Developments in Chinese Agriculture

DEVELOPMENTS IN CHINESE AGRICULTURE

abare eReport 05.7

Ivan Roberts and Neil Andrews

July 2005

abare © Commonwealth of Australia 2005

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Major extracts or the entire document may not be reproduced by any process without the written permission of the Executive Director, ABARE.

ISSN 1447-817X ISBN 1 920925 39 2

Roberts, I. and Andrews, N. 2005, Developments in Chinese Agriculture, ABARE eReport 05.7, Canberra, July.

Australian Bureau of Agricultural and Resource Economics GPO Box 1563 Canberra 2601

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ABARE is a professionally independent government economic research agency.

ABARE project 2989 abare eReport 05.7

foreword

China’s rapid economic growth is bringing about marked changes to its agricultural industries. Profound changes are taking place in the demand for agricultural products as consumers move away from staple foods such as grains to include vegetables, fruits, meats and dairy products in their diets.

So far, China has been able to meet these changes in demand by being able to adapt its domestic agricultural production. However, there is evidence now that China’s agriculture is coming under increasing pressure from problems associated with water constraints and land degradation in some regions.

Because China is a large agricultural producing and consuming country, small changes in either production or consumption can have a signiﬁ - cant inﬂ uence on world trade. Developments in China’s economy have the potential to markedly affect trade with agricultural exporting countries, such as Australia.

Developments in Chinese agriculture are examined in this report, with particular reference to production, consumption and trade. The key factors inﬂ uencing likely developments in Chinese agriculture and trade that are of importance to Australia are assessed.

BRIAN S. FISHER Executive Director

July 2005

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acknowledgments

The authors wish to thank Stephen Apted, Leanne Lawrance, David Barrett and Don Gunasekera from ABARE; and Noel Benjamin from the Food and Agriculture Division of the Australian Government Department of Agriculture, Fisheries and Forestry.

Funding for this report was provided by the Food and Agriculture Divi- sion, Australian Government Department of Agriculture, Fisheries and Forestry.

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contents

Summary 1

1 Introduction 3

2 Some key trends in China 4 Rising and more varied food consumption 4 Adaptability of China’s agriculture to satisfy increasing demand 7 Potential limitations on production 12

3 Agricultural policies in China 16

4 Trade policies in China 18

5 Trends in Australia's trade with China 22

6 Concluding comments 23

References 24

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box 1 Consistency and reliability of China’s consumption statistics 6 ﬁ gures A Average yields of major grains – China 9 tables 1 Food consumption in China 5 2 Food consumption in China and selected other countries, 2002 5 3 Household consumption of selected foods per person in China, 2003 6 4 Maize supply and utilisation – China 8 5 Wheat supply and utilisation – China 8 6 Average annual compound growth rates in Chinese production 10 7 China’s imports of soybeans 10 8 Tariff quota commitments on China’s accession to the WTO in 2001 19 9 China’s tariff commitments for selected tariff-only items 20 10 China’s imports under tariff quotas and percentage tariff quota ﬁ ll rates in 2002 and 2003 21 11 Australia’s overall and agricultural trade with China 22

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summary

■ China’s rapid economic growth and urbanisation are bringing about profound changes in demand for agricultural products and in the country’s ability to meet that demand from its own agricultural industries. ■ Overall food consumption in China is rising and there are marked changes in the composition of diets. Consumption of meat, seafood, dairy products, vegetable oils, fruit and vegetables is rising, while consumption of starchy staples, including wheat and rice, is declining. These trends are expected to continue. ■ China has so far been successful in adapting its domestic agricultural production to meet the challenges of increasing demand and changing demand patterns. This has been made possible by a combination of market reforms, greater use of inputs and improvements in technology. ■ However, there is now substantial evidence of stress on China’s production base, with problems associated with water constraints and land degradation in some regions. ■ While China has so far maintained a high level of overall food suffi - ciency, there appears to have been a strong political preoccupation with trying to maintain self suffi ciency in food grains in particular. However, it is notable that cultivated areas of both wheat and rice have been declining since the late 1990s, while yields have leveled off. The reductions in areas under these crops have occurred because of a combination of competition for land from products with rising demand, such as fruit and vegetables, land degradation from overexploitation, government programs to divert erodible land to pastures and tree crops, and displacement of land through urbanisation and infrastructure development. ■ China is devoting substantial resources to advancing agricultural technology, especially in plant breeding. However, since the late 1990s, yields for the main grain crops have not been increasing, owing, it appears, largely to pressures on soil fertility, and limitations in availability and quality of water in some northern regions. ■ For wheat, self suffi ciency was largely maintained until 2003, partly through the running down of previously accumulated stocks.

