractor Agricultural labor/land Source: China Statistical Yearbook, 2010. value agricultural products, if imple- 3. Continue to strengthen mented properly. They help smallhold- the provision of (rural) ers reduce transaction costs in ensuring vol- public goods ume, consistency and quality and are a potent vehicle to link them to the high value mar- Continue to increase investments in ag- kets. Tightened control over the produc- ricultural R&D and extension to retain tion process also increases food safety, and smallholder grain competitiveness and the concentration of animals in larger pro- foster the adoption of sustainable agro- duction units facilitates animal waste man- nomic practices. Given constraints on ex- agement (e.g. through biogas digesters), mit- panding land, water and modern input use igating agriculture’s field problem. Since the and institutional limits on the speed of land enactment of the China Farmers Professional consolidation, growth in total factor produc- Co-operative Law (FPCL) in 2007, there has tivity (TFP) will be key to keep smallhold- been a rapid expansion of farmers’ coopera- er farmers competitive. Despite massive in- tives. But there are rising concerns that the vestment over the past decade, investments in emerging cooperative structures do not en- agricultural R&D will still have to increase able smallholders to capture the full benefits by 15% annually between 2005 and 2020 to from high value products. They appear of- maintain the 1995–2005 yield growth. China ten dominated by a company or a few larger is increasingly betting on agricultural bio- farmers, who retain the decision power and technology, focused on crops for the domestic appropriate most of the profits. Cooperatives market in which it misses a natural compara- need to be monitored and steps taken in or- tive advantage. GM rice and maize are nearest der to better protect the interests of minority commercialization. But, how broader aware- shareholders, and to maximize their poten- ness about GM crops will affect consumer ac- tial in addressing agriculture’s farm problem. ceptance is an important development to be Executive Summary xvii watched. GM maize, widely adopted in the health and undermine consumer confidence US and Latin America, may face less resis- in Chinese agricultural produce, at home tance as animal feed. Research and demon- and abroad, preventing China’s agriculture to stration of sustainable agronomic practices fully benefit from the employment and in- offer great promise. For example, nitrogen come generating opportunities that the ris- consumption in some areas could be re- ing domestic and international demand for duced by 30 percent without loss of output. high value products presents. While food Achieving this fertilizer use reduction will safety problems are not unique to China, require, however, extensive extension and a they must be addressed more forcefully. This possible reversal to larger institutional fund- will require greater awareness, an upgrad- ing of extension agents. ing of the legal frameworks and regulations to cover the whole food chain, a clarification In addition to agricultural R&D, in- and consolidation of responsibilities by gov- creasing investment in rural education ernment agencies including a separation of and rural roads has also high payoffs risk assessment and management, and a fo- in mitigating both the food and farm cus of the government on responsibilities that problems. Notably, the marginal returns are inherently public—such as the enforce- to low grade roads (most of which are ru- ment of rules and regulations through risk ral) are estimated to be higher than those to based monitoring and testing. The govern- high grade roads. The returns are highest in ment should also assist and induce the food lagging regions, consistent with the region- industry to take up their proper responsibili- al shift in investments under the 10th and 11th ty. To implement this agenda the capacity of five-year plans, with the decline in overall in- both the public and private sector will further equality hinting at some success. Following need to be strengthened. the relocation of businesses inland as labor costs rise rapidly along the coast, many ru- 4. Support rural incomes ral off-farm opportunities are likely to open while avoiding the up, increasing the returns to rural roads and subsidy trap small town development in interior China. In this, the potential of nurturing cluster de- Producer support in China has risen rap- velopment deserves special attention, in anal- idly from being negligible ten years ago to ogy with their previous success in coastal ar- 17 percent of gross farm receipts in 2010. In eas. The returns to rural education were also addition to distortionary measures, WTO- high, but high costs cause rural children (es- permitted subsidies/transfers increased from pecially in poorer communities) to drop out about RMB 100  million in 2002  to about early from secondary schools and reduce their RMB 147 billion (US$21.5 billion) in 2010. participation in college. This can be addressed Input subsidies (rising seven-fold between through conditional cash transfers and exper- 2006 and 2010) make up the bulk (Figure E). imental reforms of intergovernmental fiscal One way forward to meet WTO commit- systems and the inclusion of social develop- ments while continuing to support farm- ment targets in the performance evaluations ers and address agriculture’s field prob- of local cadres. lem, is to eliminate agro-chemical subsidies and use income support mechanism instead. Tackle food safety issues more effective- Unconditional income support programs, ly. Despite enormous efforts, frequent food decoupled from production, have been suc- safety scandals continue to damage public cessfully applied in Mexico. But, conditions xviii The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Figure E Agricultural subsidies (billion Yuan) in China have risen exponentially over the past decade (2002–2010) 160 140 120 100 80 60 40 20 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Ag insurance Comprehensive subsidy on ag inputs Machinery subsidy New variety extension payment Grain planting subsidy (direct payment) Sources: OECD 2009, 2011; Lei Meng, 2010. could be usefully added. Farmers’ incomes ground and surface water from the increasing could for example be supplemented when concentration of intensified livestock pro- they adopt more sustainable and less nitro- duction in (peri-)urban areas proper animal gen rich land management practices. Future waste management practices and regulations support streams could also serve as collater- (including zoning) will be needed. This will al to relax credit constraints (Pro-Campo, also reduce the atmospheric emissions of ex- Mexico). This requires public registries that cess nitrogen and the increased risk of animal formalize property rights, such as to land and and human pandemics, such as avian flu. water. 6. Manage risks better– 5. Improve agricultural adapt to and mitigate water and animal waste the effects of climate management change The institution of water fees that reflect ac- Adaptation to climate change in agricul- tual costs, including pollution discharge,and ture will involve expanding trade, technol- water user rights and water trading can help ogy and better short term risk management allocate agricultural water more effective- based on refined agro-weather and climate ly and reduce its use. With remote sensing information. The increased focus in R&D on and geographic information systems, man- drought, heat and flood resistant varieties of aging water use based on actual consump- the major crops should continue. Improved tion is now more possible. Implementation agro-climatic information for farmers can requires well functioning water users associ- further improve climate resilience of agri- ations and strong river basin authorities in- culture. Weather-indexed insurance schemes cluding all stakeholders to help resolve inevi- hold promise to manage risks. But agricul- table conflicts. To reduce nutrient leaching to ture is also an important sector for achieving Executive Summary xix the national target of reducing carbon in- to better animal waste management practices, tensity by 40–45% by 2020—the mitigation mid-season drainage can, for example, be an agenda. It contributes the most green-house effective option to mitigate the carbon-foot- gases after power. Reforms in both the live- print of rice fields, especially when N fertil- stock and crop sector can help. In addition izer application rates are reduced. xx The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 1 IN T R ODUC T ION C hina is an agricultural growth and poverty reduction success story. Ever since China embarked on its reform agenda more than 30 years ago, its economic growth and poverty reduction have been nothing less than remarkable. Agriculture has been an im- portant contributor to these developments.3 Since 1978, China has almost doubled its cereal production (rice, wheat and maize)4 and it is now feeding 1.3 billion people, or 20 percent of the world’s population, while having less than 11 percent of the world’s agricultural land and less than 6 percent of its water.5 By providing abundant and cheap food, agriculture kept nomi- nal wages low and paved the way for China’s export led industrialization and its ensuing growth miracle. At the same time, by raising farm incomes, agriculture has also been the driving force be- hind China’s massive reduction in (absolute) poverty, herein aided by the equal distribution of the user rights of its farm land.6 But new challenges are presenting themselves for China’s agriculture, and old ones are resurfacing. High (land saving) TFP growth and increasingly open domestic and inter- national markets, combined with grain self-sufficiency targets, a multitude of very small, frag- mented production structures, and distorted land and labor markets have defined Chinese agri- culture over the past three decades. Defying the predictions of many,7 they have enabled China to secure an ample supply of cheap grains, provide its farmers with much better incomes and largely free its population from hunger. But, as income growth in its (urban) non-agricultural sectors roared ahead and agriculture’s exploitation of its land and water resources continued un- abated, a series of new challenges have emerged, while old ones are resurfacing. Agriculture’s farm (income) problem. First, and foremost, farmers’ income growth is ever struggling to keep up with non-farm income growth, undermining social and political 3  World Bank (2007); Ravallion (2009). 4  Cereal production increased from 247 million metric ton (mmt) in 1978 to 474 mmt in 2009. 5  World Bank World Development Indicators consulted on June 2, 2011. Agricultural land concerns land that is under temporary and permanent crops or pastures, land under market or kitchen gardens, and land tempo- rarily in fallow. The water flows considered here, refer to internal renewable water resources present within countries, i.e. the internal river flows and groundwater from rainfall. 6  Ravallion and Chen (2007); Montalvo and Ravallion (2010); Christiaensen, Demery, and Kuhl (2011). 7  Lester Brown (1995; 2011) has just been one of the more notable and vocal proponents that China will be unable to feed its population. 1 harmony. How to address this growing rural- concentrated in (peri) urban areas to meet urban divide poses a major challenge. Similar rising demand for meat is bound to further pressures on agriculture and its smallholder aggravate agriculture’s environmental pres- farms have historically been observed during sures. These developments and trends come the structural transformation in most devel- in the face of increasing urban competition oped western and Asian countries. It is com- for China’s agriculture resource base (wa- monly referred to as agriculture’s “farm (in- ter and land) and declining tolerance for ag- come) problem�8  and has in the past often riculture’s abuse thereof. This describes ag- resulted in the adoption of politically expedi- riculture’s emerging “field problem�. It also ent, but economically inefficient agricultural highlights the limits of China’s current ag- subsidies and protection. ricultural model of intensification based on copious use of water and chemical inputs to The “farm (income) problem� is particular- meet future cereal demand. The increasing ly pertinent in China today. Now that not concentration of its animal production next only urban wages, but also rural wages are to its consumers further poses important hu- starting to rise rapidly, it is becoming in- man health hazards. creasingly hard for China’s smallholder and fragmented farms to generate incomes and The re-emerging food problem. Over income growth commensurate with what the past 15  years, agricultural policies have could be earned off the farm by farming only. gradually shifted away from a focus on secur- Farm consolidation provides an answer, but ing aggregate food supply to improving indi- inertia is bound to be substantial given ten- vidual access to food among the increasing- ure insecurity and the extensive transaction ly few that continue to struggle with hunger. costs involved in exchanging the multitude But, two bouts of double-digit food price in- of tiny, fragmented plots, even if factor mar- flation over the past three years suggest that kets were completely undistorted. Which aggregate food supply is struggling again to agrarian structure to promote (smaller ver- keep up with rapidly rising demand, hint- sus large farms) to keep staple food supply up ing at a resurgence of the “food problem�. In and cheap (food problem), while taking max- particular, as labor costs rise and internation- imal advantage of agriculture to generate re- al imports of grain become more competi- munerative employment and bring the rural- tive following Renminbi appreciation, while urban divide down (farm (income) problem), changes in the agro-climatic conditions add is undoubtedly one of China’s prime conun- uncertainty, it is becoming increasingly tax- drums moving forward. ing to secure all cereal supplies (rice, wheat, and maize) through self sufficiency, especial- The field problem. Second, soil erosion, ly since these more recent developments are especially in the western provinces, deple- compounding longer standing challenges tion of the water tables in the northern plains, posed by China’s land constraints and grow- and nutrient leakage from over fertilization ing water scarcity. Greater reliance on cereal in China’s more densely populated grain pro- trade provides an alternative. But, it may face ducing areas are eroding its natural resource political resistance, especially if it were to un- base. Mounting animal waste from intensi- dermine China’s food sovereignty. It may also fying animal husbandry that is increasingly perturb the international markets, especially 8 The terminology of ‘food’ and ‘farm problem’ to describe the quite different challenges agriculture faces in lower and higher income countries goes as far back as Schultz (1953). 2 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 if the policy shift is sudden and substantial. exploit its potential to contribute to reduc- How to secure sufficient cereal supplies in the ing the rural-urban divide (the farm prob- aggregate has started to re-occupy China’s lem), while maintaining its ability to secure agricultural policy agenda. affordable food for all (the food problem) and safeguarding its resource base for the future But, as supply constraints tighten, de- (the field problem) poses a major challenge. mand dynamics also provide oppor- Robust and broad based growth in agricul- tunities, as do agronomic practices to ture provided the backbone for its take-off produce more with less. As China grows in 1978. How China will shape its agricul- richer and urbanizes, its diets become more ture in addressing these new (and re-emerg- protein rich (meat and dairy) and diversified ing) challenges—the farm and field and food (fruits and vegetables).9 Producing these high problems—will be equally consequential in value products is more labor and less land and determining its success in reaching its ambi- water intensive. This opens up important tion of becoming a modern, harmonious and new business opportunities for agriculture to high income society by 2030. A modern, up- help overcome its “farm (income) problem�. dated vision for China’s agriculture 2030 and Second, the dietary shift also comes along a path stipulating how to get there are need- with a slowing growth in the demand for sta- ed. As the world’s largest agricultural econ- ple cereals. This reduces some of the pressure omy and a leading importer and exporter of on agriculture’s “food problem� as well as its agricultural products, this is not only impor- “field problem�. It is the demand for animal tant for China itself. Ripples in China’s do- feed (maize and soybeans) that will drive fu- mestic agricultural markets will reverberate ture cereal demand. While this demand will like waves internationally, especially when be substantial, cereal feed is a less laden com- shifts are unanticipated and/or abrupt. Both modity. It also has more substitutes (e.g. cas- China and the world stand to benefit from sava, potatoes), rendering reliance on trade a more profound understanding of the chal- politically more palatable. Finally, important lenges and opportunities China’s agriculture agronomic opportunities have been iden- faces and the policy responses it anticipates. tified to reduce agriculture’s environmen- tal footprint and tackle agriculture’s “field The report’s road map. The report pro- problem�. Extensive research from China’s ceeds by proposing a vision for China’s agri- fields suggest for example that crop nitro- culture 2030 in section 2, a vision which is gen use could be reduced by at least 30 per- embedded in its historical context and draws cent while maintaining yields through the on the empirical and theoretical insights application of different agronomic practices. about the role of agriculture as countries de- Yet, not all environmentally friendly practic- velop. The structural features of China’s ag- es will generate immediate cost savings and riculture today and the emerging challeng- important intertemporal trade-offs will need es in fulfilling its three functions tomorrow to be made. are then analyzed in detail in section three. This sets the stage for delineating core ar- Success of China’s agriculture is critical eas for policy dialogue and intervention in for China, and the world. Clearly, how to section four, punctuated with some concrete modernize China’s agriculture so as to fully suggestions. 9 Meat consumption per capita is projected to increase to 73 kg per person per year in 2030 for example (up from 53 kg in 2010 and 25 kg in 1990). INTRODUCTION 3 2 T o w ar d s a V i s i o n f o r C h i n a’ s A g r i c u lt u r e 2 0 3 0 I ngredients for a Vision. Generating decent and intersectoral comparable livelihoods for its farmers, sustainably managing the natural resource base, and securing access to food for all are agriculture’s three quintessential functions. Meeting these three objectives often entails trade- offs, between efficiency, equity and sustainability. Formulating a vision for a country’s agricul- ture thus requires determining the relative importance of each of these objectives.This often trans- lates in specifying where on the range between full food self sufficiency and fully market mediated food security the country would like to position itself in securing its food supply. Given differ- ent social implications, it further necessitates a stance on the agrarian structure the country seeks to promote to do so—including a mixture of small to medium sized commercial family farm- ing system (including part time farming) and larger scale corporate farming structures. To moti- vate the vision and given deep path dependency in policy making, this chapter begins by a brief review of where China’s agricultural policies are today in relation to these three functions as well as how they got there. Agriculture in China 1978–2000  focused on food, with the farm income problem emerging. From the late 1970s until the 2000s, the emphasis of the Rural Reforms in China was firmly, and successfully, on resolving the food problem. It resulted in an abundant sup- ply10 of inexpensive food11 and enabled China to largely resolve (though not eliminate) its hun- ger problem and dramatically reduce poverty.12  Between 1980  and 2000, average rural per 10  Grain output per capita rose from 319 kg/capita in 1978 to 393 kg/capita in 1990. It declined to 334 kg/cap- ita in 2003 (following a large release of grain stocks during the early 2000s) to rise again to 399 kg in 2009. Furthermore, following dietary shifts, especially since the 1990s, meat production (pork, beef and mutton) quintupled between 1978 and 2009, from 9 to 44 kg/capita, milk production rose from 1.2 to 26 kg/capita and aquatic production rose from 4.9 to 38.4 kg/capita. 11  Grain prices fell in real terms by 33 percent (maize) and 45 percent (wheat) between the late 1970s and ear- ly 2000s. Coupled with rising incomes, falling grain prices reduced the budget share for grains in consump- tion from nearly 40 percent in the 1970s to about 14 percent for rural households in 2004. In urban areas, the grain budget share dropped from 20 to less than 3 percent in 2003. 12  Between 1981 and 2001, the fraction of the population below 888 Yuan per person per year at 2003 ru- ral prices (World Bank poverty standard) fell from 65 percent (comparable to India’s poverty rate at the time) to 33 percent in 1990, cut by half again by 2001 to 15 percent and 10 percent in 2004. The absolute num- ber of poor fell from 652 million to 135 million, a decline of over a half a billion people (World Bank, 2009). Using the latest official poverty line of 2,300 Yuan/year per rural resident, which is slightly less than $1-day, 128 million people were poor in 2010. 5 Figure 1 The divergence between average urban and rural income continues its exponential rise 14,000 3.5 12,000 3.0 Ratio of urban to rural income RMB (constant year 2010) 10,000 2.5 8,000 2.0 6,000 1.5 4,000 1.0 2,000 0.5 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Difference in urban and rural income (left) Ratio of urban to rural income (right) Source: NBS (2010 and 2011). capita incomes tripled from 719  to 2253 (in became as important in the design of agricul- real 2000  Yuan). Yet, urban incomes rose tural (investment and price) policies as ensur- even faster.13 As a result, after the initial de- ing an abundant supply of inexpensive food, cline in the rural-urban income gap between the “food problem�. These were further com- 1978  and 1984, when agriculture was espe- plemented with targeted poor area develop- cially buoyant, the ratio of average urban to ment programs to address persistent pockets average rural income increased from 2.1  in of hunger and food insecurity14 in more re- 1985 to 3.5 in 2009 (Figure 1). The growing mote and lagging counties and villages, many media attention to the rural income problem of which were in the western provinces.15 was about ratios, not levels. From 2000  onwards, the farm problem Rising discontent among China’s rural pop- dominated, with field problems lurking ulations turned addressing this rural-ur- in the background. Following the “take- ban imbalance into a major policy objective less-and-give-more� principle, the longstand- and resolving the “farm (income) problem� ing net fiscal flows from rural to urban areas 13  The decline in the agricultural labor force (from 69 to 50 percent between 1980 and 2000) did not parallel the income growth rates in industry and services, which were even faster than in agriculture. 14  The availability of ample supplies at the national level usually goes along with a substantial decline in the incidence of hunger, but doesn’t eliminate it. As Sen (1981) reminded the world, famines often happen, and pockets of food insecurity often persist, in the midst of plenty. As a result, the approach in addressing the food problem shifts as countries develop from a pre-occupation with securing national supplies to securing access to these supplies by all, including for those marginal groups and areas that continue to struggle with hunger and poverty despite sufficient aggregate supplies. This can be through raising their food producing capaci- ty locally, often for those in remote areas where food markets are poorly integrated and food is thus not al- ways available, or through raising their incomes, especially for those living in more integrated market areas. 15  This was part of the “Go West� strategy adopted in the 10 th five year plan (2000–2005) and continued in the 11th five year plan (2005–2010). 