topic 5 agriculture

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Economics 162The Economy of China

Topic 5 Chinas Agriculture

Professor David Roland-HolstDepartment of Agricultural and Resource Economics

Tuesday and Thursday, 3:30-5PM, 10 Evans


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Roland-Holst 212 June 2011Economics162

Agriculture

Rural Area Agriculture SectorUrban population 1/3; Rural population 2/3

But agriculture labor force is around

Why?

Many working in the urban areas without urbanresidence permit (counted as rural residents)

Many rural residents working in rural industry notin agriculture (Township and Village Enterprises)


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The Importance of the Agriculture Sector

China is the worlds largest consumer andproducer of food

The traditional sector, largest in terms ofemployment

The disastrous sector under central planning The successful first reform sector Economic linkages to other sectors

Releasing excess labor (very important)

Providing savings (now going in reverse)Generating consumer demand (eventually)


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Rural Organization

Natural Units 1962-84 1984-present

Market town Commune(2000hh) Township

Large village Brigade (200hh) Village

Small village Teams (50 hh)or neighborhood

Household Household Household


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Basic Features of Agricultural Collectives

Property Rights: The land was pooled and worked incommon

Land is collectively owned Management: The collective served as the basic

accounting unit

Distribution: Net income was distributed tohouseholds on the basis ofwork points

Households accumulate work points over one year The collective after paying taxes, deducting collective

accumulation (retained public funds) distribute income tohouseholds by the year end, in grain and cash


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Benefits of Agricultural Collectives

Achieves governments goal of product mix Grain is priority in planning: Take grain as the key link

Mobilization of resources for big projects Consolidation of scattered land Big construction projects such as irrigation system

Local public goods Water supply Education Health care (barefoot doctors) Some insurance (risk pooling) functions

Non-agricultural activities Rural industry (small factories and workshops)


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Costs of Agricultural Collectives

Terribly inefficient in agricultural production Why? Incentive problems Structural features of agricultural production

Output takes long time (usually one year) toproduceA long sequence of tasks (sowing, weeding,

watering, harvesting, etc.)

Important input is effort, which is hard or costly tomeasure

Workplace only measures time spentAdjustments made according to age, gender,

health, but imperfect (manual work)


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Outcome of Agricultural Collectives

Grain production growth between 1957 and 1978Annual growth rate: 2.2% (from 200mt to 300mt) Per capita growth rate: 0.2% (300 kg per capita)

Non-grain agriculture output growth even lower Cotton growth rate: 1.5% Oilseed growth rate: 0.5% Per capita growth rates below zero Per capita consumption of poultry, eggs and fish also

declined

Some other social indicators improved Infant mortality: declined Life expectancy: increased Literacy rate: increased Rural infrastructure (roads, irrigation): increased


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Agriculture Reform:

Household Responsibility System

Main features Form 1: linking the remuneration of a small group

or household to the output of a specific plot of

land Form 2: an individual household pays a fixed

amount to the government and keeps the rest

Individual household farming Form 2 is essentially individual household farming

(with lump-sum taxation)

But it is not a legal privatization of farming Land is still owned by the village collectives


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Agriculture Reform:


Why it works? Incentives

Form 1: share croppingmax [yi (ei) c(ei)]

(dyi (ei)/dei) = c(ei)

Form 2: residual claimantmax [yi (ei) Fi c(ei)]

dyi (ei)/dei = c(ei)

Under diminishing returns, Form 2 elicits more effort.

Tradeoff: incentives vs. risk sharing

(Stiglitz (1974), Incentives and Risk Sharing inSharecropping)


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Agriculture Reform:


Labor days per hectare

1953 1978 1985

Rice 250 421 328

Wheat 120 461 281

Cotton 300 980 643


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Patterns of Agriculture Reform

Started as an experiment by peasants themselves The first recorded practice: December 1978 Xiaogang Production Brigade, Fengyang County,

Anhui Province

20 peasants representing 20 households put theirfingerprints on an agreement: to divide the commune's land among the households to fulfill the procurement quota of grain to the state in case trouble, surviving households have obligations help

others Spread to other counties in Anhui The central government encouraged the practice only

in 1982

Spread throughout China by 1984


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Agriculture Reform:


What hasnt changed? Land still owned by the village collectively Use right is transferable but not ownership right Land cant be used as loan collateral Redistribution of land still happens to

accommodate demographic changes

Why?