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In 2004, relatively large imports were required. Unless substantial improvements can be made in water and land management and there are breakthroughs in the development and commercialisation of new production technologies, it appears that China could become more dependent on imports of wheat despite an offi cial position that has promoted self suffi ciency in food grains. However, imports could vary widely from year to year with changes in seasonal conditions. ■ How China’s agriculture responds to the big increases in demand that are occurring for meat is likely to have profound implications for agricultural imports. China faces alternatives of importing more stock feeds, including feed grains and oilseeds that yield protein feed meals, importing more meat or a combination of these. Where similar situa- tions have arisen elsewhere in Asia, the response has been to increase domestic production of meat, principally intensively produced pig and poultry meat, and to import additional quantities when the domestic expansion has been inadequate. Already, China has been importing substantially increasing quantities of soybeans that have provided greatly increased volumes of high protein feed meals, while exports of maize, the main feed grain, are now declining. It seems likely that China will require increasing imports of feed grains. ■ Unlike many other agricultural products, China has relied on imports of wool for a substantial part of its supplies. Australia has been the main supplier. There appears to be scope for further growth in imports of wool within tariff quotas, but whether that will be taken up will depend on demand in the face of ever increasing competition from synthetics. ■ China appears to have been very fl exible in adjusting its agricultural production patterns away from land extensive crops, such as grains, toward more labor intensive products such as fruit, vegetables and meat in which it has a greater comparative advantage. As such, it would not be surprising if in future, China became a larger importer of feed grains. China is also likely to increase imports of wheat and oilseeds. Also, China’s growth in milk production, although rapid, is falling behind its consumption growth and further increases in imports, primarily of milk powders, are likely. With continuing adjustment of China’s agriculture toward labor intensive farming activities it could become an increasingly important competitor on world markets for horticultural and processed agricultural products.

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introduction

China is emerging as an increasingly prosperous country, its annual gross domestic product having risen at an average rate of 9 per cent since the early 1990s. Rapid growth is expected to continue, with actual rates depending on economic conditions elsewhere as well as developments in China itself — this is because the Chinese economy is becoming increasingly trade oriented and more open to foreign investment.

A number of important underlying factors have contributed to this growth and these appear likely to contribute to further growth. In general, growth is being generated by transfers of resources from low to higher productivity activities, high levels of investment, preparedness to adopt improved technologies and gradually increasing population. In particular, with efforts to tap the economic potential of the country, there has been a progressive transfer of resources away from low productivity state enterprises toward higher productivity private activities. Also, there has been a strong trend toward urbanisation. In China, urban incomes have been around three times as high as rural incomes and this disparity has been maintained despite the urban share of total population having risen from 18 per cent in 1978 to 39 per cent in 2002. In addition, population growth has been around 1 per cent a year over the past decade and China appears to have been increasingly prepared to adopt and develop productivity increasing technologies.

Such ongoing growth is bringing about profound changes to China’s agricultural industries and has a potential to markedly affect future trade. The Chinese Government has had a policy of agricultural self suffi ciency although there is a history of imports to make up for peri- odic production shortfalls, especially of wheat, and to supplement domestically produced supplies of products such as wool. China has also become a major importer of soybeans since the mid-1990s to meet its rising demand for vegetable oils and also to boost feed supplies as inputs to the country’s rapidly expanding livestock industries. China has also been a signifi cant exporter, primarily of processed agricultural products, with such exports refl ecting its comparative advantage in these products. Overall, both China’s exports and imports of agricultural products have been small relative to its very large domestic production and consumption, and the country has been maintaining approximate agricultural self suffi ciency.

In 2001, China joined the World Trade Organisation (WTO), signaling greater preparedness to accept imports and embrace opportunities provided by export markets. China is also currently exploring possibilities of bilateral free trade agreements (FTA) with a number of countries including ASEAN, New Zealand, Chile and Australia, further signaling China’s preparedness for greater international engagement in trade, including in agricultural products.

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some key trends in China

Rising and more varied food consumption Economic growth and urbanisation transforming China’s food consumption The rapid economic growth and urbanisation in China are bringing about profound changes in demand for food within China. There has been a strong trend away from traditional diets that are heavily oriented toward starchy staples that characterise low income developing countries. In particular, there has been a change toward more varied diets incorporating markedly increasing quantities of animal products and fruits and vegetables, but lower quantities of food grains. Furthermore, with increasing incomes, aggregate food intake in terms of calories per person has been increasing (table 1).

Total food consumption per person rising; food grain consumption falling; and consumption of fruit, vegetables, vegetable oils, meat, aquatic products and dairy products all rising Using FAO food balance sheets as a basis for comparison, China’s total consumption of food per person in terms of calories had risen by 2002 to be higher than in any other country in east, south or south east Asia except the Republic of Korea (table 2; FAO 2004). Also, average intake of animal products, in terms of calories, had risen to the highest level for any country in these regions. Nevertheless, consumption levels are still below those in the developed countries of north America, western Europe and Oceania.

As, according to the FAO food balance sheets, Chinese food consumption has already reached a high level in comparison with other Asian countries, the question may be asked, ‘will China’s changes toward higher food intake per person, lower consumption of food grains and rising consumption of fruits, vegetables, vegetable oils, meat and dairy products continue?’ The answer to this question is that, while China’s income growth rates remain high and while there is a marked trend toward urbanisation, it is likely that these trends will indeed continue.

One of the reasons for this expectation is the possibility, even likelihood, that the data in the FAO food balance sheets have overstated Chinese food consumption levels up to the present time. Consequently, actual food consumption per person in China might not be as high relative to levels in other Asian countries as it appears from the FAO data — see box 1 for a discussion of China’s consumption statistics. But the main reason for the expected continu- ation of the established trends in food consumption is that rising incomes and increasing urbanisation are likely to continue, and dietary patterns will increasingly reﬂ ect a greater orientation toward urban consumption levels and consumption patterns.