6 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 to finance industrialization were reversed. Farm and resurfacing food problems Agricultural and rural fees and taxes were first will continue to feature prominent- abolished between 2003  and 2005, followed ly during the 2010–2030  period, with by an exponential increase in farm subsidies “field problems� increasingly captur- from a minuscule 100 million Yuan in 2002 to ing attention as China moves to 2030 as 55 billion Yuan in 2007 and 147 billion Yuan the population urbanizes and mind- in 2010 (including a seven-fold increase in in- sets shift further. In the years ahead, the put subsidies).16 These developments in China’s farm problem will undoubtedly take further agricultural policies closely mirror those his- prominence on China’s agriculture agen- torically observed in other middle and high in- da, as the rising rural-urban and interregion- come countries.17 It has helped slow down the al divides create serious political concerns growth in the average urban to rural income (Box 1). And as discussed in section one, ratio (reaching 3.53 in 2009). But, in absolute while “field problems� are increasingly cap- terms, the difference in income has continued turing attention, food problems are resurfac- to rise rapidly (reaching 10,504 (2000Yuan) in ing, posing trade-offs. The pertinent nature 2009.18  Though declining in number, pock- of such trade-offs is well illustrated by the re- ets of food insecurity and hunger continued to cent shift in focus of the “Grain for Green� exist, and were addressed by increasingly tar- program from expansion into new areas to geted interventions and expansion of social as- consolidation of ongoing conversions out of sistance.19  A beginning was further made in fear that the loss of land might jeopardize fu- using agricultural and eco-compensation pol- ture food supplies. However, as the pressures icies to address the “field problem�, most no- on China’s precious natural resources contin- tably through the “Grain-for-Green� subsidy ue to build, including through intensification initiated in 1999, which compensates farmers of livestock production in peri-urban areas, to retire marginal and sloping cropland.20 and urbanization further changes mindsets, 16  Subsidies include grain land based income transfers, grain land based input subsidies, new variety extension payments and agricultural machinery subsidies. The need for supporting agricultural incomes was explicit- ly mentioned as a motivation for the fundamental turnaround from taxing to subsidizing farmers (Central People’s Government, China, 2008), in addition to continuing concerns about national food security. The lat- ter arose from the decline in China’s grain production following years of low prices and substantial destock- ing in the early 2000s as well as concerns about rising land pressure. 17  Hayami (2007). Figure 4.4, World Bank (2007). 18  The absolute and relative income differences reported here account for differences in the price evolution in rural and urban areas in China during 1978–2009, which were in effect minimal (Statistical Yearbook of China, 2010). However, they do not account for differences in cost of living between rural and urban areas in the base year (2000), and are thus likely to overstate the gap somewhat. 19  In the 2000s, China fine-tuned the targeting of its poor area programs from identifying nationally desig- nated poor counties to nationally designated poor villages. It also started to increase direct transfers to its citi- zens for example through the rural dibao program. Nonetheless, in 2009, official statistics still put the number of people below 1196 Yuan/year (less than half the international poverty line of US$1.25/day) at 36 million, or 3.8 percent of the population. At such low levels of income, people are still fundamentally food insecure, focused on solving their basic problems of hunger and clothing. 20  A total budget of RMB 337  billion has been set aside for this Conversion of Cropland to Forests and Grassland Program (CFGP) (of which 130 billion has been spent during 2000–2006) enrolling 9.27 million ha of cropland and 13.67 million ha of wasteland (Bennett, 2009). Following its initial success, implementa- tion has substantially slowed down since 2004 (OECD, 2011) given increasing (though largely unsubstantiat- ed) fears that the program might jeopardize China’s self sufficiency in grain production (Xu et al., 2006). The focus is now on operation and maintenance issues to consolidate and successfully complete the ongoing con- versions as opposed to the conversion of new areas. Towards a Vision for China’s Agriculture 2030 7 Box 1 For development, the nature of inequality is as important as its degree Rapid economic progress in China has been accompanied by rapidly rising inequality. This is strikingly illustrated by the rise in the Gini coefficient from less than 30 in the early 1980s at the start of the reforms, to 45 in 2005. However, the real threat of China’s rising inequality lies in its composition, and not so much in its overall level. Inequality can be seen to arise from two sources: 1) inequality between groups and 2) inequality within groups. Inequality in the US, for exam- ple, is mainly driven by within group inequality, with rich and poor people in each state living side by side. In the enlarged European Union, on the other hand, the main cause of inequality lies in the difference in mean incomes between its member states, with the poor and the rich living geographically concentrated. And it is the large differences between poor and rich states within a country or within a political union such as the European UU, that tend to undermine politi- cal cohesion, especially when further grafted on ethnic, religious or cultural differences, and not so much the high levels of inequality as such. This is a much less appreciated insight highlighted by Milanovic (2011) in “The Haves and the Have Nots – A Brief and Idiosyncratic History of Global Inequality�. It is no accident, Milanovic contends, that at the time of the break up in 1991, the gap in GDP per capita in the Soviet Union, between its richest (Russia) and poorest (Tajikistan) republic was about 6 to 1, a gap similar to the difference in average income between South Korea and Ivory Coast. Inter-republican differences were even larger in the Former Yugoslavia. Slovenia was only four times as rich as Kosovo (in GDP per capita terms) in 1952, but grew to become 8 times richer at the time of its break away in 1991. This remains a very little talked about fact in the analyses of Yugoslavia’s political breakdown. By way of comparison, in Italy, where regional inequalities are notori- ously large, the richest state is about 3 times richer than the poorest one, while this ratio amounts to 1.5 to 1 in the United States or 1.4 to 1 in Germany. With China’s development shifting to the urban areas in the coastal provinces since the early 1990s, this top to bottom ratio increased from 7 to 1 in 1990 to reach 10 to 1 in 2006. Following the recent shift in policies to foster a harmonious socialist countryside and the massive amount of transfers and investments going to the rural areas, there are signs that the increase in the overall Gini coefficient may be leveling off (Fan, Kanbur, and Zhang 2011). In 2008, the Gini was ac- tually even estimated at 42 (as opposed to 45 in 2005). Nonetheless, the economic cleavages among and within prov- inces, and between rural and urban constituencies, are clearly high and warrant continued attention, including for their implications for policy making in agriculture and rural development. Source: Milanovic (2011). environmental concerns will take on greater functions as China charts its way to becom- significance, forcing agriculture to increas- ing a modern, harmonious, high income ingly evolve from an (ab)user of natural re- society. It builds on the ongoing chang- sources to a diligent custodian. This will also es in China’s society and is consistent with open up new opportunities to generate rural the evolution historically observed in Japan, employment and simultaneously address the South Korea and several countries in Western farm problem such as through eco-compen- Europe. However, in these countries, the sation programs. China’s recent embrace of transition has usually also come along with “green growth� strategies serves as a precur- a reversal to subsidization and protection sor of this shift in mindset. of agriculture to address the rising gap be- tween farm and non-farm incomes. Even This is the anticipated shift in relative em- though politically expedient, it is economi- phasis on agriculture’s three quintessential cally and often also environmentally highly 8 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 inefficient. Following WTO accession, this This overall vision serves as an overall guiding path is somewhat curtailed in China’s case, post, against which region specific interven- though the recent exponential rise in its sup- tions must be adapted in line with their en- port to agriculture serves as an eerie remind- dowment ratios.21 This vision of commercial er of the profound challenge of avoiding the smallholder farming and food self sufficiency subsidy trap for agriculture when navigating ambitions (even though restricted) is cogni- a country’s structural and occupational trans- zant of China’s initial condition of small and formation. Against this background, the fol- fragmented farm structures as well as the po- lowing vision for China’s agriculture 2030 is litical imperative of food sovereignty (not to advanced. be identified with food self sufficiency or food security). Commercial smallholder farming A vision for China’s agriculture 2030. (and part time farming during the transition) China’s agriculture in 2030  will predomi- will be argued to be economically viable, so- nantly consist of commercially viable small cially desirable, and politically sensible. to medium sized family farms that ensure self sufficiency in strategic, but land and wa- Realizing this vision for China’s agricul- ter intensive staple cereals such as rice and ture 2030  will be no small feat. Indeed, di- wheat, though not in maize. It maximizes etary change, rapidly evolving production cost rural employment opportunities in the pro- structures and shifting ecological, agro-climat- duction and processing of the labor intensive ic and international environments are intro- high value agricultural products (including ducing new economies of scale, international meat and dairy) consistent with its natural competition and uncertainty that pose impor- comparative advantage, and it will act as a tant challenges, especially to grain production diligent custodian of its precious natural re- and the current smallholder farm model. But, sources. they bring also new opportunities. 21  Chen, Huffman and Rozelle (2009); Ito (2010). Towards a Vision for China’s Agriculture 2030 9 C h i n a’ s A g r i c u lt u r e A n n o 3 2010 – Challenges and O p p o rt u n i t i e s 3.1 The Structure of Agriculture 1978–2010 Production structure – moving beyond grains, while keeping an eye on them. After China introduced its reforms in 1978, staple grain production expanded rapidly. Total cereal output (rice, wheat and maize) grew from 247 mmt in 1978 to 384 mmt in 1990, i.e. at an an- nual rate of 4.6 percent. It continued to expand thereafter, though at a slower rate. In 2009, ce- real output stood at 474 mmt, with most of the increase since 1990 coming from maize.22 In particular, following satiation of demand for the key staples, rice and wheat, production peaked already in the late 1990s (Figure 2), while growth in the production of maize continued to feed the growing livestock sector.23 Figure 2 Rice and wheat production peaked around 2000; maize production rising rapidly since 250 200 150 MMT 100 50 0 1978 1985 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Rice Corn Wheat Source: NSBC, Statistical Yearbook of China, 2010. 22  Total maize output rose from 96.8 mmt in 1990 to 106 mmt in 2000, with its output growth accelerating rapidly thereafter to reach 163.9 mmt in 2009. 23  Earlier in the reform period growth in maize production was pursued to maintain exports for hard currency. 11 Non-grain crop production (such as cotton expansion throughout the 1990s, with fruit and edible oils and vegetables and fruits) also production still growing by more than 20 per- increased rapidly during the initial reform pe- cent a year well into the 2000s. Indeed the rise riod (Table 1). With the exception of cotton, of the vegetable and fruit sectors has been so non-grain crops continued their rapid pace of fast that it almost defies imagination. Between Table 1 The annual growth rates (%) of agricultural commodities, 1970–2010 Pre-reform Reform period Post reform Commodity 1970–78 1978–84 1985–95 1996–2000 2001–2005 2006–2009a Agricultural Gross Domestic Product 2.7 7.1 4.0 3.4 3.9 3.5 Grain total Production 2.8 4.7 1.7 0.03 1.1 2.3 Sown area 0.0 –1.1 –0.1 –0.14 –0.7 1.1 Yield 2.8 5.8 1.8 0.17 1.8 1.2 Rice Production 2.5 4.5 0.6 0.4 –0.8 2.0 Sown area 0.7 –0.6 –0.6 –0.5 –0.8 0.7 Yield 1.8 5.1 1.2 0.8 0.0 1.3 Wheat Production 7.0 8.3 1.9 –0.6 –0.4 4.3 Sown area 1.7 –0.0 0.1 –1.6 –3.1 1.6 Yield 5.2 8.3 1.8 1.0 2.7 2.7 Maize Production 7.4 3.7 4.7 –1.3 5.6 4.1 Sown area 3.1 –1.6 1.7 0.8 2.7 4.3 Yield 4.2 5.4 2.9 –0.9 2.9 –0.2 Total cash crop area 2.4 5.1 2.1 3.5 1.5 3.4 Cotton Production –0.4 19.3 –0.3 –1.9 6.5 2.8 Sown area –0.2 6.7 –0.3 –6.1 5.3 –0.5 Yield –0.2 11.6 –0.0 4.3 1.2 3.3 Edible oil crops 2.1 14.9 4.4 5.6 0.8 0.6 Vegetable area 2.4 5.4 6.8 9.5 3.1 1.0 Fruit Orchards area 8.1 4.5 10.4 2.0 2.4 2.6 Outputs 6.6 7.2 12.7 10.2 21.0 6.1 Meat (pork/beef/poultry) 4.4 9.1 8.8 6.5 4.9 2.5 Milk — — — 5.7 25.5 6.8 Fishery 5.0 7.9 13.7 10.2 3.6 3.7 Sources: Huang and Rozelle, 2011 and NSBC, 2010. 12 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 1990  and 2005  China as a nation added the But, grain production is staging a come-back. equivalent of the vegetable production capac- Over the past 5  years, grain production has ity of California (the world’s most produc- picked up again, particularly the production tive vegetable basket) every two years. When of the staples, rice and wheat, which grew at it comes to fruits, it dedicates now twice the 2 and 4.3 percent per year respectively during share of its cultivable land to fruit orchards 2006–2009. After years of taking land out of than the next closest major agricultural nation rice and wheat production, rice and wheat ar- (including the US, the EU, Japan, India).24 eas have been growing again since 2003. Rice and wheat production levels are now almost Agriculture thus transformed itself from back to their peaks of the late 1990s.25 This re- a grain first sector to one that is also pro- versal in rice and wheat production follows ducing cash crops and horticultural prod- the turn-around in the long term staple prices, ucts. In addition, with growth in the live- which bottomed out after China restructured stock and fishery sector outpacing growth its stockholdings in the early 2000s. The price in the cropping sector (Table 2), China reversal came along with the accelerated de- also moved away from a crop-first agricul- cline in cultivated land area between 1999 and ture. Double digit growth in meat produc- 2004 following the Grain for Green land resto- tion (mostly pork and poultry) dominated ration program. Together they heightened con- growth in the livestock sector throughout cerns about China’s ability to maintain the food the 1980s and 1990s, with dairy production self sufficiency targets. They refocused China’s booming since the 2000s, and aquaculture attention back on rice and wheat production. emerging as an important new subsector. In 2005, the livestock sector contribut- More broadly, these evolutions on the do- ed already more than a third to agricultur- mestic market are consistent with the trends al GDP, while fishery accounted for 10 per- in the world market. After having trended cent, up from 2 percent in 1980. Between downward for more than three decades since 1980 and 2005, the share of crops in agri- the last world food crisis in 1972, world ce- culture dropped from about three quarters real prices also picked up again following of total output to about half. the turn of the millennium. Over the past Table 2 Changes in structure (%) of China’s agricultural economy, 1970–2005 1970 1980 1985 1990 1995 2000 2005 Share in agricultural output Crop 82 76 69 65 58 56 51 Livestock 14 18 22 26 30 30 35 Fishery 2 2 3 5 8 11 10 Forestry 2 4 5 4 3 4 4 Source: NSBC, Chinas’ Statistical Yearbook, various issues and China Rural Statistical Yearbook, various issues from 1980 to 2007. Huang and Rozelle (2011). 24  Nonetheless, sown areas of rice and wheat remain still well below their maxima ever attained (by 14 and 25  22 percent respectively). The area sown with maize also reached its maximum in 2009. China’s Agriculture Anno 2010 – Challenges and Opportunities 13 5  years, world rice prices have on average production has so far come almost entirely been 2.2  times their 2000–2005  average.26 from small-scale operations, despite increasing Higher and more volatile world cereal pric- competition following liberalization of do- es are considered the new reality in the short mestic input and output markets and WTO ac- and medium term.27 This also matters for cession in 2001. Strikingly, between 1980 and China, bound by WTO regulations since it 2002  the average size of land controlled by joined in 2001. While the latter have not yet farming households actually fell even further constrained China’s agricultural policy room from 0.71 to 0.55 ha.28 Average farm size has of maneuver to protect its domestic markets increased slightly recently, to 0.6 ha in 2008, from international price movements through through the renting of land (Figure 3). But, protection and subsidization, they may well not only are farm holdings very small, they are do so in the future (see further section 4.4). further typically divided in several 4–6 sepa- rate noncontiguous parcels.29 Farm structure—smallholder farming on small and dispersed parcels remains However, over the past few years, the num- the defining form. China’s agricultural ber of producer and marketing cooperatives Figure 3 Small farms getting smaller till 2002, with some consolidation through renting thereafter 0.8 0.7 Land rental provides opportunities 0.6 Average farm size (ha) for expansion 0.5 0.4 0.3 0.2 0.1 0 1984 1987 1990 1993 1996 1999 2002 2005 2008 Source: NSBC. 26  They peaked in 2008, when they were up three times from their 2006 levels. 27  Christiaensen (2011). 28  This mainly followed from the continuing increase in the absolute number of people employed in agricul- ture and not from the decline in cultivated area, which, contrary to popular perception, actually increased slightly between 1986 and 2000 (see Box2). Between 1980 and 2002, the total population employed in the primary industry continuously rose from 291 million in 1980 to peak at 368 million in 2002. It has declined since to 297 million in 2009. This growth in the agricultural labor force till 2002 was driven by population growth and happened while the occupational transformation proceeded, with agriculture’s share in total em- ployment continuously declining, from 68.1 % in 1980 to 50% in 2000. 29  These typically include one or two plots for grain, one plot close to the village for vegetable production, one plot on the more marginal hillside area, etc. This way both quantity and quality of land are equitably redis- tributed, as households get parcels in both more and less fertile areas (Lohmar, Gale, Tuan and Jansen, 2010). Tan, Heerink and Qu (2006) found these egalitarian principles in distributing and redistributing land follow- ing demographic changes to be the major force behind land fragmentation in contemporary China. 14 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 (called Farmer Professional Associations even though land consolidation and a thick- – FPAs) has risen rapidly over the past few ening of the tails of the farm size distribution years, and there are also an increasing num- (more part time farming and larger commer- ber of anecdotes of companies cultivat- cial farm entities) are likely just around the ing large tracts of land. But, still relative- corner. ly few villages and farmers belong to FPAs. According to Shen et al. (2005), as of 2005, 3.2 Drivers of Success only seven percent of villages had FPAs, of which only about one-third of the farmers Total factor productivity growth belonged, resulting in a farmer membership through institutional change during of cooperatives of about 2 percent. This is far 1978–1984 and land saving technologies below almost all other East Asian nations and thereafter have kept smallholders pro- many Western nations during their develop- ductive and competitive. Studies uni- ment years, where participation rates were al- formly indicate that during the first years of most 100 percent. Following the adoption of reforms (1978–1984), TFP increased extreme- the Farmers Professional Co-operative Law ly fast, by 5 to 10 percent per year (Figure 5). (FPCL) in 2007, there has been progress, with This happened largely because of the intro- about twenty-two percent of villages hav- duction of the household responsibility sys- ing a cooperative by 2008 (Figure 4). About tem, which released an enormous amount of 13 percent of households belonged (5 percent untapped potential.30 Thereafter, TFP con- are formal members and 7 percent are infor- tinued to rise at around 2  percent per year mal members) (Deng et al., 2010). on average into the mid 2000s, including pe- riods of lesser growth (late 1980s and late Clearly, while there is change, the organiza- 1990s) and with TFP growth in the (richer) tion of farm production is still predominant- eastern and coastal regions consistently out- ly on small farms run on fragmented plots, performing TFP growth in the other parts of Figure 4 Share of villages with Farmer Producer Cooperatives increased dramatically since enactment of 2007 Farmers Professional Co-operative Law (FPCL) 25 20 15 % 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Huang and Rozelle (2011). 30  Fan, Zhang, and Zhang (2004). China’s Agriculture Anno 2010 – Challenges and Opportunities 15 Figure 5 Institutional change drove TFP growth between 1978–1984; technological change thereafter 200 Institutional change (HRS) was major source of TFP growth in 1979–84 150 TFP After middle 1980s, technology has been major factor 100 50 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 Wheat Maize Rice Source: Jin et al. (2002). China.31 Annual agricultural TFP growth of productivity losses from soil degradation, at around 2 percent is substantial, also by inter- least during the 1990–2004 period.33 national standards. For comparison, TFP in the US, many Western Europe countries and Among technologies, it is biological and bio- Australia grew by around 2 percent per year chemical technologies that have been shifting in the post WWII era. the frontier, and not mechanical or machin- ery technologies.34 The former increase land Importantly, technological progress (shift- productivity through the intensive use of in- ing the production frontier outward) has termediate inputs, the adoption of new va- been driving TFP growth since 1984, rath- rieties, and the improvement of soil and ge- er than improvements in efficiency (moving netic resources, while the latter reduce the farmers up to the frontier). Producing on av- amount of labor needed—they are labor as erage at 80  percent of the production fron- opposed to land saving. At over 300  kg/ha tier, farming in China is generally quite ef- in 2004 (three times the world’s average), ris- ficient, though inefficiencies of scale have ing to almost 350  kg/ha in 2009, fertilizer started to manifest themselves, suggesting less use intensity in China is amongst the high- than optimal input-output positions.32 The est in the world (Figure 6). In provinces TFP estimates further imply that technolog- where land to labor ratios are much higher, ical progress has so far managed to outpace or where rapid outmigration of agriculture 31  Fan (1997); Jin, Huang, Hu and Rozelle (2002); Chen, Yu, Chang, and Hsu (2008); Jin, Huang, Hu and Rozelle (2010); Ito (2010). 32  Chen, Yu, Chang, and Hsu (2008). 33  Slower TFP growth in some of the lower income/western provinces was not due to lower technological progress—it actually exceeded 4 percent in Shanxi, Inner Mongolia, Anhui, Henan, Gansu, Qinghai, and Ningxia, but to a deterioration in technical efficiency. The latter may have been a consequence of localized soil degradation, but likely also reflects the steep learning curve associated with the rapid increase in machin- ery use in these provinces (Chen, Yu, Chang, and Hsu, 2008). 