Stabilization of rural populations

The role of land as a means of security andinsurance

Political economy: the landless are a riskyconstituency


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The Side-Effect of Reform

Decline of some rural public services Health care: barefoot doctors disappeared,

hospital beds stagnated, village and township

paramedics declined, private facilities increasedbut expensive

1978: 70% covered by inexpensive socialized facilities 1990s: less than 1/3

Elementary school: despite nationwide 9 yearcompulsory education, rural education suffering

Supply side: local public finance constraint, qualitydeclining with real wages and migration

Demand side: drop out rates seem to be rising


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Will China Starve the World?

Lester Brown: Who Will Feed China? (1995)Washington Post: How China Could Starve theWorld? (August 28, 1994)

Growth => Increase demand for foodImport massive amount of grainRises in world food prices and no one can supply

Scott Rozelle: How China Will NOT Starve theWorld

(1996)

David: China will reverse a 50 year downwardtrend in global food prices. (2010)


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Roland-Holst 1612 June 2011Economics 162

How we got here:Total World Grain and Oilseeds

80

100

120

140

160

180

200

1975 1980 1985 1990 1995 2000 2005 2010 2015

Production Yield Area Harv Percap Use Population

Index: 1975 = 100

Peak

Peak

Source: USDA.


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Agricultural Technology Change I

Expanding output through intensification ofland use Land improvement through terracing: carve

small flat plots on hills

Multi-cropping: multi-cropping index over 150 Rotation Intercropping Relay cropping

Changing crops Grain crops: Rice, wheat, maize, potatoes, etc. Economic or cash crops: Cotton, oil seeds, sugar

crops, tobacco, vegetables, fruits, etc.

The Green Revolution


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Agricultural Economics

Demand Calories and protein came mainly from grain Changing diet: shifting from grain to meat,

vegetables, fruits, fish, poultry, etc.

Forecasting future demand critical for worldmarket Supply

Grain production is land intensive: China is a landscarce country

Meat production requires a lot of grain: highconversion ratio for pork (4:1) (but low for poultry(2:1))

Comparative advantage of labor intensiveproducts: vegetables, some fruits, etc.


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Agricultural Economics

Government policiesBefore 1996: redistribution from rural to urban

(agriculture product prices below world prices)

After 1996: redistribution from urban to rural(agriculture product prices above world prices)Agriculture tariffs (average)

Wheat: 24%

Maize: 29%

China both imports (wheat and maize) andexports (rice) grain. A net importer.

Net self sufficiency rate in grain: set to 95%


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Agricultural Technology Change II

The Green Revolution crops: High yield varieties Three complementary ingredients to make the green

revolution work Improved seeds

hybrid rice and wheat Research and development (R&D) Multi-level research facilities

Fertilizer Domestic production (imported big factories and small local

factories)

Imports Water

Irrigation facilities Rice growing region (south of Huai river) vs. wheat growing

region (north of Huai river) (Huai river is between YangtzeRiver and Yellow River)


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Complementarity: Fertilizer and Seeds

Fertilizer Applied

Outpu

t

Traditional Variety

High-Yielding Variety


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Fertilizer and Irrigated Area

0

5

10

15

20

25

30

35

40

45

MillionTons(Fertilizer)

0

10

20

30

40

50

60

MillionHectares(IrrigatedArea)Irrigated Area

Fertilizer


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Rural Motive Power

0

50

100

150

200

250

300

350

400

450

Mil

lion(headofanimals;kilowattsofmachinery)

Draft Animals (head)

Mechanical Power (kilowatts)


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Sources of Agriculture Growth

Inputs (land, labor, capital) Productivity

Institutional change (introduction of householdresponsibility system)

Price change (increase of procurement prices forgrain)

Technical innovation Using different types of inputs (seeds, fertilizers,

irrigation)

Shifting cropping patterns (multiple cropping, non-graincrops)

Change to other high value products (off seasonvegetables, organic products)


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Chinas Agricultural

PotentialOpportunities

1. Productivity growth impressive butnot keeping pace with other sectors

2. Economies of scale seriousinstitutional challengesConstraints

1. Land area small and shrinking2. Water nationally scarce, most

major aquifers are already inoverdraft


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0

2

4

6

8

10

12

14

1994 1999 2004 2009 2014

India

Thailand

Bangladesh

Pakistan

Indonesia

Malaysia

Philippines

Asia Pork and Poultry Production

Million metric tons

Source: USDA.