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1 Food consumption in China 1975 1980 1985 1990 1995 2002

Daily calorie intake per person calories calories calories calories calories calories Vegetable products 1 954 2 153 2 383 2 402 2 399 2 333 Animal products 135 174 235 310 463 618 Total 2 089 2 328 2 618 2 712 2 861 2 951 Consumption per person kg kg kg kg kg kg Cereals 163.4 185.7 210.5 207.7 194.2 166.6 – wheat 43.5 60.9 78.1 80.9 79.3 65.2 – rice 79.9 84.1 97.8 93.4 91.3 82.8 Starchy roots 109.3 91.2 65.6 58.9 59.4 80.7 – potatoes 12.4 9.9 10.1 11.0 14.4 35.3 – sweet potatoes 94.5 78.8 53.0 45.9 42.7 43.0 Sugar and sweeteners 3.3 5.4 7.5 8.0 7.4 7.2 Pulses 5.0 4.9 3.6 2.2 1.6 1.4 Oil crops 5.2 5.4 5.9 5.6 7.7 6.9 Vegetable oils 2.0 3.2 4.5 6.3 7.1 9.5 Vegetables 47.2 49.4 78.6 98.9 148.1 254.1 Fruit 6.3 7.3 11.1 16.5 31.9 47.3 Meat 10.6 14.6 19.3 25.9 39.1 52.5 – bovine meat 0.3 0.4 0.5 1.0 2.9 4.6 – mutton and goat meat 0.3 0.5 0.6 0.9 1.4 2.5 – pig meat 8.5 12.0 16.1 20.4 26.9 34.2 – poultry meat 1.3 1.7 1.9 3.3 7.3 10.5 Milk, excluding butter 2.4 3.0 4.5 5.9 7.7 13.3 Eggs 2.2 2.6 4.7 6.4 12.7 17.4 Fish, seafood 5.6 5.2 7.3 11.5 20.8 25.6 – freshwater ﬁ sh 1.2 1.3 2.7 4.5 7.8 10.8 Source: FAO (2004). 2 Food consumption in China and selected other countries, 2002 Korea, United China Rep. of Japan Thailand India Indonesia States Australia Daily calorie intake per person calories calories calories calories calories calories calories calories Total calories 2 951 3 058 2 761 2 467 2 459 2 904 3 774 3 054 Vegetable calories 2 333 2 587 2 187 2 172 2 270 2 778 2 727 2 022 Animal calories 618 478 572 295 189 125 1 047 1 032 Consumption per person kg kg kg kg kg kg kg kg Cereals 166.6 151.7 113.8 122.3 157.8 203.1 112.5 83.8 Starchy roots 80.7 17.2 34.1 18.0 24.1 66.7 63.7 54.9 Vegetable oils 9.5 12.3 14.1 6.3 9.4 10.4 27.8 17.9 Fruits 47.3 66.8 56.3 87.8 37.7 36.0 110.3 93.3 Vegetables 254.1 209.2 106.5 42.1 69.5 27.9 127.7 92.3 Sugar and sweeteners 7.2 37.7 29.4 31.9 24.7 17.5 71.9 48.2 – sugar 7.2 19.2 19.3 31.9 24.7 16.5 32.9 40.6 Meat 52.5 49.2 43.9 26.4 5.2 8.2 124.1 108.8 Milk excluding butter 13.3 29.4 67.1 18.8 62.9 7.8 261.3 263.9 Fish, seafood 25.6 58.7 66.3 30.9 4.8 20.8 21.3 22.3 Source: FAO (2004).

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Urbanisation likely to sustain established trends of declining food grain consumption and rising fruit, vegetable oil, meat, aquatic product and dairy product consumption A large part of China’s income growth per person is linked to the facts that the proportion of people in urban areas is increasing rapidly Household consumption of selected and that the incomes of urban dwellers are 3 foods per person in China, 2003 being maintained at levels that are greatly above Rural Urban incomes of rural people. The higher incomes of urban people and greater access to a wider kg kg variety of foods are being reﬂ ected in very Grain 222.4 79.5 different levels and patterns of food consump- Vegetables 107.4 118.3 tion than for rural people, as is apparent from Fruit 17.5 57.8 the household food consumption survey data Edible Oil 6.3 9.2 Pork, beef and mutton 13.8 23.7 shown in table 3. The main differences between Poultry 3.2 9.2 Chinese urban and rural food consumption Eggs 4.8 11.2 patterns are far lower consumption levels for Aquatic products 4.7 13.4 grains in urban areas and higher to much higher Milk and related products 1.7 18.6 consumption levels for virtually all other foods. Source: China Statistical Yearbook (2004).

Box 1: Consistency and reliability of China’s consumption statistics

Analysts of developments in China’s production and consumption of agricultural products have encountered considerable problems with consistency and reliability of statistics. The consumption statistics reported in the FAO food balance sheets are determined from supplies that are estimated from offi cially reported production, changes in stocks, imports and exports. There have been problems with unreliability of reporting of production and other agricultural statistics arising from a ‘bottom up’ reporting system, under which village heads provide input that is ultimately aggregated to give national totals. In addition, the use of nonstandard defi ni- tions and parallel reporting systems have made Chinese statistics confusing and potentially misleading (Gale 2002). In particular, there has been a widespread belief that China’s reported output of animal products has been infl ated (Zhou and Tian 2003, p. 47). FAO published consumption data for China in tables 1 and 2 are substantially above consumption levels per person from the household food consumption surveys for rural and urban areas complied by the State Statistical Bureau, which are shown for 2003 in table 3. This is especially the case for vegetables, fruit, meat and milk. A survey carried out in the year 1998 by the China Agricultural University and reported by Zhou and Tian (2003), concluded that the published household food consumption survey data for meats markedly understated consumption in both rural and urban areas. In its survey, the university estimated annual per person consumption of meat for China to be 33.7 kilograms, which was well above the State Statistical Bureau fi gures of 15.5 kilograms per person for rural areas and 23.9 kilograms for urban areas. However, even the higher fi gure estimated in that survey was well below the fi gure for meat in the FAO food balance sheets of 47 kilograms per person for the same year. Much of the difference observed between the consumption levels in the university survey and those from the State Statistical Bureau household surveys arose from consumption outside the home, which is not included in the household consumption surveys.