34  Ito (2010). 16 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Figure 6 Fertilizer use expanded rapidly to among the highest in the world 400 350 300 250 kg/sown ha 200 150 100 50 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 China World Source: China Statistical Yearbook 2010 and World Development Indicators 2011. dramatically increased the land to labor ratio Markets – liberalized input and output as in Zhejiang and Jiangsu, more use is made market fostered specialization. Early on of labor saving machinery. This foretells what in the reforms there were no concrete plans is to come as agricultural labor markets are to liberalize markets. But beginning in the tightening across the country. mid 1980s, and throughout the 1990s, China gradually liberalized its domestic output and Yields were further boosted through ex- input markets. However, important distor- pansion of irrigation, which, combined tions persist in its factor markets (especially with the breeding of varieties with short the land and labor markets). Markets for in- growing cycles, enabled China to grow two puts are now largely free and lightly regulat- to three crops per plot per year, in effect dou- ed. Seeds are supplied by thousands of small bling to tripling the sown land area. Nearly seed companies that often repackage seeds 50 percent of China’s cultivated land is now bought in bulk to be sold further under their supported by irrigation facilities (Figure 7), own label in small input supply stores in vil- with extensive irrigation being used in the lages and townships. This atomistic struc- more arid, northern parts of the country. In ture also characterizes the pesticide indus- these parts, about 50  percent of the irriga- try, rendering it equally difficult to regulate. tion facilities are supplied with ground wa- Typically supplied by large companies, fertil- ter, while irrigation in the rest of China relies izer is also distributed by a myriad of small mostly on surface water. In sum, intensive scale, private traders. fertilizer use and irrigation, together with crop varieties especially developed by domes- While this has generated a competitive mar- tic research stations to thrive with abundant ket structure, the lack of a regulatory envi- input and water use, have for a long time en- ronment to install and enforce quality stan- abled China’s smallholders to secure China’s dards has also led to the widespread sale of food supply and carve a living out of small counterfeit, adulterated and poor quality farms. farm chemicals, feeds and veterinary drugs, China’s Agriculture Anno 2010 – Challenges and Opportunities 17 Figure 7 Irrigated land tripled between 1950 and 1978 to 45 million ha, increasing gradually to 60 million ha in 2009 60 50 40 Million ha 30 20 10 0 1950 1960 1970 1980 1990 2000 2010 Source: China Statistical Yearbook 2010. which at times pose important safety con- for every 1,000 km of distance from the port, cerns.35 The 1988 reforms of agricultural ex- which is between 4  and 7  percent, China’s tension, which encouraged public agricultur- agricultural market performance is similar al extension system stations to earn their own to that of the United States. Even farmers in incomes through commercial activities, fur- remote, poor villages appear integrated into ther stimulated extension stations and agents the national markets.37 Market liberalization to sell more chemical pesticides and fertilizers also facilitated specialization. The percent- than needed, inducing overuse.36 age of villages specializing in an agricultural commodity increased by 9 percentage points Unlike in the 1980s, when state-owned mar- between 1995  and 2004,38 especially where keting bureaus monopolized agricultural road access was better39 and often taking ad- marketing, small private traders, agri-busi- vantage of the rising demand for horticulture nesses as well as local and State government- and other specialty products.40 owned companies are now involved in grain marketing. Most horticultural and livestock International trade – agricultural produc- products are marketed by a vast army of in- tion is increasingly consistent with China’s dividual entrepreneurs trading on their own natural comparative advantage. While the account. As a result, China’s markets have be- value of agricultural trade already grew by come well integrated and efficient. Measured about 6  percent per year between 1980  and in terms of the percentage change in price 2000, it more than doubled since WTO acces- 35  Lohmar, Gale, Tuan and Jansen (2010). 36  Huang, Qiao, Zhang and Rozelle (2001). 37  Huang and Rozelle (2006). 38  Huang and Rozelle (2005). 39  Qin and Zhang (2011). 40  This is most vividly illustrated by the development of Anding from a low productivity wheat producing area into one of China’s three leading potato clusters, with potatoes now accounting for 2/3 of the cropping area, producing 1 kg of potatoes for every Chinese and generating 60 % of rural people’s income (Zhang and Hu, 2011). 18 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Figure 8 China evolved from net food exporter to net food importer since WTOaccession in 2001 70 60 WTO accession in Dec. 2001 50 Billion US$ 40 30 20 10 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Export Import Source: International Trade by Commodity Statistics (ICTS) Database, 2011. sion, rendering China now one of the world’s sugar crops have fallen; exports of higher val- top four agricultural import countries. Its im- ued, more labor intensive products, such as ports jumped from under US$11  billion in horticultural and animal products (includ- 2002 to over US$57 billion in 2008.41 China’s ing aquaculture) have risen.42 China’s trading agricultural exports have also grown, although pattern is aligning itself with its natural com- not as dramatically as imports, from US$ 13 bil- parative advantage, which is in labor inten- lion in 2002  to US$39  billion in 2008. From sive crops and livestock products and not in being a small net agricultural exporter during land and water intensive grains.43 most of the reform period, China thus quick- ly became a net importer after WTO accession Drivers of success in sum. Over the past (Figure 8). three decades (1978–2009) China’s agricultur- al sector has expanded and diversified substan- More remarkably however, is the changing tially beyond grains. Its gross value of output composition of trade that accompanied this (in constant prices) quadrupled and livestock shift. According to custom statistics, the net and aquatic products contribute about two exports of land-and-water intensive bulk fifths of the gross value of output now, com- commodities, such as grains, oilseeds, and pared with less than one fifth in 1978. Crops 41  Lohmar, Gale, Tuan and Hansen (2010). 42  During much of the reform period, China exported maize and imported wheat, but imported only lim- ited amounts of cotton and oilseeds. Today, China is largely self sufficient in rice and wheat, imports small amounts of maize, and large amounts of cotton (for its apparel industry) and soybeans (for livestock produc- tion, rising from 10 mmt in 2001 to more than 50 mmt during 2008–2010). At the same time, it evolved into a major exporter of many fruit, vegetable, and livestock products, including apples, garlic, aquaculture prod- ucts, poultry and pork. 43  Recall that while it has about 20  percent of the world’s population, it has more than 35  percent of the world’s agricultural labor force, but only 11 percent of the world’s agricultural land, and less than 6 percent of its water resources. China’s Agriculture Anno 2010 – Challenges and Opportunities 19 account for about half the gross value of out- common (and most straightforward) way to put now, compared to 80  percent at the be- expand agricultural production is to expand ginning of the reform period. The production the land base. Once the (productive) land fron- of this massive amount of agricultural out- tier is closed, the focus is on increasing yields, put takes mostly place on fragmented plots on through water control (enabling multiple crop- small smallholder farms, which until the mid ping) and the use of modern inputs. Nowadays, 2000s were still declining in size. Land saving the scope for expanding the agricultural land technological change (improved seeds, fertiliz- base in China is limited. There is also rising er use) coupled with the expansion of irriga- competition for land for construction purposes tion has been driving output growth, aided by (inhabitation, mining, infrastructure), which liberalized input and output markets. has contributed to the continuous decline of the cultivated land area from 130  million ha However, WTO accession in 2001  cou- in 1997 to 121.7 in 2008 (Figure 9). Ongoing pled with the gradual appreciation of the soil degradation compounds the decline in Renminbi (see further below) have increased land, undermining its productive capacity, es- competitive pressures, especially on grain pecially in the western parts of the country and production, with exports shifting away from where input use is limited.44 the more land and water intensive cereals to the labor intensive horticultural and livestock The decline in the quality and quantity of products, and grain imports for animal feed China’s agricultural land base have led the (especially soybeans, but recently also maize) government to adopt the “Grain-for-Green� being on the rise. In addition, a number of program in 1999 and to institute the so-called developments in the factor markets and di- Red Line in 2006, respectively. Under the etary shifts on the demand side are challeng- former program, sloped cropland is set aside ing China’s current agrarian structure and to increase forest cover and prevent soil ero- policy environment to address its food, farm sion, while the Red-Line institutes a dynam- and field problems. These challenges are dis- ic balance quota of 120 million ha (1.8 billion cussed in more detail below. mu45) of land to be preserved for agricultural purposes.46 Both policies have been contested, 3.3 Agriculture At a the first one for threatening China’s self suffi- Cross-Road ciency goals in grain production by taking crop land out of production47 and the second one for 3.3.1  Rising Supply Constraints limiting the necessary conversion of land for Agriculture’s land base is under pressure, economic growth48 (Box 2). Irrespectively, the but maybe not as much as claimed. The scope for increasing agricultural production 44  Ye and Van Ranst (2009) estimate yield losses from soil degradation in the eastern, middle and western belts at 1 ± 0.4%, 4 ± 3.5% and 25 ± 3.1% respectively. 45  15 mu of land = 1 hectare. 46  During State Council 2008 Wen Jiabao emphasized that a minimum of 1.8 billion mu of basic farm land must be retained. It concerns in effect a “no net loss� policy requiring county and township governments to keep their good-quality cultivated land at the current level. If cultivated land is converted to other uses, an equal amount of other land, adjusted for the quality, must be converted to cultivation somewhere else, to com- pensate for the loss. As a result, cereal production is increasingly moving out of the more urbanized and indus- trialized coastal areas moving inland and to its outer provinces (Inner Mongolia, Heilongjinang and Xinjang) where land reclamation has traditionally taken place. 47  Ministry of Land and Resources (2004). 48  Mao (2010). 20 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Figure 9 Cultivated area declined (1997–2009); sown area slightly increased thru multiple cropping 180 170 160 150 Million ha 140 130 120 110 100 1997 2000 2003 2006 2009 Cultivated land (000 ha) Sown area (000 ha) Source: China Statistical Yearbook 2010. through land expansion has clearly been ex- its cultivated land base. Rather, they call for hausted. a comprehensive, national and data driven as- sessment of the situation, which also accounts The conversion of cultivated land has acceler- for offsetting mechanisms, and promotes a ra- ated since, especially between 1999 and 2004. tional management of the conversion process. As illustrated in the table above, this was how- They further underscore the importance of a ever not due to an acceleration of conversion continued focus on increasing the productiv- for construction—the amount of agricultur- ity of the remaining resources in the agricul- al land developed exceeded the amount tak- tural sector, as the scope for increasing agri- en out of production for built up.49 Rather, cultural production through land expansion it followed from the “Grain-for-Green� pro- is clearly non-existent. gram, under which about 7 million ha of cul- tivated land was converted into forest land. Water pressures are real, though better The resulting loss in grain output was how- water management also opens up op- ever minimal, as yields on the targeted slopes portunities. One avenue to relieve land taken out of production were only 30 percent pressures is multiple cropping through bet- of the national average, and farmers increased ter water management. Over the past decade, their production efforts on the rest of their China’s sown area has continued to hover land, largely offsetting the declines from out- around 155  million ha, rising to 158.6  mil- put loss due to reduction in area. The im- lion ha in 2009, despite a decline in culti- proved hydrological capacity of China’s vated area by over 8 million ha to 121.7 mil- mountainous areas may further increase pro- lion ha in 2008 (Figure 9). As a result, the ductivity in the downstream regions. multiple crop index rose from 1.18 in 1997 to 1.3 in 2009. Yet, rising competition for water These findings are not taken to show that from industry and human consumption and there are no pressures on China’s grain pro- declining water availability (from 2194  cu- ducing capacity from continuing pressures on bic meter/person in 2000 to 1816 cubic meter 49  Chau and Zhang (2010). China’s Agriculture Anno 2010 – Challenges and Opportunities 21 Box 2 Cultivated land loss in China – what do the numbers really say? The debate about agricultural land conversion hasn’t always been well served by solid empirical evidence, with two care- fully executed empirical studies suggesting that the actual loss in agricultural output potential due to land conversion for construction and ecological restoration may have been much less than often purported.a In particular, between 1986 and 2000 the conversion of cultivated land to non-agricultural uses (mainly built up) has in effect been more than offset by the conversion from other land uses into cultivated land (especially grasslands in the north-western parts of China and the eastern parts of Inner Mongolia, forests in northeast China, and large tracts of unused wetland and barren land in Hei- longjiang). This actually resulted in an estimated net increase of cultivated land of 1.9 percent. The newly cultivated tracts were however less productive than the converted cultivated land for construction (mostly along the east coast and around Beijing, Shanghai and Zehjiang). Nonetheless, overall, the resulting net decline in average potential productivity was only 0.3%.Source: Chau and Zhang, 2010. Total land development for agriculture exceeds total loss due to land conversion for cultivation Total addition Total loss Total Of which due to land Of which due to Total area of (Million development, consolidation Total conversion to cultivated land Year ha) and reclamation (million ha) construction land (year end) 1999 0.41 0.26 0.85 0.21 129.85 2000 0.61 0.29 1.57 0.16 128.88 2001 0.27 0.20 0.90 0.16 128.25 2002 0.34 0.26 2.04 0.20 126.56 2003 0.35 0.31 2.90 0.23 124.01 2004 0.53 0.35 1.49 0.29 123.06 2005 0.63 0.31 0.99 0.21 122.69 2006 0.72 0.37 1.03 0.26 122.38 1999–2006 3.82 2.35 11.76 1.73 a Xu et al., (2006); Deng, Huang, Rozelle and Uchida (2006). per person now) limit the scope for expand- person, water endowments in China are also ing agricultural production through in- unevenly distributed. They are relatively creased water use, rather the opposite. abundant in the south, but scarce in the north. Nonetheless, it is the north which is especial- In addition to being much lower than in the ly intensive in the production of water inten- rest of the world, where water availabili- sive crops such as soybeans, maize, wheat and ty is on average above 7000 cubic meter per cotton, including through irrigation.50 And Most of the rice, which also heavily relies on irrigation, is produced in the relatively water-abundant south- 50  ern parts of China. Most of the northern part of China receives sufficient rain for summer grain production during normal years. Winter wheat production on the other hand, relies heavily on irrigation. Overall, it is 22 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 through domestic food trade, northern China (see below) together with population growth annually exports about 52 billion cubic me- will further increase the crop water require- ters of water in virtual form51 to the south- ments for food production (1127 km 3/year in ern provinces. 2003), by 36 to 46 percent by 2030, depend- ing on the assumed speed in dietary change This has resulted in severe groundwater de- and the assumed reduction in the virtual wa- pletion, with the deep water aquifer under ter content of crops. This implies an addi- the North China plain, for example, already tional amount of water needed ranging be- dropping at about 3  m per year and about tween 407 to 515 km3 per year, equivalent to half of the communities using ground water 182 to 230 percent of consumptive irrigation in the northern plains reporting a decline in water use in 2005.55 ground water levels between the mid 1990s and mid 2000s.52 Whether the water tables But, China’s low efficiency of current wa- can be effectively and efficiently replenished ter use in irrigated agriculture also provides through the south-north Water Transfer opportunities to improve its domestic food Project is debated. In effect, the current vir- production capacity (the food problem) and tual north-south trade in water actually ex- remain internationally and intersectorally ceeds the maximum proposed water transfer competitive (the farm problem) through bet- volume along the three routes of the south- ter water management.56 Yet, it is unlikely north Water Transfer Project.53 These num- to suffice and increased virtual trade of wa- bers would suggest that the regional distri- ter through increased import of more water bution of cropping patterns may need to be intensive agricultural products such as grains revisited. may well have to be part of the answer. This will be discussed further below. Nonetheless, systemic water scarcity in many regions has so far not prevented overall pro- The scope for agricultural productiv- duction from rising.54 Scenarios suggest how- ity gains through expansion of chem- ever that dietary shifts to animal products ical input use is equally limited, but estimated that 90 percent of rice production is irrigated, 85 percent of total wheat production, 45 percent of China’s maize production and 30 percent of its soybean output (Fischer, Ermolieva and Sun, 2010). 51  The virtual water content of a crop corresponds to its total accumulated evapotranspiration over the com- plete growth cycle. It is generally higher for grains and most cash crops, and lower for potatoes, vegetables and most fruits (except citrus). If the amount of water lost through evapo-transpiration is not replenished, for example, with precipitation, crop water use will result in a localized net water loss and become unsustain- able over time. 52  Lohmar and Hansen (2007); Wang, Huang and Yang (2009). While water availability is a pressing concern in the North China Plain (which includes the provinces of Henan, Hebei, Shandong and the northern parts of Jiangsu and Anhui), this is less of an issue in the Northeast (provinces of Heilongjiang, Jilin and Liaoning), where Fischer, Ermolieva and Sun (2010) still see scope for further expansion of irrigation. 53  Ma et al. (2006). 54  Lohmar, Gale, Tuan and Hansen (2010). 55  Liu and Savenije (2008). 56  During the mid 2000s, the amount of (irrigation) water used to produce 1 kg of grains (0.96 cubic me- ter or about 960 liter/kg of grain) was twice the amount used in developed countries (Zhao, Luo, Deng and Yan, 2008). Note that it concerns the application of irrigation water here, and not the crop water requirement as measured by evapo-transpiration during the crop’s growth cycle. While more efficient irrigation practices would not change the latter, they help slow down depletion of the water tables, if water loss during the irriga- tion process on and off the farm, resulting in higher evaporation, is not replenished locally. China’s Agriculture Anno 2010 – Challenges and Opportunities 23 more output could be attained with that fertilizer application rates could be cut less inputs, yielding important oppor- in many situations, by at least 30%, through tunities to save costs and reduce envi- better agronomic practices, without loss of ronmental pressure. At more than 300 kg crop production or risk to the nation’s ag- per ha (340  kg/ha in 2009), China is al- gregate food supply.60 Similarly, the wide- ready among the highest fertilizer users in spread adoption of transgenic insect resis- the world (4th highest after Japan, Korea, and tant Bt cotton seeds has already substantially Holland in 2004) (Figure 6). The margin- reduced production costs through a reduc- al productivity from additional fertilizer use tion in pesticide use by two thirds, increas- was already declining rapidly in the 1990s ing net income per ha by about 340 percent.61 (from an estimated 11.5 kg crops per addi- This suggests that resolution of some of the tional kg of fertilizer in 1981–85 to 2.03 kg field problems through smarter application of in 1991–95)57 and may well have become chemical inputs and GMOs can also provide negative since. Research undertaken un- important cost saving opportunities. This der the UK-China Sustainable Agriculture will also prove critical in resolving the food Innovation Network (SAIN) suggests wide- and farm (income) problem by keeping grain spread 30–60% overuse of nitrogen fertil- production competitive, domestically and in- izer on crops. A report by the Ministry of ternationally. This is especially relevant to- Agriculture reported the efficiency of nutri- day in light of rapidly rising costs of agricul- ent use was only 30–40%, compared with tural labor. 60–70% in developed countries.58 Rising labor costs drive farm mechani- Low efficiency combined with over use of zation and farm polarization. Abundant fertilizer has substantially contributed to ni- agricultural labor has for the longest time trogen and phosphorus eutrophication of been considered one of the defining features China’s lakes and (ground) water systems. of China’s agriculture. It has in the past in- The manufacture and use of synthetic ni- spired some observers to consider China as trogen fertilizer was estimated to produce the ultimate example of a Lewis type econ- 7 percent of China’s total 2007 greenhouse omy, where (surplus) labor (with zero or low gas emissions.59 Deficiency of organic fertil- marginal productivity) could be extracted out izer use has further resulted in a decline in of agriculture for employment in the non-ag- organic matter in soils, reducing soil fertil- ricultural sector (where wages are somewhat ity. China is also among the largest pesti- higher) without a reduction in overall agri- cides consumers in the world, much of it su- cultural output. A corollary to this view is perfluous. that there were few incentives to substitute capital for labor in agriculture. This com- Clearly, increasing agricultural output by in- bined with relatively high labor to land ra- creasing chemical inputs is not an option. tios has made China’s agriculture very labor But, it may not even be necessary. Tests on intensive, with technological innovations fo- thousands of farmer fields across China show cused on land saving technologies. 57  Mao (2000). 58  Zhao, Luo, Deng and Yan (2008). 59  SAIN (2010). 60  SAIN (2010). 61  World Bank (2007). 