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0

10

20

30

40

50

60

70

80

90

100

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

India

ThailandBangladesh

PakistanIndonesia

MalaysiaPhilippines

China

Asia Pork and Poultry Production

Million metric tons

Source: USDA.


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1979 1984 1989 1994 1999 2004 2009 2014

0

20

40

60

80

100

120

China

World

China Pork Production

Million metric tons

Source: USDA .Source: USDA.


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Chinese Arable Land is Scarce


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and shrinking.Provincial Land Stock Changes


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Water too is scarceAnnual Rainfall


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Most Major Aquifers are in

Overdraft

Yellow River Basin Water Use

300

350

400

450

500

550

600

650

2000 2010 2030 2050

100MillionM

etricTons

Available Water Resources

Water Demand, Best Case

Water Demand, Worst Case


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And cities are thirsty.Urbanites are more than twice as water-intensive

Urban and Rural Residential Per Capita Water

Consumption (L/personday) in Chinas River Basins


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Chinese Supply Conditions

Productivity growth has been impressive,but resource constraints are very serious.

Output growth might sustain current trendsfor the next decade, but it is unlikely to

accelerate in any major categories.


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Chinas Food Requirements

One of every seven people on the planet is a Chinesefarmer. Should other farmers be worried aboutthis?

No. One of every five people on the planet is aChinese consumer.

Average incomes are rising fast, and so is theresource intensity of consumption.

Concluson: You aint seen nothin yet.


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Income is Rising in China(Current USD normalized to unity in 1980

Source: World Bank.

1"

10"

100"

1980"

1982"

1984"

1986"

1988"

1990"

1992"

1994"

1996"

1998"

2000"

2002"

2004"

2006"

2008"

2010"

GDP"

GDPPC"


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and so is Inequality

Source: USDA.


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Chinas Population is Moving,(Rural and Urban, millions)

Half a billion people will switch from the food supply side to the demandside.

Source: UN.


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Urbanites have more purchasing power,

Chinas urbanites do not need food pricesuppression.This stimulates both domestic prices and

imports.


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and Diets are Changing

kcal/person/day Percent of caloric

intake

Resource

intensity


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Emergent Imbalances

Despite significant progress in productivity, theimplications of these trends in supply anddemand are both obvious and inevitable.

Chinas growth can only be sustained withincreased absorption of resources and resource-intensive products.

As it has with energy, China will emerge as aleading global importer of agricultural products.


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China Soy Demand

Source: USDA.


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Chinas Soy Tsunami

Net trade in soy products (Million MT)

Source: USDA/ERS.


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Chinas Import Trends I

Growth rates are five-year averages ofannualrates!Annual Growth

Product Millions in 2004 1999-2004

Almonds 4.048 22.5Beef 7.110 4.4Cereals 2,218.543 34.9Cherries 2.334 160.5Crustaceans 312.036 20.5Blueberries 1.163 29.1Fish - whole chilled, frozen 1,516.575 30.0Fish - fillets (chilled, frozen) 45.556 24.9Frozen Potato/French Fries 51.485 71.3Gra es 67.546 23.4

Hazelnuts 2.297 17.6Infant Formula 88.821 27.5Juices and Concentrates 61.001 35.4Lobsters uncooked 0.131 159.3Mollusks 332.462 26.6Oran es 36.994 31.4Pistachios 17.432 21.9


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Chinas Import Trends II

Annual Growth

Product Millions in 2004 1999-2004

Pollock 1.250 1.9Pork 54.452 17.5

Poultr 153.413 -17.8

Prunes 0.922 39.4Raisins 14.666 104.5Salmon 26.612 63.0Scallo s 8.023 15.5So beans 6,956.654 50.9Soy Flour 1.758 5.9Thickeners 12.604 14.7

Whey Powder 119.744 15.6Wine containers less than 2L 25.247 30.4Wine (containers more than 2L) 24.436 -2.0


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Roland-Holst

4612 June 2011Economics162

Food Cost is Rising in ChinaAnnual CPI change by commodity, 2006-8

Can a single economy reverse global food price trends?

topic 5 agriculture

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