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Consequently, the continuing trend toward urbanisation is expected to be accompanied by further reductions in consumption of grains per person and increases in consumption of fruit, edible oils, meats, eggs, aquatic products and milk and related products.

Uncertainties about further growth in vegetable consumption per person The only major non cereal commodity group for which the trend toward urbanisation may not result in markedly increased consumption levels is vegetables for which household consumption levels in urban areas are reported not to be greatly above those in rural areas (table 3). Nevertheless, to the extent that consumption of food outside the home that is not included in the household surveys, increases with urbanisation, there may still be some growth in demand as urbanisation proceeds.

Adaptability of China’s agriculture to satisfy increasing demand To date, China’s agriculture sector has been highly ﬂ exible in reorienting available resources to meet the increasing demand for food in aggregate and for more varied types of food. Broadly, the main changes have been a major shift in production away from land intensive products such as cereals, toward higher value labor intensive products such as meat, fruit, vegetables, eggs, milk, ﬁ sh and seafood.

Overall area planted to crops relatively constant While there have been major changes in land use within agriculture, the total area of crops planted has remained relatively static at 150–155 million hectares. This has occurred despite substantial urban expansion that has been encroaching into some of the most fertile agricultural land. There are a number of possible reasons why it appears that the total area sown to farm crops is being maintained. One is expansion into more marginal areas. Another is more widespread double cropping, which, although not increasing the area of land utilised, increases the total area planted to individual crops. Another possible factor is re-entry into cropping of land previously taken out of cropping when former farmers left the sector.

Grain areas falling and shifting to other crops, affecting future imports Traditionally, a large proportion of the area planted to crops has been sown to cereals, but the proportion declined from 63 per cent in 1991 to 50 per cent in 2003. The reduction has been mainly in wheat and rice, which are used primarily for direct human consumption. Production of maize, the dominant feed grain, rose markedly through much of the 1990s but has since leveled out. The area under maize rose by about 20 per cent between 1990 and 1999, while production rose by almost one-third. Not only has the quantity of maize produced to date been sufﬁ cient to meet domestic requirements but it has also generated signiﬁ cant exports. Since 1999, however, neither plantings nor production has increased and it appears that stocks have been run down (table 4). Consequently, it is uncertain whether China will remain a net exporter of feed grains. In fact, China could become a net importer in future years.

During most of the 1990s, increasing yields along with some small increases in plantings resulted in marked increases in production of both of the main food grains, rice and wheat. However, between 1997-98 and 2003-04, the areas planted to both these major crops declined. Also, the increases in average yields per hectare planted that occurred up

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4 Maize supply and utilisation – China 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05f Area harvested million ha 23.8 25.2 25.9 23.1 24.3 24.6 24.1 24.5 Production Mt 104.3 133.0 128.1 106.0 114.1 121.3 115.8 128.0 – share of world % 18.2 22.0 21.1 18.0 19.0 20.2 18.9 19.9 Imports Mt 0.3 0.3 0.1 0.1 – – – 0.1 – share of world % 0.5 0.4 0.1 0.1 0.1 – – 0.1 Domestic consumption Mt 109.5 113.9 117.3 120.2 123.1 125.9 129.4 131.5 – feed use Mt 82.5 86.5 89.5 92.0 94.0 96.0 98.0 98.5 Exports Mt 6.2 3.3 9.9 7.3 8.6 15.2 7.6 6.0 Stocks closing Mt 106.9 122.9 123.8 102.4 84.8 65.0 44.9 35.5 f Forecast. – Imports less than 0.05 million tonnes, and share of world imports insigniﬁ cant. Source: US Department of Agriculture (2005). to 1997-98 were not sustained, and there have been some reductions in recent years. In fact, the reductions in production of the main food grains, as shown from ofﬁ cial statistics, have been substantial. For wheat, production in 2002-03 and 2003-04 averaged 88 million tonnes a year, compared with a 1996-97 to 1999-2000 average of 114 million tonnes a year — a reduction of 23 per cent. For rice, the reduction for the same periods was 16 per cent.

The reductions in wheat production since 1997-98 appear to have been far greater than the reductions in domestic consumption, and currently, domestic consumption is running well ahead of Chinese production (table 5). The extent to which domestic production has fallen below domestic consumption has, according to US Department of Agriculture estimates, been made possible without China resorting to major imports of wheat, through the running down of stocks that had been built up to high levels by the late 1990s. However, in 2004-05 China entered the world market as a large purchaser (table 5).

Further declines likely in overall food grain demand but increases in some specialised products The trend toward lower demand for food grains is expected to continue as incomes increase and the trend toward urbanisation persists. Nevertheless there will be some specialised uses 5 Wheat supply and utilisation – China 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 f Area harvested million ha 30.1 29.8 28.9 26.7 24.7 23.9 22.0 21.5 Production Mt 123.3 109.7 113.9 99.6 93.9 90.3 86.5 91.0 – share of world % 20.2 18.6 19.4 17.1 16.2 15.9 15.7 15.5 Imports Mt 1.9 0.8 1.0 0.2 1.1 0.4 3.8 7.0 – share of world % 1.8 0.8 0.9 0.2 1.0 0.4 3.7 7.0 Domestic consumption Mt 109.1 108.3 109.3 110.3 108.7 105.2 104.5 102.0 – feed use Mt 4.9 5.0 6.5 10.0 9.0 6.5 6.0 4.0 Exports Mt 1.2 0.5 0.5 0.6 1.5 1.7 2.8 1.0 Stocks closing Mt 96.2 97.9 102.9 91.9 76.6 60.4 43.3 38.3 f Forecast. Source: US Department of Agriculture (2005).