24 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Looking ahead however, urbanization and labor, including in agriculture. The observed the ageing of China’s population are rapid- acceleration in rural wages around the mid ly reducing the agricultural and rural labor 2000s,63 even in the more remote areas force. About 20 million rural people are esti- and provinces, such as in Gansu, suggests mated to migrate to urban areas a year, while that these deep slow running demograph- temporary migration is estimated at 100 mil- ic and economic forces have already start- lion per year. These trends are already re- ed to bear themselves out in the labor mar- flected in the average total hours spent per kets (Figure 10). They are also reflected in the household on the farm, which declined from accelerated decline in the agricultural labor 3,500 hours in 1991 to just over 2,000 hours to land ratios observed since the early 2000s in 2000  and only 1,399  hours in 2009.62 (Figure 11).64 Concentration of migration amongst the young further exacerbates the ageing of the These developments have critical implica- rural demographic and with male migrants tions for the viability of the current farm outnumbering females, agriculture in China structure and the resolution of the food and is also feminizing. farm problem. Rising labor costs make cap- ital, and thus mechanization of agriculture, Exhaustion of the demographic bonus and more attractive, putting upward pressures on urbanization will push up the cost of rural the farm size, given the economies of scale Figure 10 Rural daily wages have risen sharply since 2003 60 50 Daily wage (real RMB) 40 30 20 10 0 1993 1995 1997 1999 2001 2003 2005 2007 Gansu Sichuan Jilin Jiangsu Shaanxi Hebei Source: Zhang, Yang and Wang (2011). 62  De Brauw, Huang, Zhang and Rozelle (2011). 63  Zhang, Yang, and Wang (2011); Fleisher, Fearn, and Zhen (2011). 64  Despite fears to the contrary, the feminization of agriculture has so far not been found to reduce efficien- cy in agriculture (De Brauw, Huang, Zhang and Rozelle, 2011). This has been attributed to the equal access by women to land, inputs and machinery services. The latter are particularly helpful as they enable women to also perform the heavier tasks and capture the economies of scale from machinery without needing the cap- ital to invest in it themselves. China’s Agriculture Anno 2010 – Challenges and Opportunities 25 Figure 11 Mechanization accelerates as agricultural labor/land ratio declines (negative growth) 30 Increase in Decrease in Decrease in labor/land; rapid labor/land; labor/land; increase in growth of large deceleration in acceleration in mechanization 25 Annual growth (3yr moving average) small/decline large small & increase mechanization in large 20 mechanization 15 10 5 0 –5 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Large tractor Small tractor Agricultural labor/land Source: China Statistical Yearbook 2010. that come with the indivisibility of machin- costs only rise when the available plots for ery.65 These pressures are already manifest- rent are small, scattered, and usually not ing themselves, with the accelerated decline contiguous to one’s own plots. Moreover, in the agricultural labor-land ratio inducing while machinery services can help small- a rapid acceleration in the growth of large holders capture the economies of scale from and medium size tractor use (Figure 11), a mechanization and remain international- trend which is lately also actively support- ly competitive, farm size expansion is also ed by the government through machinery necessary to remain intersectorally compet- subsidies.66 itive, i.e. to be able to generate enough in- come from the farm relative to what could Yet, these are early days and enormous chal- be earned outside agriculture (Box 3). This lenges of adjustment lie ahead. Aggregating poses a particular challenge in mountainous land through land rental and sales to obtain areas, where smaller plots on more sloped more commercially viable farming entities land make mechanization and land consol- entails significant coordination costs. These idation even harder. 65  Another indivisible factor is a farmer’s ability to acquire and process information. This becomes more im- portant as agricultural technologies advance giving operators with formal schooling and technical education a competitive edge. It is most pronounced for those engaged in high value agricultural products characterized by increasing quality demands and tightening safety standards and will also gain in importance as the pres- sures to adapt to a changing climate increase. 66  The sequencing of the argument is critical here (Kislev and Peterson, 1982; Hayami and Kawagoe, 1989). Mechanization as such is not driving the decrease in labor/land ratios here, but rather intersectoral labor mar- ket dynamics, whereby agricultural laborers are pulled out of agriculture by better opportunities elsewhere, pushing up labor costs in agriculture and making mechanization more attractive. Chinese farms have so far, by and large been sufficiently large to capture the existing economies of scale, such as those arising from oxen and small hand pushed tractors. However, as labor costs rise, it will become profitable to substitute larger-scale machinery for small hand pushed ones and oxen, putting pressure on the farm size. 26 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Box 3 Pressure on farm consolidation from rising off-farm wages – some rudimentary arithmetic The pressure on land consolidation emanating from intersectoral labor competition in China is nicely illustrated by the following rudi- mentary numerical example.a It also highlights the practical limitations for large scale farming in China. Based on data from the China National Development and Reform Commission (NDRC), average income per ha from paddy rice production almost tripled between 2003–2008, from 1353 (2000RMB)/ha in 2003 to 3630 (2000 RMB) in 2008, rising by about 2300 RMB in total (of which 600 RMB/ ha were due to subsidies and 90 RMB/ha due to the abolishment of agricultural taxes in 2005). Without subsidization, after tax net rice income per ha only doubled—rising by about 1500 RMB, hinting at the rising importance of agricultural subsidization as a response to keep farm incomes up with non-farm ones.b At an average farm size of 0.6 ha and assuming only rice were produced, this suggests an average increase in net income between 2003 and 2008 of 1380 RMB per farm household (with subsidization/taxation) and of 900 RMB (without subsidization). Net average increases in cereal income per ha of a similar magnitude were found for the other cereals (somewhat higher for wheat, and somewhat lower for maize and soybeans).c Compare this with an increase in average annual real disposable income per rural and urban house- hold between 2003–2008 of 8552 and 21,924 RMB (in 2000 RMB) respectively (assuming an average households size of 4 in rural and 3 in urban areas). In other words, and assuming constant returns to scale, to match the average rural and urban income increase, rice farms should have expanded 8.5 or 22 times respectively (without subsidization). With subsidization, they should have expanded 6.2 times (to 3.6 ha on average) or about 16 times (to 9.6 ha) respectively. Clearly, this is massive, and such a pace of land consoli- dation is unfeasible, without draconic interventions. To picture this, note that to increase one farm’s size from the average 0.6 ha to 3.6 ha in five years time, five farmers (3 ha = 5*0.6 ha/farm) would have to give up farming, or one farmer among any six farmers should quit farming each year. Such an exodus of farm labor is clearly unsustainable, causing massive disruptions on both the rural/ sending side as well as on the urban/receiving side. Overall, three important insights emerge from this simple arithmetic. First, China’s cereal production on its small and fragmented farms proves still profitable as such (excluding labor costs), despite doubts to the contrary by some. Second, subsidies are becoming an im- portant part of cereal farming income—and they have continued to increase since 2008. Third, a substantial share of China’s cereal farms has become too small to keep up with income growth outside agriculture and generate a comparable standard of living from cereal farming alone. Assuming constant returns to scale, only (rice) farms of 3.7 ha or more (=8552/1380*0.6) would have generat- ed a similar income growth as what has been observed on average among rural residents. Without subsidies, only full time (rice) farms of 5.1 ha would have yielded similar income growth. Such larger farm holdings do exist, especially in the corn, wheat and soybean sur- plus producing regions of the North East (e.g. Heilongjiang and Liaoning). But, they are generally a minority, and most current farm holdings do not reach this size.d In short, cereal production on the current farm structure is under substantial economic pressures from intersectoral competition. Against this background it is no surprise that in 2005 non-farm income accounted on average already for 40 percent of farmers’ income. a Numbers are taken from Fang (2010). b Without subsidization, net income was estimated at RMB 2940/ha (in 2000 RMB) in 2008, up from 1447 (2000 RMB) (before taxes) in 2003. c Note that the growth in returns is not unduly driven by the choice of the beginning and especially the end period. Indeed, world cereal prices spiked in 2008, but as explained in Fang (2010), China stabilized its grain prices during the 2008 crisis, while allowing a gradual increase thereafter to bring them more in line with world markets again. China’s domestic grain price index (2000=100) stood at 95, 147 and 173 in 2003, 2008 and 2010 respectively; the international grain price index (in RMB) evolved from 120 in 2003 to 207 in 2008 and 183 in 2010. During the 2008 crisis, China’s domestic rice prices were kept well below the 2008 world market price and have been kept well below the world rice market since. The 2008 wheat and maize world price surges were also passed through only partially (an increase of 17 and 23 percent in 2008 compared with 2006, while world market prices increased 51 and 61 percent) (in Chinese RMB terms). Soybeans tracked the world market prices throughout. d Some household survey based descriptive statistics of differences in farm size and degree of mechanization and capital intensity across re- gions can for example be found in Chen, Huffman and Rozelle (2009) (Table 1). China’s Agriculture Anno 2010 – Challenges and Opportunities 27 A dual farm structure may thus arise, with part Appreciation of the Renminbi will in- time farming predominant in the mountain- crease international competition. As ous areas and larger mechanized farms char- China continues to rebalance its drivers of acterizing future agriculture in the plains. To growth from exports to domestic private con- enable part time farming in mountainous ar- sumption (12th Five-Year Plan) and proceeds eas, off-farm employment opportunities will with the gradual appreciation of its curren- be necessary in neighboring towns and cit- cy, international exporters will become more ies, underscoring the importance of small price-competitive on its domestic market. and medium town development in overcom- The consequences of this will not only be felt ing the farm problem, especially in the more in merchandise trade and financial markets, mountainous areas. Land reforms, institutional which tend to dominate the media’s atten- innovations, such as machine rings, and more tion, but also in the agricultural commodi- widespread access to credit will further be nec- ty markets. This may further induce domes- essary to enable small to medium sized family tic calls for protection, subsidization or other farms to stay commercially viable within this measures to curb the inflow of agricultural more mechanized environment. Otherwise, commodities. the landscape will be largely captured by large scale, capital intensive corporate farms that As illustrated in Figures 12 and 13, land and generate little rural employment and increase water intensive cereal farming is most vulner- pressure on urban migration. While that may able to Renminbi appreciation, while more resolve the food, it will not resolve the farm room for maneuver is left for Chinese fruits problem, increasing pressures to adopt OECD and vegetables, consistent with the global dis- type agricultural policies of subsidization and tribution of factor endowments and increased protection even further (Box 4). trade. Further appreciation will thus pose an Box 4 Rising rural labor costs raise subsidization and protection – the Post-War experience in Japan The experience in Japan is illustrative of what is awaiting China as its rural labor costs increase and pressures to mech- anize mount, while the structural transformation of its economy away from agriculture outpaces the occupational trans- formation of its rural labor force and the consolidation of its farms. Studying Japan’s agricultural transformation, Hayami and Kawagoe (1989, p237–8) conclude: “(…) a severe adjustment problem will await [developing countries] as they will successfully enter the stage at which the real wage rate begins to rise sharply. At that stage, agricultural production will be subject to increasing returns. But, the transfer of labor to the non-agricultural sector and the expansion in farm size will proceed slowly, even without severe regulations on the land market, as depicted by the experience of Western econ- omies. Meanwhile, the comparative advantage will shift away from agriculture in countries with relatively rapid increas- es in industrial as compared to agricultural productivities. The lag between the loss of comparative advantage in agricul- ture and the intersectoral re-allocation of labor can be expected to give rise to agricultural protectionism in such countries. This has been the experience in Japan [Hayami (1988)] and may well be repeated by newly industrializing countries, especially those located in areas of high population density in Asia. Indeed, it has already occurred in Korea and Taiwan [Anderson and Hayami (1986)].� The increase in China’s producer support estimate (PSE) from 3 to 17 per- cent between 1995–97 and 2010 and the increase in the ratio of the producer to border price (the nominal protection coefficient) from 1.01 to 1.06 between 1995–97 and 2008–2010 are striking reminders of the pertinence of these ob- servations for current China. 28 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Figure 12 Chinese cereal production vulnerable to appreciation of Renminbi Estimated price of imported commodities in China Corn Wheat Soybeans 3,000 Domestic Price 2,500 Domestic Yuan/metric ton 2,000 Domestic Price Price 1,500 1,000 500 0 7.8 7.5 7.0 6.5 6.0 7.8 7.5 7.0 6.5 6.0 5.5 7.8 7.5 7.0 6.5 6.0 Exchange Rate (yuan/dollar) Source: Gale and Tuan (2007). Note: Based on December 2006 prices. Calculations assume prices, tariffs and taxes, and shipping rates prevailing in December 2006 remain constant. Figure 13 Fruit and vegetable production not so vulnerable to appreciation of Renminbi 18 Estimated supermarket price (yuan/kilogram) 16 15.6 yuan 14.8 yuan 14 12 Supermarket price 10.6 yuan of “high quality� 10 domestic apples 8 6 4 2 0 7.8 yuan/dollar 7 yuan/dollar 3 yuan/dollar Exchange Rate Port Price Tariff and Tax Distribution Costs from Port to Supermarket Source: Gale and Tuan (2007). Note: Calculations assumed constant US$ port price of $.83/kg and a constant distribution cost of 7.6 Yuan/kg. Tariff on apples is 10 % and value added tax is 13%. Port price obtained from December 2006 China customs statistics. Supermarket prices obtained from Tianhui Supermarket Fruit Prices. important additional challenge to the com- 2011 and the incipient increase of maize im- petitiveness of China’s cereal farms (the farm ports (estimated at up to 3 mmt in 2011 after problem) and its cereal self sufficiency objec- many years of net exports) to meet the rising tives (the food problem), not unlike what hap- demand for animal feed, may not be coinci- pened in Japan. Indeed, the dramatic increase dental. In the summer of 2007, the Renminbi in soybean imports since 2006  from about passed the 7.5 Renminbi/US$ mark at which 28  mmt in 2006  to more than 56  mmt in US soybeans become competitive on the China’s Agriculture Anno 2010 – Challenges and Opportunities 29 Chinese market, according to the calcula- China’s agriculture with the same strength.70 tions reported in Figure 12.67 In the spring Rather, it highlights that further Renminbi of 2011, it breached the 6.5 Renminbi/US$ appreciation is likely, and that this is likely to mark at which US maize was considered to affect the competitiveness of China’s agricul- become competitive. ture over the coming decades, especially the competitiveness of its cereal production. This To further appreciate the potential impor- is bound to further increase calls for support. tance of China’s expected exchange rate ap- preciation for the future development of its Climate change increases uncertainty in agricultural sector, it is useful to recall the the production environment. The chal- experience of Japan. As China, Japan has also lenges the economic pressures pose on the followed an export led growth paradigm and agrarian production system to shift from a la- as in China, cereal production has also been bor intensive to a more capital intensive sys- concentrated on very small farms. When tem must be addressed in increasingly fragile Japan embarked on export led development in ecosystems and in the face of rising climat- the 1950s, the Yen was set at 360 Yen/$US. It ic uncertainties. Some simulation models remained at this rate throughout 1971, when suggest that global warming is likely to be the gold standard was abolished. By then, it harmful to rainfed farms, but beneficial to ir- had become undervalued (and increasingly rigated ones, with the net impacts only mild- criticized for it). The Yen has continued to ly harmful at first, but growing over time depreciate since to about 80 Yen/US$ now- (Wang et al., 2009). However, the impacts adays.68 During the course of this transition, vary across regions, and the indirect effects Japan also developed one of the most protect- of possible changes in the water flows, which ed agricultural sectors in the world.69 This is are quite real, are not captured in these par- not to say that a similar rate of appreciation is ticular models. Indeed, as discussed above, to be expected in China or that it will affect the most binding environmental constraint is 67  Chinese soybean import increased from being quasi zero in the mid 1990s to about 28 mmt in 2006. Since then, Chinese imports have doubled again to 56 mmt in 2011, accounting for more than 57 % of the world’s total exports today. The initial increase in China’s soybean imports was first especially sourced from Brazil, which saw its soybean exports rise from about 8 mmt in 1996 to 26 mmt in 2005. Since then, the US have seen their soybean exports rise from about 31 mmt in 2007 to about 41 mmt in 2010. During the first half of the 2000s, when the Renminbi was above the 7.5 Renminbi/US$ mark, their exports hovered mostly between 25 and 30 mmt (USDA, 2011). In sum, while Renminbi appreciation is not the only reason for the increase in China’s soybean imports over the past 15 years, it has undoubtedly contributed to its dramatic increase over the past 5 years. Early on, imports were facilitated by the abolishment of the monopoly of state-trading com- panies on soybean imports in the late 1990s. As an important water user, soybean imports also help substan- tially in mitigating water needs (see further Figure 15), though this may have been a fortunate coincidence. 68  Kokko (2002). By way of comparison, the Renminbi was devalued by 50 % from 5.8 to 8.7 Yuan/US$ in 1994. After having been fixed at 8.3 Yuan/US$ since 1995, the Renminbi started to gradually appreci- ate in June 2005 to reach 6.8 Yuan/US$ in July 2008 (an appreciation of 18%). Stopped in July 2008 to fight the consequences of the global financial crisis, appreciation of the Renminbi picked up again in May 2010 to reach 6.38 in August 2011 (or 23% appreciation compared with 1995). Analysis of the prevailing economic forces suggests that further appreciation is likely (IMF, 2011). 69  World Bank (2007). 70  In addition to its first round effects of making international imports cheaper, given the size of the Chinese market, sizeable increases in China’s cereal imports following an appreciation of the Renminbi are bound to increase world market prices, thereby also raising the competitiveness of its domestic production. Second round effects are thus likely to take away some of the edge of the appreciation’s first round effects. This may not have been the case for Japan, whose population is only one tenth the size of China’s. 30 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 likely water, especially in the northern plains, food cereal demand is halting. An impor- jeopardizing potential production gains from tant corollary to the ongoing urbanization pro- mechanization. cess is the shift away from grains as households become richer and move to the cities. Chinese These, and other simulations, underscore diets now include fewer grain products like that at the local and regional scale, rising un- rice, bread, and noodles, while consumption of certainty about the production environment meats, eggs and dairy has risen. In addition to is the defining feature of climate change. income growth, urbanization in itself is also an Future temperature and precipitation pat- important driver of this shift, with average food terns are uncertain and extreme events be- grain consumption among Chinese urban- come more likely. This adds an important ites on average only a third of their fellow ru- layer of uncertainty to a production system ral countrymen.71 This is reflected in the nega- that is intrinsically uncertain to begin with. tive income elasticities of demand for rice and Adaptation will have to be part of the answer wheat in urban areas, compared with the small, to provide relief, while mitigation in agricul- though still positive income elasticities ob- ture will also need to be embraced as part of served in rural areas (Figure 14). In light of the China’s international responsibilities. supply constraints and uncertainties described above, this does provide some relief for China’s 3.3.2 Changing Demand Dynamics pursuit of self sufficiency for rice and wheat. Cereal feed demand is propelling the over- The Chinagro II model predicts that con- all demand for grain going forward, while sumption growth of these two grains between Figure 14 Income elasticity of demand (in 2006) for rice and wheat is low and in urban areas negative; income elasticity of demand for high value crops is positive, and almost one for dairy 1.2 1.0 Income elasscises of demand 0.8 0.6 0.4 0.2 0 –0.2 –0.4 Rice Wheat Coarse Grain Edible Oil Sugar Vegetable Fruit Beef Poultry Fish Pork Milk Rural Urban Source: Huang and Rozelle (2001). 71  Lohmar, Gale, Tuan and Hansen (2010). China’s Agriculture Anno 2010 – Challenges and Opportunities 31 2005–2030 will be virtually zero and easily met expected 3 mmt in 2011). The grain self suf- by domestic production.72 ficiency strategy to resolve the food problem is being challenged. The income elasticities for oils, sugar, vegetables and fruits, and meat, on the other hand, are pos- Dietary shifts also open up important itive and similar in both rural and urban areas new and remunerative employment op- (between 0.4 and 0.6). The income elasticity of portunities for farmers,75 both directly demand for dairy is estimated at around 1, which through the more labor intensive production is consistent with its more recent boom in do- of meat and dairy, fish, and fruits and vegeta- mestic production. Annual meat consumption bles, as well as through the increased demand per person is expected to increase by another for (unskilled) labor in the downward agro- 20 kg from about 53 kg/person/year in 2010 to processing industries and marketing. There about 73 kg in 2030, up from about 25 kg/per- are however important economies of scale in son/year in 1990. With expected population these downstream industries, promoting ver- growth still positive till about 2025–2030  and tical integration of the supply chains to en- average feed-meat conversion ratios substantial- sure a stable supply of high quality agricul- ly above one (estimated at 4.7  for pork, 4  for tural products. These only grow as consumer beef, 2.8 for poultry and 1.15 for milk on av- demand for quality and food safety increases, erage)73, the demand for feed grain (maize, soy- and food standards tighten, putting the small- bean) is rising rapidly. It is expected to remain holder farm model under pressure. strong throughout the period under consider- ation here (on average 1–1.5 % per year over the The pressures for consolidation have not 2005–2030 period).74 prevented smallholders to participate in the growing fruit and vegetable sectors.76 Almost With domestic cereal supply struggling to all purchases of fruit, vegetables, and nuts keep up with this demand, China has dra- have been by small traders. Livestock prod- matically increased its soybean imports, ucts, particularly pork raised by households, from virtually nothing in the mid 1990s to are also traded by small traders, though there about 10 mmt in 2000, 28 mmt in 2006 and is an increasing contingent of large-scale ani- 56 mmt in 2011 (much of it from Brazil first mal farms and agri-businesses. As economies and increasingly also the US). The next (feed) of scale grow and standards tighten, the pres- crop under pressure is maize, with China sures for consolidation and vertical integra- switching its net trading position from being tion will continue to grow.77 Adequate in- a net exporter (of 3–15 mmt over most of the stitutional innovations (including through past decade) to becoming a net importer (an producer associations) will become increas- 72  Keyzer and van Veen (2010). This model does not account for climate change. 