8 abare eReport 05.7 of grains for human consumption that are likely to increase as tastes become more diverse and as consumers demand higher quality products. For example, demand for beer could be expected to rise, resulting in greater demand for malting barley. There could also be expanding markets for particular types of wheat with speciﬁ c protein and other characteristics to meet demand for an increasingly diverse range of wheat products. Consumption of wheat products is becoming diversiﬁ ed away from traditional noodles, steamed bread and dumplings, toward more westernised products including bread, cakes and other processed foods. Likely outcomes from these expected changes in demand include greater efforts to match qualities of domestic crops with changing market conditions, and where that cannot be competitively done, greater imports of some products.

Expansion in use of land for products with rising demand – fruit, vegetables, oil crops and aquaculture The changes in areas and production of cereals have reﬂ ected dietary changes that have included declining per person consumption of food grains and increasing consumption of animal products that require feed grains. At the same time, increasing areas of land are being diverted into vegetable and fruit production, oil crops and aquaculture, also in line with the increasing domestic demand for these groups of products. These changes, as well as being instrumental in reducing areas planted to cereals, could have contributed to the lack of growth in average cereal yields that has been apparent since about 1997 (ﬁ gure A). It is likely that much of the land diverted from grains to oilseeds and more intensive crops such as vegetables would have been the most fertile land that had previously been used for grains. Also, it is likely that with rising incomes, increasing demand for higher quality food grains could be resulting in greater emphasis on quality rather than yield.

In contrast to the major changes in areas under cereals, oilseeds and fruit and vegetables, areas under cotton and sugar crops have been ﬂ uctuating around relatively constant levels since the early 1990s.

Overall agricultural production still rising, but growth rates slowing Rising overall agricultural production has been achieved by a combination of higher variable input use and improving technologies. However, there has been some slowing in the rates of production growth since the late 1990s. In addition to the downward trends in absolute levels of grain production, rates of Average yields of major grains increase in production of fruit, aquaculture, A China oilseeds, meat and eggs that had been rapid Rice throughout most of the 1990s, have been 6 slowing. There have, however, been some 5 Maize exceptions. For cotton, production declined 4 between the early and mid-1990s but has since recovered. Milk production, which 3 Wheat until recent years had been small relative 2 to most other agricultural pursuits in China, has risen much more rapidly in recent years 1 than previously. An indication of the slowing t/ha rates of increase in production for most 1980 1986 19921998 2004

9 abare eReport 05.7 agricultural items is provided by the growth Average annual compound growth rates in table 6. So, although China has been 6 rates in Chinese production able to maintain approximate self suffi ciency Between 1990–92 Between 1996–98 in agricultural products, greater diffi culty and 1996–98 and 2001–03 might be encountered in the future. % % Rising soybean imports – an indicator of Total grain 2.0 –2.9 Cotton –1.6 2.5 future more widely based import demand? Sugar cane 2.5 2.1 The situation for soybeans could provide an Sugar beet –0.4 –7.8 early indication of future diffi culties in main- Oilseeds other taining high levels of self suffi ciency for some than soybeans 5.4 5.1 agricultural products where demand is rising Soybeans 5.5 1.9 rapidly. Until 1995, China was only a minor Tubers 3.1 1.5 Fruit 15.2 6.8 importer of soybeans. Since then, however, Meat 8.5 4.9 soybean imports have increased rapidly and, in Milk 5.6 15.1 recent years, China has accounted for almost Eggs 13 4.7 a third of world imports of soybeans (table Wool of sheep 2.5 2.5 7). This has been despite some increases in Fresh water aquatic products 14.3 8.7 domestic production. The extra imports have been to satisfy the rising demand for edible Source: National Bureau of Statistics of China (2004). vegetable oils and also to provide a substantial additional input of high protein stock feed that has helped meet the rapidly rising domestic demand for meat.

Rising demand for meat and dairy likely to raise import demand for stockfeed ingredients and milk products China’s demand for meat is expected to continue to expand markedly and it is uncertain whether it will be met primarily through domestic production or through a combination of greater domestic production and larger imports of meat. If China is to meet future demand for meat wholly or primarily from greater domestic production, then its exports of corn are likely to be constrained and it may become a net importer with further supplementation of China’s imports of soybeans feed supplies from imports of soybeans and 7 other sources of protein and roughage. Alter- natively, China could choose to import larger China’s World China’s share of imports imports world imports quantities of meat. Trends in other Asian countries that have experienced rapid demand Mt Mt % growth for meats have been that they have 1994-95 0.16 32.69 0.5 attempted to meet much or most of the demand 1995-96 0.80 32.91 2.4 growth through expanding their domestic 1996-97 2.27 35.59 6.4 meat industries, primarily pigs and poultry. To 1997-98 2.94 38.57 7.6 1998-99 3.85 38.92 9.9 do this they have relied on feed supplies both 1999-00 10.10 45.82 22.0 from within the country and from imports. 2000-01 13.25 52.95 25.0 Nevertheless, where domestic feed produc- 2001-02 10.39 54.24 19.2 tion capacity has been limited, such as has 2002-03 21.42 62.72 34.2 occurred in Japan, growth in demand for meat 2003-04 16.90 55.11 30.7 is being met partly from imports of meat. Sources: ISTA Mielke (2004); US Department of Agricul- ture (2005).

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For dairy products, rapidly increasing demand is likely to be met by greater domestic production, requiring larger quantities of feed, with additional quantities of imports of dairy products also being required. So, although there are uncertainties about the future balance between greater Chinese imports of feed grains and other feeds on the one hand and direct imports of meat and dairy products on the other, China’s increasing demand for meat and dairy products will generate greater imports of agricultural products in one form or another.

There is evidence that China is already taking the route toward meeting as much of its increasing demand for livestock products as possible from increasing domestic production. Between 1996 and 2003, its total meat production rose by 51 per cent. The bulk of the increase in absolute terms was in pig and poultry meat, but in percentage terms the advances in beef and sheep meat were more rapid. So far, trade has played only a peripheral role in meeting China’s rising demand for meat that reached around 70 million tonnes in 2003. Both imports and exports have varied around 0.6 million tonnes a year since 1996. Most imports and exports have been of pig and poultry meat. Imports of beef, sheep and goat meat have so far been small but are rising.

As with meat, there has been rapid growth in milk production to meet rapidly rising demand. Between 1996 and 2003, milk production rose by 150 per cent. Despite this rapid expansion, China’s production of milk and milk products has not kept pace with demand and imports have been rising markedly. Imports of milk and milk products in terms of product weight increased from 78 000 tonnes in 1996 to 315 000 tonnes in 2003. The imports have been primarily of milk powders and whey products. Imports of butter have been small. Although consumption of milk and dairy products has been rising rapidly, the increases have been from a very small base and Chinese consumption per person is still low relative to levels in many countries (table 2).

Trend toward large scale livestock enterprises likely to continue A development that could have a substantial impact on the future size and structure of livestock industries in China is the degree to which there is a trend toward large scale, technically effi cient production units. To date, the great bulk of meat and milk production has been from a large number of small farms. In recent years, however, a trend toward large to very large scale intensive production units has begun to emerge, mainly in pig meat, poultry and milk production. It is reasonable to expect that large scale, specialised operations would be more technically innovative than the traditional small scale units, more fully utilising genetic improvements, scientifi cally based feed compounding and least cost feeding strate- gies, herd recording, animal health and marketing. In particular, it might be expected that now strongly established trends toward food sales through supermarkets and increasingly centralised supply arrangements for supermarkets (Hu et al. 2004) would encourage the sourcing of large quantities of standardised, well presented products that can be obtained most readily from large scale production units. As such, a trend to such enterprises could be expected to continue and contribute to higher productivity, production growth and more effi cient marketing of animal products. The trend would also be likely to result in greater emphasis on grain and concentrate based feeds, with implications for future demand for feed grains and oilseed meal and other feed concentrates.

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Presence of multinational food corporations and expansion of supermarkets improving efﬁ ciency of food distribution and increasingly centralising supplies, including imports Another factor that is likely to affect the sourcing of agricultural supplies from domestic or import sources is the extent to which multinational food corporations are established in China and the policies of those corporations on the sourcing of products. There is a continuing trend for multinational food processing and distribution corporations to ratio- nalise the sourcing of their major raw materials and other inputs toward centralised purchasing (Department of Foreign Affairs and Trade 2001). In some instances this has involved efforts to obtain production at the lowest possible costs. There has also been ‘a growing emphasis on large-scale production facilities at locations which enable companies to optimise as many as possible of the factors of production, distribution and marketing, and often in lower cost economies with good access to necessary skills and raw materials from which the company can supply not just the local market but also neighboring markets, and even the global market for particular products’ (Department of Foreign Affairs and Trade 2001, p. 57). Many such corporations are already established in China, and the sourcing of their materials from domestic and external sources could be an important determinant of supplies to the Chinese market.

These same forces involving the drive toward economies of scale and rationalisation of sourcing of supplies to attain cost advantages have been instrumental to the rapid development of supermarkets as outlets for agricultural products in China. The supermarket sector has been expanding at an extraordinary rate since the mid-1990s and an estimated 30 per cent of total food sold in China is now supplied through supermarkets (Hu et al. 2004). This trend, which is continuing apace, has involved both rapid increases in number and size of domestically owned supermarkets and also the establishment and expansion of many foreign owned supermarkets. These supermarkets have many advantages of convenience and quality assurance for China’s increasingly urbanised, mobile and discerning consumers. In particular, improvements in transport and in ease of storing fresh food through greater access to refrigeration are providing advantages over more traditional ‘wet markets’. In 2003, 89 per cent of Chinese urban households were estimated to have refrigerators, but only 15 per cent of rural households had them (National Bureau of Statistics 2004).

Modern supermarket chains achieve scale economies and bargaining power through centralised procurement. The increasing prominence of supermarkets is transforming food procurement systems away from wholesale markets increasingly toward centralised distribution centres and by contracting with specialised suppliers. In turn supplies for these centres are being sourced both from within China and internationally, with obvious implications for potential suppliers including those from Australia.

Potential limitations on production Factors that are likely to limit the extent to which production growth can keep pace with China’s rising demand for agricultural products include the limited land base, increasing pressure on availability and quality of water, particularly in the more northern areas of the country, environmental concerns and urban encroachment into some of the highest quality farm land.

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These limiting factors need to be considered along with the potential growth-inducing factors such as research and development and structural changes including those toward more specialised, larger and more efﬁ cient enterprises.