73  Zhang, Wei, and Malcolm (2008). 74  Keyzer and van Veen (2010). While in the mid 2000s, about half of China’s feed consumption was still met through traditional local feeds, such as grasses, crop-by-produce and crop-residuals, as future growth in live- stock production is largely met through intensive animal husbandry (stall-fed poultry and pigs in large pro- duction units), the demand for cereal feed is also rising rapidly (Fang and Fuller, 1998). 75  Keyzer and van Veen (2010) predict farm value added from livestock production to grow at more than twice the rate as farm value added from cereal production (5.1 versus 2.2 percent per year respectively). While both are still below non-agricultural growth (fixed at 6–7%/year), the gap is substantially less for livestock produc- tion. 76  Wang et al. (2009); Huang, Otsuka, and Rozelle (2008). 77  Reardon, Timmer and Minten (2010). 32 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 ingly necessary to enable smallholders to the coastal areas to reduce transport costs, will connect to these modern supply chains, so only aggravate the challenge. that they can maximally benefit from the new growth opportunities, while adequate- Without proper regulation and animal ly addressing safety and environmental con- waste management practices, atmospher- cerns and ensuring supplies of high quality. ic emissions of excess nitrogen and nutri- This will be critical in overcoming the farm ent leaching to ground and surface water problem. will aggravate the existing field problems from over utilization of chemical inputs. Increasing amounts of animal waste To illustrate the scope of the challenge, from intensifying livestock production Table 3 presents estimates of the excess ni- aggravate the field problem and increase trogen and phosphate supply from both animal and human health hazards. Most chemical fertilizer use and confined live- of the growth in livestock production will be stock production per ha crop and orchard concentrated on large intensified production land in 2005  and 2030. These are high- units in close proximity to its consumers in the est for nitrogen and in 2030  they amount towns and cities to reduce transportation costs. to about 200–276  kg per ha in the East, This results in a massive nutrient transfer from Central, South and Southwest regions the cereal feed producing areas in the urban (Table 3). A counterfactual exercise with hinterlands and the northern and northeastern farmers optimizing farming practices and regions to the livestock producing areas in the chemical fertilizer application in line with peri-urban and urban areas. It breaks the nat- the latest agronomic insights available, still ural local nutrient balance in both the nutri- points to an oversupply of 40 kg of nitro- ent producing and consuming areas. Massive gen per ha, and much more in the East re- imports of cereal feed, inducing a concentra- gion, but no longer an excess release of tion of intensified livestock production along phosphates (results not reported here).78 Table 3 Excess nutrient supply1) is substantial, especially for nitrogen, with little decline in sight Kg/ha crop & orchard land Nitrogen Phosphate Region 2005 2030 2005 2030 North 223 165 88 71 Northeast 88 76 16 13 East 252 263 75 90 Central 221 197 94 92 South 219 276 74 115 Southwest 192 211 70 84 Northwest 68 73 23 31 China 171 166 60 66 Excess nutrient supply = estimated total nutrient supply from chemical fertilizer nutrient application and confined livestock production minus the maximum nutrient uptake by crops. Source: Fischer, Ermolieva and Sun (2010). 78 These numbers are not reported in Table 3, but can be found in Fischer, Ermolieva, and Sun (2010). See also Fischer et al. (2010). China’s Agriculture Anno 2010 – Challenges and Opportunities 33 The environmental pressure posed by the in- to bridge the growing feed grain gap, as al- tensification and geographical concentration ready practiced through the rapid expansion of animal husbandry is extremely high, but of soybean imports provides one alternative. there is also hope. Indications are that cur- Whether to extend this to other feed (and/or rent rates of fertilizer use are often excessive food) grains such as maize presents an impor- from a purely financial perspective-much tant policy choice for China moving forward less an environmental perspective-given in addressing its food problem. scope for potentially rapid change. Indeed, the concentration of livestock in larger pro- Rising rural nonfarm wages are further chal- duction units can facilitate the enforcement lenging the smallholder farm model to cap- of regulations and proper animal waste man- ture the economies of scale from mechaniza- agement practices.79 Relocation of intensi- tion and provide comparable earnings with fied animal production to less densely pop- off-farm employment. Opportunities for ulated areas for example through zoning, as mechanization and land consolidation are in Thailand,80 will also be important to ad- also more limited in the mountainous ar- dress the increased risk of animal and human eas. These evolutions are only adding to the pandemics. prominence of the farm (income) problem, with the field problem lurking in the back- 3.4 The Outlook in Sum ground as over use of chemicals is pollut- ing waters and air (most precipitously in the Rising supply constraints pose deep challeng- Eastern and Southern Regions) and land deg- es; changing demand patterns provide some radation is reducing soil fertility (especially opportunities, if managed well. Rising water in the West). These environmental pressures scarcity, competition for land and labor, and will be exacerbated through the concentra- a changing climatic environment are push- tion of intensified livestock production in the ing up production costs and risks, resulting peri-urban areas in response to the growing in upward pressures on domestic food prices, demand for livestock products. while Renminbi appreciation makes interna- tional agriculture more competitive. These Nonetheless, the increasing demand for more developments increasingly put domestic ag- labor intensive high value products (includ- riculture in a bind, especially land inten- ing livestock products) also provides impor- sive and water consuming grain production, tant opportunities to address the farm prob- while the demand for feed grains (maize and lem (in addition to migration and mitigation), soybeans, not rice or wheat) is rising rapid- if appropriate institutions can be developed to ly, following the rising demand for livestock enable smallholders to link in to the increas- products. As a result, the food problem is re- ingly tight value chains. These are the chal- surfacing with the grain self sufficiency mod- lenges ahead of Chinese agriculture as China el as primary vehicle to resolve it, increas- charts its way to becoming a harmonious, ingly challenged. Increasing reliance on trade high income society by 2030. 79  There is also a national smallholder biogas program focused on households with at least two pigs. But the trend is towards bigger, more concentrated animal and waste management units 80  World Bank (2007). The concentration of animal production in urban and peri-urban areas increases risks of pathogen cross over across species following more intensive animal-human interaction. This poses a threat to human health, as the 2003 Avian Flu outbreak reminded us. 34 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 T o w ar d s M o d e r n 4 C o mm e r c i a l S ma l l h o l d e r Farm i n g T o achieve a modern commercial smallholder agriculture that achieves national food se- curity, narrows the rural-urban income gap, and renders the natural resource base more sustainable, the vision for China’s agriculture 2030, six areas of actions present them- selves: 1. revisit China’s food security objectives—in particular, self sufficiency targets for maize; 2. rationalize factor markets and use institutional innovations to empower smallholders; 3. continue to strengthen the provision of (rural) public goods—agricultural technology, ru- ral education and infrastructure, and food safety; 4. support rural incomes while avoiding the subsidy trap; 5. improve agricultural water and animal waste management; 6. manage risks better—adapt to and mitigate the effects of climate change. The following sections discuss why and how certain policy actions in each of these areas can make a critical difference in modernizing agriculture in support of the creation of a harmoni- ous and high income China by 2030. 4.1  Revisit Food Security Objectives Given the supply and demand trends described above, China’s approach to food se- curity should allow greater import reliance for maize, even if targets for rice and wheat are maintained. Like many countries, China sets a premium on food sovereignty, i.e. maintaining independent control over its food supply at all times. The political sensitivity of household access to cheap staple grains and geopolitical considerations have in the past often compelled large nations like China to strive for food self sufficiency to maintain such indepen- dent control, as opposed to relying on the markets to secure their supplies. In this architecture, policies to promote domestic production are coupled with large buffer stocks to compensate in case of domestic harvest failures. International trade is called upon to equalize the residual bal- ances (gaps or surpluses), only at the margin, and when really necessary. Securing one’s food supply through food self sufficiency can come at a high cost. When coun- tries do not have a comparative advantage, imports may be cheaper, and buffer stocks (especially 35 for rice) are costly to maintain.81 But, food self The efficiency (market pressures), equity and sufficiency provides a sense of being in con- ecological considerations reviewed in section trol of one’s food destiny, and thus a sense of three all suggest it should. To begin, given its being food sovereign, which market mediat- land and water resource endowments, China ed food security does not.82 One appears no has no international comparative advantage longer susceptible to food production and in land and water intensive cereal produc- trade choices of other nations. But, one re- tion. Competition for land from other sec- mains equally susceptible to domestic weather tors and rising water scarcity are increasingly shocks. To the extent that world markets may squeezing profits, while putting upward pres- still need to be relied upon in case of large sures on grain prices for consumers. Rapidly domestic production shortfalls, it could even increasing nonfarm wages are further mak- be argued that one becomes more susceptible ing it harder to earn a decent and comparable to (uncontrollable) domestic shocks as world living on the farm, while Renminbi appre- markets will now be less prepared to cater to ciation is making international maize more such large and sudden increases in demand. competitive and WTO regulations limit space for distortionary and inefficient protec- While having been surprisingly successful in tionist support or subsidization. Bans on ag- achieving grain self sufficiency for most of ricultural land conversion would hinder the the reform period, after several years of taking necessary development of other sectors and marginal land out of rice and wheat produc- economic growth (Box 5). Sole focus on cap- tion in the 1990s in response to a decade long ital intensive production through mechaniza- decline in grain prices, the ability to maintain tion on large scale farms to overcome labor grain self sufficiency became a concern again costs would not generate the necessary ru- in the mid 2000s. However, following great- ral jobs, exacerbating, instead of alleviating, er selectivity in agricultural land conversion, the farm income problem. Moreover, more a rapid increase in agricultural subsidies, and erratic weather patterns following climate an expansion in agricultural R&D investment, change are bound to make annual domes- overall rice and wheat production levels edged tic production more volatile. This would in- up. They now almost reach their peaks of the crease the need for occasional reliance on the late 1990s again. At the same time, import de- world market (as in 2011), unless even larger pendence for feed grains has been growing (es- and more costly buffer stocks are maintained. pecially for soybeans), while exports of maize Limited ex ante engagement with the world gradually declined, with China even becom- market also leads to thinly traded world mar- ing a net importer of maize in recent years, al- kets, which will subsequently be less able to beit still in small amounts. But, worries about absorb sudden demand shocks in case of do- market reliance remain, not helped by the mestic weather and crop failures. 2008 and 2011 international cereal price hikes and the recurrence to restrictive trade practic- The massive increase in soybean import es by exporters. Should China continue on its observed over the past decade (exceeding current path of greater reliance on world mar- 50 mmt/year since 2009) has been a rational kets for feed grains, including maize? response to these rising resource constraints, Dawe, et al., (2010). 81  By way of comparison, people typically consider car, a safer medium of transport than airplanes, despite a 82  plethora of evidence to the contrary, as the former provides more opportunities for exercising control than the latter. 36 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Box 5 Balancing land uses between agriculture and non-agriculture Industrialization and modern development demand that land conversion continues. But, given more rational land conver- sion practices, this can also benefit agriculture, rural residents and urban expansion alike. Rural land is under collective control. The State however has exclusive power to acquire rural land and transfer it to urban users and the existing land acquisition practices are biased towards urban development. They further limit the share of the collective and the rural land use holder in the appreciating value of land that enters the urban market. This is an important missed opportunity in resolving the rural-urban divide and the farm income problem. It partly emanates from the relatively unbalanced revenue and expenditure assignments of local governments following the abolition of agricultural taxation. This has induced local authorities to seek extra-budgetary income to foster local growth, which has been a key criterion for the promotion of local political leaders. Reducing the incentives for land conversion, better rules for offsetting land development, and a more transparent implementation of land acquisitions can go a long way in fostering a more rational land use for agricultural and nonagricultural purposes. It will likely also be more successful in effectively and efficiently maintaining the 120 mil- lion ha of cultivated land currently set aside under the ‘Red Line’ policy. The combination of the State’s power to expropriate rural land and convert it to urban use as well as its monopoly in the urban land market enable local governments to rely heavily on the income generated from land transfers to supplement regular budget funds and meet their expenditure needs. Local governments also increasingly rely on mortgage loans using requisitioned land as collateral through land banks.a Both practices have resulted in the aggressive requisitioning of rural land resulting in a waste of land resources and unstable growth processes. These problems can be addressed by reforming the current system of local finance through a gradual introduction of property taxes that would reduce their re- liance on extra-budgetary financing sources. Second, a more adequately designed land development allowance policy combining quota for cultivated land conversions with subsidies for off-setting agricultural land development elsewhere can further contribute to emulating nationally first best land use allocation between agriculture and non-agriculture in the face of incomplete decentralization and inter-ju- risdictional competition for mobile capital. The possibility and need for offsetting the conversion of cultivated land by land development for agriculture elsewhere already exists. It could be improved through an explicit set of guidelines linking land conversion quota to land development efforts at the provincial government (Chau and Zhang, 2010). Finally, the process of land acquisition needs serious reform in three dimensions. First, the current ambiguous limits on the purposes for which the State can use its powers of compulsory acquisition need to be clarified and narrowed. Second, the standards, variation and distribution of compensation for land acquisition need to be rethought. Finally, the process of requisition needs to be made more transparent, with realistic timetables and with possibility of appeal. Over- all, fairer benefit-sharing approaches in the urbanization process could be pursued by gradually granting access for col- lectives or rural land use rights holders to urban land markets, while at the same time, phasing out the State’s monop- olist power in the land market. a Unrecorded local government debt is rapidly becoming a threat to the stability of China’s financial system. It has increased to 3.5 trillion yuan ($540 billion) according to the rating agency Moody (July 5, 2011), raising the estimated local government debt to Chinese banks to 8.5 trillion yuan. not least this of water. With 3203  m3  wa- among the lowest value per cubic meter water ter required per ton output (or 3203  l/kg), used (6 US cents per cubic meter (Figure 12)). soybean production is among the most wa- Importing soybeans thus equates with im- ter intensive crops. It yields at the same time porting vast amounts of water, giving rise to a Towards Modern Commercial Smallholder Farming 37 virtual trade in water.83 This relieves pressure rural employment opportunities and much on the water tables in the northern plains, higher returns per ha (important for resolv- where water scarcity is felt most.84 It also al- ing the farm problem). leviates the need for the massive, ecological- ly disruptive, and economically costly south- To be sure, rising corn imports by China north water transport infrastructure. would exert upward pressures on the world market price, especially if there wasn’t a com- While not as thirsty as soybeans, at around mensurate supply response elsewhere. When 850  water m 3/ton output (or 850l/kg), it concerns a moderate increase, as proposed maize is also a large user of water and it here, and if pursued gradually and predict- yields an equally low return on water use ably, coupled with increased support to in- (about 0.08 US$/m 3), just like the other ce- ternational agricultural research institutes reals. Most fruits (except citrus) and vegeta- to boost production worldwide and invest- bles (including potatoes) on the other hand, ment in African agriculture and diplomacy, are much less water intensive. They also yield it would also provide the world’s production much higher returns per cubic meter. From system time to adapt and disruptions in the this perspective, the move to relax self suf- world markets could be avoided (Box 6). By ficiency targets on soybeans first may thus way of comparison, the increase in China’s have had important unintended positive ef- soybean imports from virtual nothing in fects on the water front. It was also facilitated 1995 to about 30 mmt in 2005 has been man- by the appreciation of the Renminbi, which aged without major disruptions in the world already rendered US soybeans competitive market prices during that period, in this case on China’s markets at an exchange rate of largely through an expansion of Brazil’s pro- around 7.5 Yuan to the US$ (Figure 12) com- duction capacity in its Cerrado, most of it pared with 6.5 RMB/US$ for maize. Against supplying the Chinese market.86 this background and with the exchange rate now at 6.3 RMB/US$, it makes economic, A limited effect on world prices is also ecological and social sense to extend the cur- what is predicted by 2005–2030 simulations rent strategy adopted for soybeans and relax based on the computative general equilibri- self-sufficiency requirements for maize, the um Chinagro II model that enables endoge- other main animal feed,85 while at the same nous reactions of world prices to changes in time expanding the exports of fruits and veg- China’s net trade flows.87 In particular, using etables, which require less land, yield higher the OECD-FAO projections in Agricultural 83  Liu, Zehnder and Yang (2007) estimate that China’s total net virtual water import implied in its grain trade increased massively over the past decade from between 20  to 30  billion cubic meters per year during the 1960–1990 period to over 70 billion cubic meters in 2004. 84  While about two fifths of China’s total soybean production comes from Heilongjiang (the Northeast Region), where water scarcity is less of a concern, about one fifth comes from the five provinces in the north- ern plains (Hebei, Jiangsu, Anhui, Shangdong and Henan). 85  While maize is a major feedstock in pork production, soybean has been particularly important in aquacul- ture. 86  Brazilian Agriculture. The Miracle of the Cerrado – Brazil has Revolutionized its Own Farms. Can it Do the Same for Others? The Economist, Aug 26, 2010. 87  See Keyzer and van Veen (2010) for a detailed description of the Chinagro II model and different scenario simulations. Chinagro II results from a 5 year collaborative EU-funded effort (Chinese Agricultural Transition – Trade, Social and Environmental Impacts) – CATSEI) led by the Center for World Food Studies at the Free University of Amsterdam. The Chinagro model is a 17-commodity, eight region general equilibrium welfare 38 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Box 6 Qualitative perspective on a moderate, gradual expansion of maize imports by China Chinese maize production increased by 63 mmt between 2000 and 2010 (from 114 mmt to 177 mmt or 6.3 mmt per year); during the same period, the world’s production (exclusive China) increased by 174 mmt or 17.4 mmt on average per year (from 591 to 765 mmt). Global maize trade increased from 70 to 90 mmt (or about 10–11% of world production). Meeting one third of China’s growth in maize demand through imports (keeping growth in China’s demand constant at 6.3 mmt per year and abstracting from the animal feed substitution possibilities discussed further below and keeping the world’s growth in demand constant at 17.4 mmt) would thus require a 12 percent increase in the world’s maize produc- tion growth (=2.1/17.4 mmt). This is undoubtedly substantial, but not unlike what has been observed in the soybean mar- kets before, where all of China’s 30 mmt growth in soybean demand between 1995 and 2005 was produced outside China, with nominal world soybean prices (in US$) in the mid 1990s and mid 2000s at similar levels (around 300 US$/ton). It should also be seen in light of the estimated untapped production potential. An estimated 83.3 million ha uncultivated non-forested land with potential for maize production is still available worldwide, of which 20 million in Argentina and Brazil alone, where current yields are 6.5 and 4.1 ton/ha (Box 7). This suggests that it should be feasible to meet China’s future growth in import demand of maize (put at a third of its assumed annual growth of 6.3 mmt) for a number of years, without excessive impacts on world prices, provided clear and predictable market signals for investors. Twenty years of a third in China’s growth in demand coming from imports (about 42 mmt) would put China’s self sufficiency rate for maize still at 86% (=261/303). Outlook 2009–2018  to capture expected 24  to 58  million tons (in cake equivalents). world demand and supply with several up- As a share of demand in China, these import ward adjustments for grains, feed and meat, volumes are not excessive (52 % and 42 % for the baseline Chinagro II scenario predicts edible oils and protein feeds respectively and that China would import about 16  million less than 20 % for the other shares). Yet, they tons of maize by 2030, assuming that gov- can be large for the rest of the world, with ernment tariff policies would allow large vol- carbohydrate and protein feed imports by umes of imports at low tariffs. Carbohydrate China accounting for 30–40% of world trade feed imports (feed other than maize that is and maize and edible oil imports accounting rich in carbohydrates, such as those based on for 15–20 percent. Nonetheless, based on sep- tubers and minor grains) would rise from 1 to arate simulations using the worldwide GTAP 14 million tons (in grain equivalents) and pro- model, world feed prices (including maize) in tein feed imports (feed rich in proteins such the baseline scenario only rise by about 5 % as oilseed cakes, wheat and rice bran) from in 2030 compared with 2005.88 But, the feed model with farm supply represented at the county level (2,885  counties). For each county, the outputs of 28 activities and nine land use types and livestock systems are accommodated. Consumption is modeled at the regional level, separately for urban and rural population, each divided into three income groups. The mod- el is calibrated on the 2005–2010 database and is quite unique in its high degree of spatial and social detail. It assumes 6–7 percent nonagricultural growth, moderate population growth (to 1,436 million people by 2030) with urbanization rising to 60%, continued intensification of the livestock sector with higher feed efficiency but lower use of residual animal feed, further trade liberalization, and the introduction of grain price support. 88  It concerns the average effect on world prices of the expected increase in China’s import based on the base scenario simulation. Relative world prices for maize, carbohydrate feed and protein feed would increase by 5.7%, 3.3% and 6.5%, respectively, or about 5 % on average. The effect is moderate partly because of feedback effects from a rising world price on China’s domestic production. Towards Modern Commercial Smallholder Farming 39 grain price rise may be higher if imports are animal products itself.90 Concerning the for- higher (as discussed in Box 6). This is an im- mer, the domestic production of potatoes also portant area for future analysis. provides a much more water efficient alterna- tive for animal feed (see Figure 15). Useful But predicting the impact of a relaxation of lessons could be learned from the experi- China’s maize self sufficiency ambitions is a ence of Anding County in Gansu, as it de- complex matter, which ultimately requires a veloped from a low productivity wheat pro- general equilibrium approach, which should ducing area into one of China’s three leading also include the effects of changing climat- potato clusters, thereby providing important ic patterns. From the qualitative back-of-the and remunerative employment opportunities envelope calculations above, it is concluded for its farmers.91 Meat and dairy imports are that given the economic and ecological cost also attractive from the “field� perspective as pressures on domestic cereal production, how the China’s virtual water content of meat and a gradual, predictable and moderate increase dairy products are much higher (estimated at in China’s maize imports would affect world 6.7 and 4.3 m3/ton) than this of animal feed. market prices in today’s tight food markets However, increased reliance on imported deserves to be explored further in a computa- animal products also reduces rural employ- tive general equilibrium setting. This fell be- ment and income earning opportunities for yond the scope of this review, but the first Chinese livestock farmers, which have been insights regarding the effects on the world found to contribute importantly to resolving prices provided by the CATSEI project are the “farm� problem.92 reassuring in this regard. Second, risks could be diversified through bi- But can the markets be relied upon to lateral partnerships and foreign land deals as deliver the necessary maize supply at well as vertical integration or broader strate- relatively stable prices? Given appropri- gic investments in agriculture where there is ate and timely engagement with the world still substantial potential for maize land ex- market and exporting countries, the answer pansion. The first two arrangements provide is yes. First, being primarily used as animal more direct control over the concerned food feed, the political sensitivity of maize is less trades. However, such arrangements, espe- pronounced than this of rice or wheat, the cially land purchases/leasing, must also be core staples. World maize markets are also responsive to the infrastructure needs of the more liquid and diversified than those of rice, hosting country and communities, maximize with financial instruments for hedging and employment opportunities for the local pop- securing supplies well established by now.89 ulation, work under governance structures And if feed grain shortages arise, domes- that represent civil society, and minimize en- tic and imported non-grain feeds (e.g. cas- vironmental externalities to be socially and sava and potatoes) remain an alternative, as politically viable and sustainable (Box 7). does the import of live animals or processed They could further be complemented with 89  Rice remains thinly traded in the international market (only 6–7  percent of global production), while 10–12 percent of global maize production is exported. 90  Zhou et al. (2008). 91  Zhang and Hu (2011). 92  Ma et al. (2006). The CHINAGRO model II 2005–2030 simulations highlight the critical contribution of livestock production to stemming the rising divide between farm and nonfarm incomes (Keyzer and van Veen, 2010). 40 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Figure 15 Grains (especially soybeans) have much higher crop water requirements than fruits and vegetables and much lower net return; cash crops and oil seeds are in between 0.8 Net Return/crop water requirement (US$/m3) 0.7 Watermelon 0.6 Tomato 0.5 Spinach Sesame Lettuce Cotton 0.4 0.3 Cabbage Apple Tobacco 0.2 Groundnut Sugarcane Maize Sorghum 0.1 Potato Rapeseed Grape Wheat Barley Millet Rice Soybean Sugar Beet Citrus Sunflower Pepper 0 0 500 1000 1500 2000 2500 3000 3500 Crop water requirement/output (m3/ton) Grains Fruits and vegetables Cash and oil crops Source: Liu, Zehnder and Yang (2007). Note: crop water requirement refers to crop evapo-transpiration accumulated over the growing period of the respective crop (Chen et al., 1995). The water requirement for rice includes evapo-transpiration and percolation. Net return refers to the difference between total revenue and material costs; labor cost is not included. Yield and price data for grains are based on 1999–2001 averages from the National Bureau of Statistics and FAOSTAT for other crops. Box 7 Opportunities and challenges of farming abroad – emerging experiences from Latin America Fisher and Shah (2010) estimate that there is globally still about 83.3 million ha uncultivated non-forested land available with potential for maize production and 82.8 million ha for soybean production in areas with less than 25 persons/ km2 and at less than 6 hours from a market. This corresponds to about half the currently cultivated maize and 90 percent of the currently cultivated soybean area. Together, Argentina and Brazil alone have the potential to add 20 million ha to their current maize area. They provide the most immediate potential for area expansion. Farmers are familiar with the pro- duction of maize and yields are already high (6.5 and 4.1 ton/ha respectively). Several African nations also have substan- tial potential for rainfed maize production (Angola, Tanzania, Zambia), though yields are low and access to infrastructure is often a problem (e.g. Ethiopia). With 22 and 10 million ha of uncultivated non-protected area suitable for rainfed soy- bean production, Brazil and Argentina also offer the most immediate potential for area expansion in soybeans, with much of the remainder situated in Africa, either in countries where it is already produced but yields are low, or in countries with potential but little current experience (e.g. Sudan, Democratic Republic of Congo, Mozambique, etc.). Despite the potential, Chinese purchases of vast tracts of land in Argentina and Brazil are increasingly making officials ner- vous, as related in several media articles such as the 27 May, 2011, New York Times article “China’s Farming Pursuits Make Brazil Uneasy�. As a result, Brazil’s attorney general reinterpreted a 1971 law in August 2010, making it significantly harder for foreigners to buy land in Brazil and Argentina’s president followed suit in April 2011, submitting a law to Congress lim- iting the size and concentration of rural land foreigners could own. In response, the focus is increasingly on leasing land as well as production agreements. In April 2011, Chongqing Grains signed for example a $2.5 billion agreement to produce soybeans in the Brazilian state of Bahia. Useful guidelines for host countries and investing countries, and for investing com- panies and for the local populations where the investments are taking place, are provided in Deininger and Byerlee (2011). Source: Fischer and Shah (2010); Deininger and Byerlee (2011); Barrionuevo (2011). Towards Modern Commercial Smallholder Farming 41 large scale and widespread investment in ag- countries collectively refrained from interven- riculture through bilateral development as- ing.This suggests that the successive food price sistance and foreign diplomacy, especially shocks of the late 2000s should be enough to in Africa, but also in neighboring countries motivate WTO members to negotiate a col- with untapped potential. In a similar vein, lective agreement to limit the extent of price- given the interconnectedness of the world’s insulating policies. The opening up of im- food problems, China could usefully and dra- porters’ markets comes indeed with a mutual matically increase its support to internation- obligation for exporters to keep their exports al agricultural research agencies such as those flowing, also during times of (perceived) de- of the Consultative Group on International clines in global supplies. Agricultural Research (CGIAR), in line with its emerging international responsibil- As a 10-year member of the WTO, and the ities. Support to raising agricultural produc- second-largest economy in the world, this tivity elsewhere has the added advantage that presents an opportunity for China to ex- it indirectly also fosters world food trade, ert a positive influence on global econom- which benefits all. Government to govern- ic governance. In a similar vein, increased ment trading partnerships on the other hand transparency over global grain stocks would remain imperfect substitutes for the trust further reduce price volatility caused by spec- building and better international coordina- ulative moves based on ill-informed percep- tion needed to foster world food trade. tions about global supplies.95 China’s support to greater grain stock transparency agreed Third, from China’s perspective, the reliabili- to during the June 2011 G20 meeting of the ty of world markets is largely endogenous, in ministers of agriculture in Deauville, France, that it results from coordination (or lack there- is a first step in this direction. Overall, taking of) among its major players, of which China is the lead on increased coordination and trust one. The typical response to commodity price building represents the first best plan of ac- shocks has been for exporters to impose ex- tion for China to enable greater reliance on port restrictions, while importers lower im- feed grain imports. It would yield the most port tariffs. These actions have the effect of durable results. boosting world prices higher than would have resulted from the initial shock only, while of- Continue providing income security to ten failing to meaningfully protect domestic address persistent pockets of food inse- populations from the initial price shock93 (al- curity and forcefully tackle micro-nu- though China has been quite successful in this trient deficiency. Despite remarkable suc- regard in 2008).94 These restrictive trade prac- cess in securing national supplies, massive tices during a commodity price shock repre- reduction in the incidence, depth and severity sent a classic collective action problem. One of poverty, and successful domestic food mar- country refraining from this type of insula- ket liberalization, a sizeable number of people tion faces greater shocks than would apply if is still food insecure.96 While many of them 93  Martin and Anderson (2011) estimate that about 45% of the price spike in rice markets in 2006–2008 was owed to restrictive trade practices, and 30% of the spike in wheat markets. These effects are large. 94  Fang (2010). 95  Slayton (2009). 96  According to the official statistics, 36 million people were still living below1196 Yuan per year or US$0.57/ day. At such low levels of income, people are still struggling to meet their daily minimum needs, including this of food. 42 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 still live concentrated in western provinc- does not only reduce poverty, but also contrib- es and the mountainous and ethnic minori- utes to economic growth. The migration path- ty areas, a substantial share lives now also dis- way offers some opportunities here, though persed across villages in non-mountainous, many of the poorer are also less able to mi- non-minority areas.97 And new issues of mi- grate, given lower education levels, and limited cro-nutrient deficiency such as anemia have access to information and lack of formal and emerged following the depopulation of rural informal labor recruitment networks. The ex- areas and the ensuing consolidation of prima- penses related to movement and labor search ry school children in boarding schools.98 costs and higher costs of health and education for migrants’ children in the cities pose fur- The need to move beyond securing nation- ther challenges. Development of small and me- al supplies in addressing China’s food prob- dium towns can provide more accessible off- lem to also incorporate household income farm employment opportunities for the poor and access to food has long been recognized. closer to home.101 Promoting agricultural de- It has given rise to a series of poor area de- velopment also holds important opportuni- velopment programs starting as early as the ties.102 Overall, it would require making the mid 1980s.99 In recognition of the wider geo- existing poor area programs more effective in graphic dispersion of the poor, these have the range of employment opportunities they more recently been supplemented by a rap- produce. Continuation of the ongoing expan- id increase in targeted income transfers (from sion of social protection system into the rural 2.5 billion RMB rural dibao expenditures in areas is further desired, especially for those un- 2005  covering 8.25  million beneficiaries at able to work, though the need for assessing its a rate of 76 RMB/person/month, to 39 bil- effectiveness in reducing poverty presents itself, lion RMB in 2009  reaching 47.6  million especially since the rapid expansion of the ru- people at a rate of 101 RMB/person/month). ral dibao program over the past couple of years. And anemia incidence among primary school boarders has now also attracted attention at Finally, initial policy responses to reduce ane- the highest level.100 mia incidence among primary school board- ers in Shaanxi and Ningxia by providing ev- Overall, ensuring access to food in the remain- ery student with one egg a day (or one glass ing pockets of hunger requires increasing em- of milk) are unlikely to suffice to overcome ployment opportunities for the unskilled poor micro-nutrient deficiencies in general, and and increasing the return to their labor. This iron deficiency anemia in particular. They 97  World Bank (2009) estimated their share at more than 50%. 98  Luo et al. (2012). Anemia incidence levels of 38 percent were recorded among primary school boarders in 8 of the poorest counties in Shaanxi. Prolonged iron deficiency impairs hemoglobin production, limiting the amount of oxygen that red blood cells carry. It leads to lethargy, fatigue, poor attention and prolonged physi- cal impairment, negatively affecting educational outcomes such as grades, attendance and attainment. 99  See Ravallion and Chen (2005), Chen, Mu, and Ravallion (2009), Christiaensen, Bhattamishra, Pan and Wang (2009), and Park and Wang (2010) for a description and assessment of different poor area development programs in China over the 1985–2005 period. 100  http://reap.stanford.edu/research/teachers parents_and_students_teaming_up_to_learn_about_overcom- ing_anemia/ 101  Currently, more than 60 percent of rural migrant laborers work in medium-large cities at prefecture lev- el or above (World Bank, 2009). 102  Christiaensen, Pan and Wang (2010). Towards Modern Commercial Smallholder Farming 43 don’t contain iron. A series of randomized ments further limit the scope for raising farm experiments of different treatment packages incomes through increased protection at the and sensitization campaigns (e.g. letters to the border, though some room remains. parents/innovative curricula) in collaboration with the respective provincial governments Creating a commercially viable smallholder are currently underway to identify more ef- agriculture will especially entail institutional fective interventions. Better nutritional out- innovations in the land, labor and rural capital comes improve educational performance103 markets to facilitate farm consolidation and an and can also reduce dropout rates from high orderly transition of labor out of agriculture as school in rural China, which are much high- well as an urbanization process that avoids ur- er than in urban areas. Given high returns to ban overconcentration and facilitates second- higher education, this will become increas- ary town development to productively absorb ingly important to enable the rural popula- a significant part of this labor in a buoyant ru- tion to increase their incomes and stem the ral economy, more like in Thailand and Taiwan rising rural-urban divide. (China) than in the Philippines and South Korea respectively.106 The balancing act is to 4.2 Rationalize Factor accommodate land consolidation and labor Markets and Use movements so as to remain self sufficient in the Institutional core staples (rice and wheat) at internationally Innovations competitive prices (the food problem), while at the same time maintaining commercially vi- Rationalize Factor Markets to 4.2.1  able livelihoods for a sufficiently large group Facilitate Farm Consolidation of smallholder farmers both through full and Rationalization of factor markets (land, part time farming. This will be critical to stem labor and capital) will facilitate land the growing rural-urban divide and maximize consolidation and the creation of com- poverty reduction (the farm income problem). mercially viable smallholder agricul- Indeed, given the current initial conditions, by ture. To remain competitive, domestical- 2030, China’s farming landscape will still be ly and internationally, Chinese farms must largely dominated by smaller holdings, by any grow in size, as has also been observed his- international standard (Box 4). torically in other high income countries (Box 8). Rising total factor productivity in Fostering land rental is the most practi- agriculture, even though historically high cal way forward in the near and medium and still inordinately important for the future term, while reforms in private land use (see point 4.3), is unlikely to suffice to close rights and their marketability proceed; the income gap with non-agriculture.104 The voluntary exchange platforms can also scope for a more rapid increase in food pric- help. As land can currently not be bought or es is also limited.105 China’s WTO commit- sold, land consolidation must happen through 103  Test scores among those provided with multivitamin with mineral supplements improved for example by 0.4 standard deviations (akin to moving from a “C+� to a “B� in the American grading system). 104  TFP has been growing at 2 per cent on average over the past two and a half decades, which was at least as fast as daily wage growth for male workers until the mid 2000s. Since then, rural daily wage growth for male workers has picked up substantially, growing on average at 9.1 percent between 2004 and 2007 (Zhang and Yang, 2011). 105  Between 2000 and 2010 the domestic grain food price index already rose by 73 percent. Increasing domes- tic food prices faster is unlikely and would not be politically palatable. 106  Otsuka (2007) and Christiaensen (2007). 44 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Box 8 Farm size rises in line with non-agricultural wages – insights from the US experience A close relation has historically been observed between the evolution of nonagricultural wages and the size of farms. As rural nonagricultural wages rise, farm operators seek ways to attain incomes comparable to what they can attain in other sectors. This usually implies substitution of capital for labor and an increase of farm size in line with nonagricultural wage rates, both to capture economies of scale arising from the indivisibility of inputs, but also to generate sufficient volume to yield incomes comparable with those attained outside the sector. The co-movement of non-agricultural wages and farm size observed in the United States for most of the 20th century is indeed striking in this regard. 200 14 180 Manufacturing wage (1992 US$/hour) 12 160 140 10 Farm size (ha) 120 8 100 80 6 60 4 40 2 20 0 0 1910 1930 1950 1970 1990 Average farm size (ha) Manufacture wage (1992US$/hour) Source: Based on Gardner (2002) Similarly, the pressure on land consolidation emanating from intersectoral labor competition in China was strikingly illus- trated by the numerical example discussed in Box 3. It showed that to generate a similar increase in income from rice farming as the 2003–2008 observed increase in rural household incomes, average farm size would have had to increase six times in 5 years (or 8 times when excluding the increase in subsidy), implying that one in six farmers would have to give up farming each year. These calculations already take into account a 52 percentage point rise in the grain price index between 2003 and 2008. And while the upward trend in grain prices has continued into 2011, rising domestic grain prices much faster as a way to increase incomes from farming is unlikely and would not be politically palatable, even though rice prices remain well below the world market price (though not those for wheat and soybeans). land rental markets. Even if land sales were al- the practical way forward in the near and me- ready possible, they are likely slower and un- dium term for achieving an efficient land al- likely to function competitively as a means location across households, while reforms in to facilitate a swift and steady land realloca- private land use rights and their marketabili- tion across households because of imperfec- ty proceed.107 The trend in land rental, by ag- tions in credit markets. Land rental markets are ing farmers or farmers who have migrated to 107 As highlighted by Kevane (1996), if at least one of the three factor markets (labor, land sales, or land rent- al) functions competitively, an efficient allocation of resources can be achieved under the assumption of con- stant returns to scale. In the near to medium term this is most likely to be the case for the land rental market. Towards Modern Commercial Smallholder Farming 45 Figure 16 The share of agricultural land being rented is rising rapidly 20 15 10 % 5 0 1988 1995 2000 2005 2008 Source: Huang and Rozelle (2011). cities, is indeed strongly positive, from 7 per- the benefits of combining this under a single cent of agricultural land in 2000, to 19  per- agency. Recent evidence underscores the sin- cent in 2008 (Figure 16). In the more devel- gularity with which land certification can in- oped eastern provinces such as Zhejiang, it crease productivity (by up to 30 percent), not even reaches as high as 40%. There are also re- so much through increased investment, but ports of complete village reorganizations into rather by fostering urban migration and free- large, company run farms whereby remain- ing up land for rental by those specializing ing villagers give up their land in return for in farming.109 Third, more transparency and housing (and lifetime compensation) at the bottom up accountability in the governance urban fringe. The scale of such consolidation structures of the rural collective will be need- initiatives is so far unknown, as are the long ed to reduce questionable land readjustments term welfare effects for the farmers involved. within the collective. Or, as the contradictions Overall, lingering concerns about tenure se- between collective practices and the trend to- curity,108 uncertainties related to land registra- wards private land use rights, permanent ten- tion and substantial coordination costs contin- ure security, and the marketability of land use ue to hamper consolidation. These costs are rights are growing, China could also begin even higher in mountainous areas, where plots the gradual transition from collective owner- are smaller and more scattered. ship to state ownership of rural land instead of seeking to narrow the governance deficit Better tenure security is needed to deep- within the collective. This could be a way to en the rural land rental market. This re- simplify China’s land tenure framework, over- quires a number of specific land management come its inherent contradictions and gradually related steps. First, existing land use rights need transition to a unified land market. to be secured by expanding the renewability and duration of existing contracts, improv- Government assisted voluntary exchange ing documentation, and enhancing aware- platforms could further assist both in ness of existing rights. Second, the registra- plot and farm consolidation. Land consoli- tion of farmland needs to be gradually scaled dation programs, which aim to consolidate spa- up, with international experience pointing to tially dispersed fragments of farmland to form 108  Kimura, Otsuka, Sonobe and Rozelle (2011). 