Cereal yields have not increased despite considerable research and development and increased irrigation It is perhaps surprising that average yields of grains per hectare have not increased signifi - cantly since about 1997 (see fi gure A) given that China has been making a substantial research and development effort to increase the productivity of its agricultural industries. Also, the total irrigated area rose gradually and continuously from 44.9 million hectares in 1989 to 54.4 million hectares in 2002 — there was a slight reduction for the fi rst time in over a decade, to 54.0 million hectares in 2003.

Environmental concerns appear likely to inﬂ uence the areas sown to grains Environmental concerns about the effects of high use of fertilisers and chemicals and continuous exploitation of land have probably contributed to China’s lack of yield growth for grains since about 1997. These concerns appear to have been reﬂ ected in a slowing in the rate of increase in aggregate use of chemical fertilisers from an average of 196 000 tonnes a year from 1991 to 1997 to an average of 72 000 tonnes a year from 1997 to 2003. It is not clear whether the slower increase has been in application rates for grains or other crops. However, it is likely in most instances that where land use has changed to input- intensive crops such as vegetables, fertiliser application rates would have been higher than for the grain crops previously grown. It therefore seems likely that the increases in fertiliser application rates for grain crops that were apparent until 1997 have been succeeded either by slower increases or even reductions.

Environmental concerns are also likely to have been instrumental in infl uencing the downward trend in areas sown to grains in recent years. Areas planted to grain crops rose from levels around 110 million hectares in the fi rst half of the 1990s to peak at 113 million hectares in 1998. They then fell to 99.4 million hectares in 2003. This decline would have been partly infl uenced in recent years by the Chinese Government’s ‘Grain for Green Program’ (GFGP) that was introduced on a pilot basis in 1999 and which was expanded to include 25 provinces when formally launched in 2002.

Under the GFGP the government makes incentive payments in three forms — in grain; in cash; and free seedlings for farmers to convert steep sloping and other lands prone to water and wind erosion from annual cropping to perennial grassland and forest. The objectives of the program are largely to address problems of erosion and ﬂ ooding arising from former clearing of forests for cropping and from the cultivation of large areas that were previously grassland. The program is directed primarily at farmers in the upper and particularly the middle reaches of the Yellow River and to farmers in the upper reaches of the Yangtze River where these problems are most acute. The scale of the program is ambitious, the objective being to divert more than 13 million hectares out of cropping by 2010, with at least 4.4 million hectares of that being land with a slope of more than 25 degrees (Uchida, Xu and Rozelle 2004).

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Taking around 13 million hectares out of grain cropping might be expected to have a signif- icant effect on China’s future grain production, considering that such an area is equivalent to around 13 per cent of total recent plantings to cereals. However, the regions affected are mainly the lowest yielding in the country and most of the areas taken out of cultivation would also tend to be the most environmentally vulnerable and lowest yielding in those regions.

Whether the land, once taken out of cropping remains under afforestation or pastures after the initial conversion could be an important consideration concerning the future effects of the program on grain production. Uchida, Xu and Rozelle (2004) observed that many US farmers who participate in the US Conservation Reserve Program that has many features in common with China’s Grain for Green program have indicated that they would be likely to return the land to cropping once government conservation payments cease, and the same might be expected with the Chinese program. It can also be observed that the Chinese Government faces a policy balancing act between meeting environmental objectives and a traditional objective of maintaining high self sufﬁ ciency in food grains. The payment rates made so far have been high and clearly aimed at income advancement for farmers as well as environmental objectives, and perpetuation of the program could be costly in a budgetary sense.

One aspect of the Grain for Green program that was reported in the early years of the program’s development was that, where conditions are suitable, many of the trees to be planted on formerly cropped land will be fruit and other commercially valuable trees (People’s Daily 2000). Where land under the program is planted to fruit trees, fruit production will be boosted, potentially reducing any Chinese import demand and possibly resulting in greater competition on export markets for fresh and processed fruit.

Future policy choices in R&D and water management likely to markedly inﬂ uence production It is likely that Chinese policy choices in the areas of research and development and in water supplies and management will have a major bearing on China’s future agricultural production and its degree of dependence on imports. Huang, Otsuka and Rozelle (2004) observed that China has made a major effort to develop its agricultural research and development institutions, and that those institutions have been steadily generating new varieties of rice, wheat and maize. In China, such research is being carried out by state institutions, and government outlays in biotechnology research overall is now close in absolute terms to US Government outlays on plant biotechnology research. They observe that after a period of substantial increases in volumes of inputs used, growth in input use in Chinese crop production is slowing and that future productivity growth is likely to depend substantially on whether China is able to generate new plant varieties. With the exception of Bt cotton, the new varieties that have so far been released have been developed through traditional plant breeding techniques. However, China has recently increased its commitment to biotechnology, using advanced tools for the synthesis, isolation and cloning of new plant genes and genetic transformations. The results of this work and the policies adopted on the release and commercialisation of genetically modiﬁ ed material could have a marked impact on China’s future agricultural production, including that of food and feed grains.

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Availability and quality of irrigation water is likely to present signiﬁ cant challenges for China’s ability to increase its agricultural production further. Lohmar and Hansen (2003) noted the uneven distribution of water between northern and southern China, with the productive areas in northern China having roughly a quarter of the water that the south has. They observed, in particular, the problems of the drawing down of water tables in heavily populated parts of northern China because of requirements for large urban areas and increased use for irrigation. They also noted that overexploitation of surface water over much of the Yellow River catchment in northern China can choke off the ﬂ ow to farmers in the productive downstream provinces of Shandong and Henan for parts of the year in dry seasons. Less reliable availability of irrigation water, along with pronounced seasonality of rainfall in some of the grain growing areas of northern China can compromise the ability of farmers to double crop mainly rain-grown maize with subsequently irrigated wheat. Availability of irrigation in the North China Plain is also important for cotton that relies on supplemental irrigation in the spring. Lohmar and Hansen (2003) note that maize production, being largely rain fed, is much less vulnerable to irrigation limitations than wheat.