109  Deininger, Jin and Xia (2011). 46 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 larger and more cohesive plots and farm hold- migration, especially circular migration, and ings, are not new to China.They have been in- continuous relaxations of the household reg- stalled since the 1980s. But, implementation by istration (hukou) system, further reforms of local governments has often been slow, as the the hukou system are desirable to free up land consolidation process typically involves many for farm consolidation and help farmers sort households, which raises transaction costs.110 themselves according to their comparative ad- Government initiated land consolidation pro- vantage.112 When accompanied with small and grams have been successfully applied else- medium town development, part time farming where as well, with a rigorous recent evalua- could also be promoted, especially in moun- tion of Japan’s Farmland Improvement Projects tainous areas where opportunities for land con- (FIP) showing clear improvements in produc- solidation are more limited. Such a strategy can tion conditions due to plot consolidation, en- build on the “leaving the village without leav- abling mechanization through machinery ser- ing the country side� policy of the early 1990s, vices in the plains, while encouraging farmers’ which proved hugely successful in generating exit in steeper communities by promoting el- rural nonfarm employment nearby through the derly farmer retirement.111 development of small towns in coastal areas.113 Enhancing rural social protection While these coastal towns often benefited will also help free up land for renting. from access to export markets or spillovers Cultivated land continues to provide an in- from growing cities, the conditions are much formal safety net against unemployment, more favorable now to absorb the next wave sickness and old age. Improving land tenure of urban migrants by developing small and security must thus go hand in hand with scal- medium towns in China’s interior provinc- ing up rural social protection to facilitate land es. Congestion increasingly plagues the coast- rentals and land consolidation. Important al metropoles, coastal provinces are climbing steps in this direction are anticipated under up the skill and value chain, and labor inten- the 12th 5-year plan, including the expansion sive industries are increasingly moving inward. of low income welfare payments, rural health Central support of such a strategy is consistent insurance, and rural pensions. Success in so- with the objective of reducing the regional and cial insurance will help in freeing up land and rural-urban divide. It requires increased invest- facilitating land consolidation, as will im- ment in rural education and improved rural proved labor mobility. transportation to link towns with their rural hinterlands and to link farmers with their off- Removal of remaining barriers to labor farm jobs in rural towns, often in related agro mobility combined with small town de- industries. Consistent with the gradual reform velopment further helps agricultural labor approach, the next reform phase of the huk- sort itself according to its comparative ou system should focus on facilitating migra- advantage. Despite widespread rural-urban tion to these small and medium towns (Box 9). 110  Tan, Heerink, and Qu (2006). 111  Arimoto (2011). 112  Examining the impact of rural-to-urban migration on rural poverty and inequality in a mountainous area of Hubei Province using data of a 2002 household survey Zhu and Luo (2010) find that 1) farmers with higher expected return in agricultural activities and/or in local nonfarm activities choose to remain in the country- side, while those with higher expected return in urban nonfarm sectors migrate; 2) households with binding land constraints are more likely to migrate; 3) poorer households benefit disproportionately from migration. 113  Gale and Dai (2002). Towards Modern Commercial Smallholder Farming 47 Box 9 Part-time farming – an important path out of poverty in Latin America In addition to modernizing agriculture on smallholder farms, pluri-activity or part time farming has also been a success- ful, though largely ignored path out of poverty for many farmers in Latin America. Part time farming is already the reality on many of today’s farms in China, given the large amount of circular migration. It is likely to hold most promise in moun- tainous areas where transaction costs in accessing food markets are higher and shadow prices (for self sufficient house- holds) and purchase prices (for net buying households) are thus more likely to exceed those for net sellers. In such an en- vironment, part time farming can be economical even when market prices are too low for net sellers to be competitive. As farming in part-time farming households is more often in the hands of women and elders than of adult men, access to labor saving technology is even more important. This further underscores the importance of machine rentals in overcom- ing indivisibility of machine inputs (see below). Technologies should also not be excessively sensitive to discontinuities in the presence of adult workers, so that they can flexibly respond to off-farm employment opportunities. Source: de Janvry and Sadoulet, 2000. As farms consolidate, access to credit example through the formalization of infor- becomes more important, though ma- mal lenders or cooperative financial institu- chine rental markets can already go a tions rooted in village-level bottom-up or- long way in overcoming credit con- ganizations. straints. While remittances and informal channels largely sufficed to finance mod- But credit market imperfections can also be ern inputs in the past, mechanization of mitigated through institutional innovations grain cultivation will require greater access such as machine rentals. The use of machine to bank capital in rural areas. According to renting has historically been practiced in the China Bank Regulatory Commission fi- many Asian countries to capture economies nance service map database, only 31.4  per- of scale114 and is also on the rise in China. cent of rural households had ever bor- If properly coordinated, machine rentals pro- rowed from banks at the end of 2009, and vide a practical and convenient way to sub- only 30.1  percent of micro- and small-en- stitute capital for labor, also for part time terprises. Most agricultural loans (85  per- farmers, who are often most in need of la- cent) come from Rural Credit Cooperatives bor saving technology. It helps overcome the (RCCs), instead of banks. A comprehensive indivisibility of machine inputs when cred- regulatory and supervisory framework for it markets are absent or imperfect. The gov- rural and micro-finance institutions should ernment has rightly been supporting the de- be developed, with the government focus- velopment of such machine service delivery ing on creating the infrastructure and mar- organizations through machinery subsidi- ket environment for rural finance instead zation, though support through providing of direct public provision of financial ser- credit provision, perhaps based on leasing, vices. Competition should be advanced, for might be more effective.115 The development Takahashi and Otsuka (2009). 114  Machinery subsidies are available to individual farmers, so-called specialized households and agricultur- 115  al machine service delivery organizations. Starting with CNY 480 million in 2005, machinery subsidies rose to CNY 17.8 billion in 2010. The subsidy typically compensates 20–30 percent of the purchase price and was initially targeted at the mechanization of wheat harvesting and rice planting, with trials in 2007 to expand to the mechanization of maize harvesting. 48 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 of better models to support mechanization critical in accessing and expanding both do- deserves further investigation. mestic and export markets. The concentra- tion of animals in larger production units Together, machine rental and land consoli- further facilitates animal waste management, dation can go a long way to help smallhold- including through biogas digesters, there- ers remain intersectorally and internation- by reducing nonpoint source pollution and ally competitive, either as part time farmers methane emissions.117 This mitigates agri- (mountainous areas) or as commercial small- culture’s field problem. Following the en- holders. This will be critical to help China’s actment of the China Farmers Professional agriculture simultaneously resolve its farm Co-operative Law (FPCL) in 2007, there has and food problem. Complemented with the been a rapid expansion of farmers’ coopera- smart use of agricultural subsidies in eco- tives. By the end of September 2008, there compensation schemes, smallholders could were 79,600 registered farmers co-operatives, further become a powerful force of natural with a membership of 1.08 million, 96 per- resource restoration and conservation, ad- cent of which were farmers. dressing agriculture’s field problems (see also section 4.4). But there are rising concerns that the emerging cooperative structures do not 4.2.2 Make Producer Cooperatives enable smallholders to capture the full Work More Effectively For benefits from high value products. Two Smallholders types of cooperatives have emerged, the farm- Farmer cooperatives provide a natu- er-led cooperatives and the “Company + ral institutional route to enable small- Household� cooperatives. In the latter model, holders to capture the rising emerging shares are controlled by a leading agribusiness economies of scale in the processing and other key shareholders (e.g. government and marketing of high value agricultur- officials) with farmers as participating mem- al products. The need for volume, consis- bers. Farmer-led cooperatives on the other tency and quality in processing and market- hand are usually organized in a blockholder ing high value agricultural products induces structure. They are controlled and owned by vertical integration of the supply chains. This one or more large, wealthy households with happens often at the expense of smallholders. smallholders participating as peripheral mem- Against this background, producer coopera- bers. Voting rights and profits are usually pro- tives are a natural institutional route to en- portional to the capital brought in. These are able smallholders to reduce transaction costs the two structures increasingly observed in in- in ensuring volume, consistency and qual- tensive animal husbandry.The extent to which ity and thus a potentially potent vehicle to they are starting to permeate the fruit and veg- link smallholders to the dynamic high value etable, and even the grain sector, is unclear. markets, which provide an important oppor- Among the two types, the C+H structures are tunity to address the “farm income� prob- often preferred by local government, and sup- lem. Tightened control over the production ported through tax breaks, subsidized loans process also increases food safety.116 This is and the provision of land. 116  In effect, downstream agro-processors (e.g. dairy firms) are increasingly procuring only from larger pro- duction entities, precisely for this reason. 117  Methane and nitrous oxides from soils (from inorganic and organic fertilizer application) are the two po- tent non carbon dioxide greenhouse gases (GHG). Towards Modern Commercial Smallholder Farming 49 While these new cooperative structures pro- provides hope in this regard. It underscores vide smallholders with access to the high val- the determination of China’s policymakers ue markets, smallholder farmers forego in ef- and the resilience of the system to respond. fect most of the benefits. They are mostly excluded from the decision making process Particularly, following the important fall in the cooperatives and miss out on the li- back in the research system’s performance by on’s share of the profits and the government’s the late 1980s, a nationwide reform of the support, which is capitalized in the assets research system was launched to increase its of the core members. Also, the monopson- productivity. Funds were shifted from insti- ic power of the downstream agro-process- tutional support to a more competitive dis- ing companies continues to persist. In con- tribution of research grants and applied re- clusion, despite their important potential in search institutes were encouraged to rely mitigating the “farm problem� and reducing more on the commercialization of their own the rural-urban divide, cooperatives are cur- research. In addition, following years of stag- rently not yet living up fully to that promise. nant growth during the 1990s, government- As these two types of cooperatives are rap- sponsored R&D increased by 5.5  percent idly becoming a part of China’s agricultur- annually between 1995  and 2000, acceler- al landscape, these developments need to be ating to about 10 percent between 2001 and monitored more closely and steps should be 2007, on par with national growth. Between taken to better protect the interests of minor- 2009 and 2010, the government was expect- ity shareholder, while the formation of mem- ed to further double its spending on agricul- ber-owned and controlled farmer co-opera- tural R&D. During the past decade, the in- tives should be encouraged. creases in investment in agricultural research and development have been the most rapid of 4.3 Continue any large nation. Strengthening the Provision of (Rural) Nonetheless, much more investment in ag- Public Goods ricultural R&D will be needed. Despite its rapid growth, at 0.5–0.6  percent of agri- 4.3.1 Invest More and Better in cultural GDP in 2007, China’s agricultural Agricultural Technology R&D spending still lags behind this of most Continue the increase in investment in developed countries and the world’s average agricultural R&D to foster long term of 1 percent. It is estimated that to maintain productivity growth and retain small- the 1995–2005  yield growth investments in holder competitiveness. Given constraints agricultural R&D will have to increase by on expanding water and modern input use 15 percent annually between 2005 and 2020 and institutional limits on the speed of land (i.e. by 43  billion Yuan in 2005  prices or consolidation, growth in total factor produc- US$5.25 billion).118 tivity (TFP) will be key to keep smallholder farmers competitive and raise their incomes. China is increasingly betting on agri- That China managed to maintain an aver- cultural biotechnology, including GM age agricultural TFP growth of about 2 per- corn, to promote TFP growth in the cent over the past decades, even in the face future. In 2008, it supplemented its ongo- of set-backs during the course of this period, ing research on agricultural biotechnology, 118  Chen and Zhang (2010). 50 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 which involved more than 20 crops and live- transgenic crops, having been successfully stock, fishery and forestry products, with the adopted in the US and most Latin American 26 billion Yuan (US$ 3.8 billion) 2009–2020 countries. China is one of the world’s larg- “Special Program� focused on supporting re- est consumers of GM soy, though it has not search on and the development of 5 genetical- been approved for domestic, commercial- ly modified staple crops (rice, wheat, maize, scale production yet.123 According to officials, cotton and soybeans) and 3 types of livestock China could be a leader in GMO foods, clon- commodities (hog, cattle and sheep). The fo- ing, large-scale transgenic technologies and cus is thus on crops for the domestic mar- new breed promotion by 2020. ket in which it misses a natural comparative advantage. China is also investing heavily in But genetic engineering alone will not suffice bio-safety management institutions to mon- and potential shifts in consumers’ attitudes itor and supervise the new technologies and towards GMO foods are lurking in the back- enable the issuance of commercialization ground.124 While consumer attitudes towards permits. GM crops have so far played little part in shaping the approach towards bio-safety reg- China was one of the first countries to grow ulation, public information and understand- GM crops commercially,119 and now ranks ing of GM crops has remained limited. How among the top six countries in terms of area broader awareness about GM crops would af- of land used to cultivate GM crops.120 The fect consumer acceptance is an important de- most prevalent GM crop is cotton (Bt). Since velopment to be watched. Against this back- being approved for commercialization in ground, being an animal feed, GM corn may China in 1997, transgenic species of cotton have more potential in the short run.125 now account for over 70% (3.9  million ha) of all land planted with cotton.121 Of China’s Much will also need to be gained from major grain crops, GM rice and maize have investments in agricultural ecology and been approved for commercialization,122 con- the development and widespread adop- sistent with heightened concerns about main- tion of more sustainable agronomic taining self sufficiency in these two staples. practices. Such a shift in emphasis is consis- They are not being adopted on a large scale tent with the functional shift in agriculture as yet. GM soybeans also hold promise. Biotech China modernizes, from sole pre-occupation soy is one of the world’s most widely planted with the food problem to also addressing the 119  Huang J.K. et al (2004). 120  Nábrádi and Popp (2011). 121  James (2011); NBS (2011). 122  Chen M. et al (2011). GM tomatoes and papaya have also been approved for commercialization, though are grown on a relatively small area (see Pray et al, 2011; Huang J.K. et al 2002). 123  Nábrádi and Popp (2011); Xia L.Q. et al (2011). 124  The issuance of bio-safety certificates for Bt rice production in 2009, with an estimated 10 million rice growing households (or 440 million people) potentially benefiting from the technology, provoked much de- bate in China, despite its enormous potential. 125  Recent unofficial reports about a potential push forward within the next 5 to 10 years of GM maize to re- spond to the rapidly rising demand pressures are revealing in this regard. Concerns from various sides that GM crop research, regulations, and later-stage business operations may not yet be mature to commercialize are mentioned as the key reasons for a potentially delay in the commercialization of GM rice and wheat beyond the next 5 to 10 years. As animal feed GM maize is less likely to face the same resistance (Economic Observer via GM Watch, Jiang Yunzhang, October 12, 2011). Towards Modern Commercial Smallholder Farming 51 farm and field problems. Since the late 1990s, Public funding of extension agents be- agricultural R&D has begun to pay attention comes more important in shifting cul- to sustainable development (the field prob- tivation to more sustainable practices. lem) through a series of core environmen- Sustainable agronomic practices often require tal initiatives,126 including a national program upfront investments while their effects often on balanced fertilization and integrated pest materialize only after a couple of seasons. This management and a number of initiatives sup- contrasts sharply with the more immediate porting research on the impacts of climate effects of the modern input packages (hybrid change (see section 4.6). Given water scarcity, seeds, fertilizer, irrigation), which were often widespread non-point source pollution and also adopted despite malfunctioning agricul- important economic gains from lower input tural service systems. Transferring sustainable use, these areas of investments will need to agronomic practices to farmers (including re- be ramped up. duced fertilizer use) usually requires substan- tial face-to-face time between farmers and Key technologies include zero or low till- agricultural extension agents. This can be age in grain production and the expansion of achieved by strengthening the ongoing re- green belts (to 10–100  meters) along water- versal to institutional funding of extension ways to capture run-off before it enters sur- agents. After the 1988 reforms, which shift- face waters, especially in areas where inten- ed the publicly funded extension system to a sified livestock is concentrated (East Region fee for service system, extension agents were ) and over fertilization of crops is rampant found to spend only 81 days per year provid- (Central, West and South West Regions). ing agricultural services, with those partial- Slower releasing chemical fertilizers can fur- ly funded by the government spending only ther help combat overuse of fertilizer among 27 days.128 In addition and more broadly, de- migrant farmers absent at the optimal mo- volving control over part of the public ex- ments for fertilizer application. Meteorology tension funds to the producers or producer and soil based precision farming and im- cooperatives, who could subsequently hire proved water management through advanced extension agents themselves, could further technologies127 and evapo-transpiration mon- make extension services more responsive to itoring (ET) can help in addressing wa- the farmers’ needs and thereby making them ter scarcity, not least in the northern plains, more effective. where water scarcity is most dire (see further section 4.5). Solar power and biogas from ag- Better alignment of research with the ricultural residuals and animal waste can help ongoing structural change of the sec- save energy. Continued implementation of tor (from crop to non-crop) is recom- the National Land Conversion Program of mended. Research allocations among agri- sloped farm land into forest, shrub or grass- cultural subsectors have not kept up with the land will help fight erosion and land degrada- evolving restructuring of agriculture. Grain tion, an important unfinished challenge, es- security has been the key objective for public pecially in the western regions. agricultural R&D, with about half of public 126  Some of the key initiatives include the Grain for Green program, the South-North Water Transfer project, the Three North Shelter-Belt program, and Ecological Programs. 127  With only about 800,000 ha, or about 1.5 percent of its irrigated land, under modern irrigation, China still has very low adoption rates of modern irrigation technology such as sprinkler irrigation, drip irrigation and micro irrigation (Chen and Zhang, 2010). 128  Hu et al. (2009). 52 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 agricultural R&D going to crops.129 This has of China’s agricultural scientific and techni- remained virtually unchanged over the past cal advances are not adopted in practice (only two decades, despite the rapidly rising im- 30–40 percent compared with 65–85 percent portance of the non-grain sectors. The gap in developed countries). Excessive competi- in public investment in the non-grain sec- tion and decentralization of resources fur- tors (especially animal husbandry and food ther lower research efficiency. Some of these processing) has been partly picked up by the tendencies might be remedied by promot- private sectors, whose investments have in- ing a select number of “elite� scientists and creased dramatically, from less than 2 percent research groups. More emphasis should also of total public agricultural R&D being pri- be placed on proper monitoring and rigor- vate in 1999  to 22  percent being private in ous data driven evaluation systems to provide 2006. The latter is still well below the 50 per- timely feedback about the success and failures cent of total public R&D expenditure ob- of the myriad of research and technology ini- tained in most developed nations. But, to en- tiatives being launched. able smallholders to benefit maximally from rising demand in high value product pro- 4.3.2 Target Investment in Rural duction, public research investments in veg- Education and Infrastructure etables, livestock, and fish should also be in- In addition to agricultural R&D, increas- creased. More attention should also go to the ing investment in infrastructure and rural development of smaller labor saving tools and education has also high payoffs in miti- equipment that are also accessible to part- gating both the food and farm problems. time and female farmers. Extensive research on the returns to public in- vestment in China (and a series of other coun- A better mix of basic and applied re- tries) carried out by the International Food search and a series of institutional re- Policy Research (IFRPI)130 confirms the crit- forms can further increase efficiency of ical importance of agricultural R&D for in- research spending. First, despite efforts to creasing agricultural GDP (the “food prob- encourage basic research, most spending still lem�). It yielded the highest return per Yuan goes to applied research (24 percent in 2007) of public investment and closely tracked the and development (70 percent in 2007), leav- returns to rural education in reducing pover- ing only 6 percent for basic research. By com- ty. Public investment in rural education also parison, the United States, France, Japan, and contributed most to increasing rural incomes, South Korea spend between 12 (South Korea) reducing the rural-urban divide (the “farm and 27  percent (France) on basic research. problem�). In this, it was closely followed by This partly explains the limited innovative rural roads, which were not only very effective capacity of China’s agricultural R&D sys- in increasing rural incomes, but also proved to tem. Despite a rapid increase in patents, they yield higher returns than investment in high- are largely utility models or design patents, ways.131 The marginal returns to low grade and not invention patents. Moreover, many roads (most of which are rural) were estimated 129  During 1986–95, about 49 percent of public agricultural R&D in China went to the crop sector, 10 per- cent to forestry, 12 percent to livestock, 7 percent to fisheries, 5 percent to agricultural services, 9 percent to water conservation and 6 percent to primary food processing. This division of funds remained virtually un- changed, with 48 percent going to the crop sector, 9 percent to forestry, 6 percent to livestock and 5 percent to fisheries during 2001–2007. 130  Fan, Zhang and Zhang (2004). 131  Fan and Chan-Kang (2008). Towards Modern Commercial Smallholder Farming 53 to be higher than those to high grade roads nurturing cluster development deserves spe- across the board, i.e. in increasing overall GDP, cial attention, following the example of clus- as well as urban and rural non-farm incomes, ter based production in the coastal areas to with the returns to low grade roads in terms overcome a series of factor market constraints of rural non-farm income larger than those (e.g. capital market).132 For the most remote of urban GDP. Interestingly, low grade roads areas and fragile environments, the marginal proved also more effective in reducing urban returns to infrastructure investment may de- poverty than high grade roads. cline too quickly as costs rise rapidly, making outmigration and social protection measures Focus investments in rural infrastructure the more viable options. in lagging regions and combine them with cluster development. The IFPRI Foster investment in rural education findings further suggest that the returns to ru- through governance reforms and target- ral education and rural roads are not only large ed transfers in lagging regions. In addi- (and larger than those in urban areas), they tion to raising investment in rural roads, China also highlight substantial differences across re- has also increased its attention on rural educa- gions. When it comes to increasing rural in- tion. But, local governments still bear a large comes (including rural nonfarm), the returns share of the burden to educate especially the were highest in the coastal regions. When it children of migrant workers, who often stay comes to reducing poverty and inequality, behind with their grandparents, while their they were highest in the western regions. To migrated parents work and pay taxes in the de- be sure, these (marginal) return estimates are veloped regions. Following fiscal decentraliza- calibrated on data from the early 2000s, and tion, local expenditures are more tightly linked China has substantially increased its public in- to local revenues, while local responsibilities vestments in western provinces and rural areas for the provision of local public good services under the “Go West� program (10th five year such as education, roads are remained at sim- plan going from 2000–2005) and the “New ilar levels. As a result, poorer counties with a Socialist Countryside� (11th five year plan). smaller tax base, see themselves unduly bur- Since the mid 2000s, overall regional inequal- dened.With incentives for local authorities bi- ity has also come down slightly, hinting at a ased towards reaching economic growth tar- potential pay-off of these programs. gets, inducing a preference for infrastructure investment as opposed to social spending with But, with labor costs rising rapidly along the much more delayed pay-offs, spending on ru- coast and many previously inaccessible interi- ral education in inland provinces suffers. or regions now better connected through the expanded road network, many rural off-farm A disproportionately larger population to opportunities are likely to open up, as busi- serve with less resources at hand, has result- nesses relocate inland following outsourcing ed in substantially less spending per capi- by urban and coastal production centers. This ta on education and health in inland than in increases the returns to rural roads and small coastal provinces—the difference estimated town development in interior China and pro- at a factor 1.5.133 High boarding costs are in- vides important opportunities for a buoy- deed often cited as an important reason for ant rural economy. In this, the potential of early drop out of secondary school in poorer 132  Jiangqing and Zhang (2009). 133  Yao (2009). 54 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 rural areas and prohibitive costs also pre- of awareness of food safety issues among pro- vent many rural children from continuing ducers, consumers and the private sector. to college. Conditional cash transfers, simi- Such a lack of knowledge could be overcome lar to the Progressa program in Mexico (now by massive awareness campaigns and great- Opportunidades) could be considered, with a er clarity about the legal and blacklisted food recent trial in Northwest China also showing additives. But, the food safety challenges go promising results.134 It will further require well beyond a benign lack of understanding. more experimentation with governance re- They are mainly institutional. form, including for example the inclusion of social development indicators in cadres’ per- In particular, the legal and regulatory frame- formance contracts combined with an exten- work remains incomplete and fragmented, sion of their tenure to encourage greater at- with too many agencies involved in its imple- tention to social outcomes. mentation and enforcement. Inefficiencies are further compounded by a lack of interagen- 4.3.3 Tackle Food Safety Issues cy coordination and clarity about their respec- More Effectively tive roles and responsibilities.137 A rigorous risk Better education, consolidation of re- based monitoring and testing system remains sponsibilities among government agen- missing, and the incentives and capacity in the cies, separation of risk management and private sector to embrace such a system re- risk assessment, and shifting responsi- main too low. China’s authorities have become bility to the food industry would go a acutely aware of these challenges, but have so long way in improving China’s food far not managed to address them effectively. safety.135 Despite enormous efforts of the While food safety scandals are not unique to government over the past decade in improv- China—Belgium’s dioxine crisis in 1999 fol- ing its food safety policies, regulations and lowing mixture of dioxine-contaminated an- institutions at all levels, frequent food safe- imal fat in animal feed just being one of the ty scandals continue to damage public health more illustrious examples138—tackling food and undermine consumer confidence in safety issues forcefully poses an immediate and Chinese agricultural produce, at home and urgent agenda for China’s agriculture, one be- abroad. They affect especially livestock prod- fitting its ambitions of becoming a modern, ucts and fruits and vegetables and prevent harmonious and high income society. Chinese agriculture from benefiting fully of the employment and income generating op- This will require: portunities that rising domestic and interna- tional demand for high value products pres- • An upgrading of the legal frameworks ents.136 Part of the problem is continued lack and regulations to cover the whole food 134  A recent randomized trial of a conditional cash transfer program on a sample of 300 junior high school stu- dents in a nationally designated poor county in Northwest China showed a reduction in drop out by 60 %, from 13.3 % in the control group, to 5.3 % in the treatment group. The program was most effective for girls, younger students and the poorest performing pupils (Mo et al., 2011). 135  World Bank (2008). 136  Imported dairy products nearly quintupled in volume in 2009, the year after the melamine scandal. Foreign brands now account for half of all infant milk powder sold in China (New York Times, 2011). 137  For example, the Commerce Ministry supervises pork slaughterhouses, but beef and poultry slaughter- houses fall under the Agriculture Ministry. 138  Covaci et al. (2008). http://foodsafety.k-state.edu/articles/316/belgian_dioxin_crisis_risk_comm.pdf Towards Modern Commercial Smallholder Farming 55 production, processing and marketing through institutional innovation and invest- systems. It should include the gener- ment in technology and rural infrastructure, al principle that any deliberate adulter- has so far been advanced as the major vehicle ation of food products or negligent mis- to resolve the farm income problem. But as il- handling of food that could endanger lustrated in the numerical example in Box 3, consumer health should be considered a these may not materialize fast enough and are criminal offense. unlikely to suffice for everyone, raising the • A clarification and streamlining of the in- pressures for more direct (and visible) sup- stitutional structures that strengthens ac- port. Such pressures have been encountered by countability at all levels. In this, provin- countries across the world as they transitioned cial governments must take on significant through their structural transformation139 and responsibility for implementation—espe- have usually given rise to a rapid increase in cially for monitoring and surveillance— agricultural subsidization and protection. This under centrally mandated guidelines. process is also being played out right now in Overall, it will require a long term com- China. mitment to open dialogue, transparency, and extensive training of relevant gov- Producer support has risen substantially over ernment officials. the past decade, from being negligible around • A focus of government input on food the turn of the century to 17 percent of gross safety responsibilities that are inherently farm receipts in 2010 (Figure 17). Though public, such as ensuring compliance with fluctuating in an attempt to balance produc- laws and regulations through a risk based er and consumer interests, especially during monitoring and testing system, enhanc- the 2007–2008  food price crisis,140 (distor- ing awareness, distributing good agricul- tionary) market price support141 has been the tural practice and planning infrastructure main, and since 2009, a rapidly increasing in consultation with the private sector. source of support for Chinese farmers. But • The promotion of private sector action budgetary transfers/subsidies have also in- through targeted support to enhance creased rapidly, from being negligible (RMB their capacity, as well increased incen- 100 million) in 2002 to about RMB 147 bil- tives to hold the private sector liable for lion (US$21.5  billion) in 2010 (Figure 17). food safety. They started with direct income transfers based on grain planted areas in grain surplus 4.4 Support Rural Incomes producing provinces in 2004 and have since While Avoiding the been complemented with rapidly increasing Subsidy Trap input subsidies for agricultural chemicals, which now make up the bulk of the subsi- As other countries during their struc- dies. Subsidies for improved seeds, machin- tural transformation, (Japan, Europe and ery, and since 2007, also insurance, have also the US), China has started to increase been growing rapidly over the past couple of its support to its farmers. Farm expansion years (Table 4). 139  Timmer (2009). 140  The negative market price support in 2008 was largely driven by a dramatic rise in world rice prices that was not transmitted to the domestic markets (Fang, 2010). 141  This is represented by commodity output in Figure 17 and comes through tariffs, tariff rate quotas and state trading combined with minimum guaranteed prices for rice and wheat. 56 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 Figure 17 Support to agricultural producers rising rapidly in China, most recently thru price support 20 15 % of gross farm receipts 10 5 0 –5 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Support based on: Commodity Output Input Use Current A/An/R/I, production required Non-current A/An/R/I, production required Non-current A/An/R/I, production not required Non-commodity criteria Miscellaneous Source: OECD (2011). Table 4 Rapid increase in subsidization of agriculture 2002–2010 New Variety Comprehensive Billion Grain planting subsidy Extension Machinery subsidy on agric Ag yuan (direct payment) Payment subsidy inputs insurance Total 2002 0 0.1 0 0 0 0.1 2003 0 1.1 a 0 0 0 1.1 2004 11.6 2.1 a 0 0 0 13.7 2005 13.2 3.1 a 0.5 0 0 16.8 2006 14.2 4.1 1.9 a 12 0 32.2 2007 15.1 6.7 3.3 27.6 2.15 54.9 2008 15.1 12.1 5.6 71.5 4.87 a 109.2 2009 15.1 19.8 13.0 79.5 9.02 a 136.4 2010 15.1 20.4 17.8 83.5 10.3 147.1 Sources: OECD (2009, 2011); Lei Meng (2010). a linearly interpolated due to missing observations But to avoid growth in economically eliminated and decoupled (conditional) and environmentally costly subsidies and income transfers expanded and targeted to maintain consistency with WTO commit- support farmers’ incomes. Even though the ments, agro-chemical subsidies should be early experience with the comprehensive input Towards Modern Commercial Smallholder Farming 57 subsidies was not found to distort input alloca- 4.5 Improve Agricultural tion and cropping decisions,142 China may rapid- Water and Animal Waste ly use up its WTO allowances when continuing Management along the current path.143 Moreover, in addition to the comprehensive input subsidy, there is an Base water management on actual con- additional set of policy measures aimed at low- sumption and reduce pollution. To tack- ering the prices of chemical fertilizers.144 These le China’s growing water scarcity and its un- have been lowered from CNY 89.5  billion in equal regional distribution, water use in 2007 to an estimated CNY 35.6 billion in 2010, agriculture must be more actively man- but should be eliminated altogether to discour- aged. In addition to reducing overall demand age current overconsumption of fertilizers and through increased reliance on import of wa- remedy nonpoint source pollution. ter intensive crops, there is now also substan- tial scope to develop a water management A general way forward to avoid input subsidies system based on the monitoring and regula- and price supports to meet WTO commitments tion of actual consumption using more so- while continuing support to farmers, is to ex- phisticated measures of water consumption/ pand (conditional) income support policies, de- evapotranspiration. In particular, the amount coupled from production, in addition to bet- of water actually consumed in agriculture ter targeting subsidies to reign in their growth. can now be measured through satellite based Unconditional decoupled income support pro- remote sensing and geographic information grams have been successfully applied in Mexico system technologies. under the Pro-Campo program, but conditions could be usefully added to simultaneously ad- Better water management in agriculture also dress “field problems�, as currently practiced requires better pollution control. On the under the Grain for Green program. Similarly, one hand, agriculture is the most important farmers’ incomes could be supplemented when source of nonpoint pollution, primarily relat- they adopt more sustainable land management ed to increasing fertilizer and pesticide run- practices. Other innovative uses of income sup- off from farmland and infiltration of livestock port include the issuance of advances against waste. In addition to a series of measures to future income streams. Alternatively, future in- reduce fertilizer use, proper regulations (in- come support streams could also be recognized cluding zoning of livestock production) and as collateral for credit, to relax farmers’ credit animal waste management practices will be constraints, as in Pro-Campo in Mexico. Doing needed to reduce nutrient leaching to ground so, would require an acceleration of public reg- and surface water from the increasing con- istries that clarify and formalize property rights, centration of intensified livestock produc- such as to land and water. tion in (peri-) urban areas. This will further 142  Huang and Rozelle (2011). 143  See Yu and Jensen (2010) for more detailed descriptions. As a significant share of the budgetary support programs are paid at a flat rate per unit of land, with no apparent enforceable requirements to purchase certain inputs or plant certain crops, they could be seen as direct (non-distortionary) income support (OECD, 2011). This has so far been consistent with farmers’ behavior observed in the field (Huang and Rozelle, 2011). Yet, the allocation of subsidies is in practice also one of the few instruments local officials have to ensure their ju- risdictions attain the grain production quota given to them, which is now also an explicit benchmark in con- sidering officials for promotion. 144  These include preferential prices for electricity and natural gas for fertilizer producers, preferential trans- portation prices for fertilizers, an exemption from contributing to the rail construction fund and an exemp- tion from VAT. 58 The Role of Agriculture in a Modernizing Society – Food, Farms and Fields in China 2030 reduce the atmospheric emissions of ex- associations will be necessary to implement cess nitrogen and the increased risk of ani- better water management practices, as well as mal and human pandemics, such as avian flu. strong river basin authorities that include and On the other hand, agriculture also uses large represent the interests of all stakeholders and amounts of wastewater, m ost of which is un- help resolve inevitable conflicts. treated. This poses substantial risks to public health and soil quality.145 About 4.1  million 4.6 Manage Risks Better hectares, or 7.4 percent of the irrigated lands, are irrigated with polluted water.146 Adaptation to climate change in agricul- ture will involve expanding trade, tech- Use economic tools (water pricing and nology and better short term risk man- trading) supported by appropriate in- agement based on refined agro-weather stitutional arrangements to better man- and climate information. Rising uncer- age water use. Appropriate pricing for water tainty about the production environment is use and pollution discharge, and further pilot- the defining feature of climate change—add- ing of water rights trading can go a long way ing a new layer of uncertainty to a production in managing water more effectively. In a first system that is intrinsically uncertain to begin step, irrigation fees should cover all system op- with. To diversify risk, adaptation in agricul- erations and maintenance costs, with the fees ture will involve expanding trade. This will adapted over time to also cover rehabilita- help diversify weather/water risks across dif- tion and expansion costs. This will help in- ferent regions of the world to mitigate short duce a geographical shift in cropping patterns, run harvest failures. Expanded trade is also concentrating water intensive crops in water consistent with more diversified and high- abundant areas, while promoting higher val- er value-added production, greater empha- ue water crops (higher net return per m3 wa- sis on ecological restoration and less over- ter consumed) in water scarce areas. Efficiency use of marginal lands, and greater emphasis gains can further be obtained, while protect- on ecological services particularly for water ing the rights of existing users, through the conservation in water scarce regions. In par- issuance of clear and enforceable water user allel to diversification via trade, R&D should rights, and water trading based on water con- continue to develop drought, heat and flood sumption. By regulating the total amount of resistant seed varieties of the major crops. water use rights, broader damages from over- The important steps being taken should be utilization of water could be addressed effi- strengthened. Finally, improved agro-weath- ciently. To do so, more efforts will be needed er and agro-climate information and servic- to strengthen the administration of water use es for farmers can improve climate resilience rights, with rules in place to protect against ar- across the agriculture value-chain, includ- bitrary changes in rights and better provisions ing production, post-harvesting, storage, and to resolve issues when user rights are nega- market access.148 Weather-indexed insurance tively affected.147 Well functioning water users schemes, with payouts triggered if a specified 145  According to Jimenez and Asano (2008), China is the country with the largest amount of wastewater reuse worldwide, estimated at 15 million m 3 per day. 146  Xie (2009). 147  Xie (2009). 148  For example, applying a “fungicide application timing� tool developed by the US Southeastern Climate Consortium AgroClimate for a strawberry farm in the United States, the farmer showed a $3 million dollars saving and 50% reduction of the fungicide. Towards Modern Commercial Smallholder Farming 59 weather events passes a given threshold (e.g. is vulnerable to climate change, via chang- rainfall falls below a certain level) hold fur- es in precipitation, temperature, drought, ther promise to manage weather related risks. storms, and increased CO2 in the atmosphere. Targeted subsidies may be considered, espe- Agronomic technology choices and invest- cially for poorer farmers and to overcome ments made today need to take into account fixed costs in establishing markets. both the likely impact of future changes in cli- mate on production as well as their likely im- Agriculture is also an important sector pacts on future changes in climate. Mid-season for achieving the national target of re- drainage, for example, can be an effective op- ducing carbon intensity by 40–45% by tion to mitigate the carbon-footprint of rice 2020—the mitigation agenda. China’s ag- fields, especially when larger amounts of rice ricultural sector contributes the most green- straw are returned to the soil and when N fer- house gases after power, contributing 14% tilizer application rates are reduced to mitigate of its total emissions or about 6.8  Gt of the risk that increased N2O emissions offset CO2 equivalents per year. Emissions are main- reductions in methane (CH4) emissions. Better ly from the release of soil carbon, crop burn- water management coupled with more effi- ing, and methane and nitrous oxide produced cient fertilizer application can thus not only during rice production and by livestock and save costs. It can also reduce environmental livestock waste. 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