How China manages its water supplies for the parts of its agriculture in the irrigation dependent northern areas is likely to have an important inﬂ uence on the extent to which it becomes import dependent for products that are grown in the affected areas, primarily wheat and cotton. Lohmar and Hansen (2003) conclude that if water policy reforms are successful, there is substantial capacity for China to adapt and avert a dramatic decrease in irrigated areas.

Infrastructure inadequacies being overcome Another factor that is likely to have a signiﬁ cant impact on the extent and composition of China’s future agricultural production and import requirements is the state of the country’s handling, transport and storage infrastructure. Huang, Otsuka and Rozelle (2004) noted that with the market reforms in the late 1980s and the 1990s, prices for major grains and oilseeds were being shifted in tandem throughout the country, with differences between regions closely approximating transport costs. Their analysis also showed that, over time, price variations between regions in China were declining with increasingly efﬁ cient markets and transport networks. They concluded (p. 22) that ‘the time in which China’s inland grain baskets were isolated by poor transportation and other infrastructural weaknesses has been ended, as China’s aggressive investments in roads and other infrastructure projects have come on line’. It could be expected, if China’s rapid economic growth is sustained, that remaining infrastructure inadequacies will be progressively overcome.

15 3 abare eReport 05.7

agricultural policies in China

Reforms allowing production adjustment in line with changing demand The ability of China’s agriculture to expand and adjust to the changing demands on it have been made possible by the degree to which the Chinese Government has been prepared to allow reforms that have enabled farmers to be more responsive to market forces. The reform process dates from the late 1970s when the Chinese Government started providing greater production incentives for farmers and replacing collective farming with a full contract system known as the household responsibility system. Since that time, there have been many changes to the degree to which the Chinese Government has intervened in agriculture, but the trend has been toward greater freedom of decision making by farmers to satisfy the rising and more diverse demands from an increasingly afﬂ uent community, particularly in the urban areas. While land reform has not extended to the provision of freehold rights, farmers can now take out leases of up to thirty years.

Recent moves to reduce traditional taxes on farmers and to provide some subsidies Low farm incomes have been an issue of concern to Chinese policy makers and, in 2004, China moved its policy approach away from taxing farmers toward subsidising them (Gale, Lohmar and Tuan 2005). For many years, farmers have been subjected to substantial national and regional taxes. As at 2004, farmers were subject to national taxes, with the national agricultural tax typically around 7 per cent of the normal value of production from a household’s land, plus a village administrative surcharge bringing the rate to 8.4 per cent. Additional taxes were allowed on nongrain crops and grassland areas. A direc- tive in 2004 stipulated that the agricultural tax was to be eliminated over ﬁ ve years and provincial authorities were given authority to cut taxes even faster if possible. However, at various times some crops, notably grains, have been subsidised, as was the case in the late 1990s when the government paid ‘protection’ prices above market levels for stipulated quota quantities. However, that program proved costly and since 2001 the government has been experimenting with various forms of direct subsidies for grain crops.

In 2004 a range of policy measures, including agricultural tax reductions of US$5–7 billion a year, grain subsidies of US$1.4 billion, some small subsidies for seed and machinery and a program of US$18 billion rural infrastructure expenditure, was announced (Gale, Lohmar and Tuan 2005). Although the grain subsidies are considerable in absolute money terms and they may be symbolically important, they are only small relative to either the value of production or farmers’ incomes. The direct subsidies and tax reductions have been estimated to average only US$5 per rural household member or 1–2 per cent of the 2003 average per person rural household income. Gale, Lohmar and Tuan (2005) conclude that the subsidies do not appear to have provided farmers with strong incentives to increase grain plantings.

16 abare eReport 05.7

They noted that the areas planted to rice, wheat and corn combined had fallen by 15 per cent between 1999 and 2003 as additional areas were planted to more proﬁ table crops including vegetables, cotton and orchard fruits or diverted to nonagricultural uses.

Although there has been much greater freedom for farmers to produce the products that are most in demand, the Chinese Government has maintained a propensity toward self sufﬁ - ciency policies for cereals, especially the main food grains, wheat and rice.

A range of policies to inﬂ uence import demand for wheat Future import demand for wheat is particularly difﬁ cult to forecast because it will depend on the balance between two large aggregates for consumption and domestically produced supplies that have both been declining in recent years (see table 5). Relatively small changes in either or both production and consumption can have large effects on imports that, over time, constitute the balance between these large amounts. This factor has the potential to result in highly variable imports from year to year, although the extent to which that might occur could also be markedly affected by the extent of stockholding infrastructure and stockholding policies and practices.

It may be noted that water constraints could be especially important for wheat and that policies to manage supplies for both urban, industrial and agricultural uses could be an important determinant of future Chinese production. In recent years, wheat production has declined more rapidly than consumption, but it was not until 2004 that this was reﬂ ected in an upsurge in imports. The reason for the delay in the increase in imports appears to have been an increasing reliance on the running down of previously accumulated stocks from 2000 to 2003. However, that approach could not be sustained given the low production in 2003 in particular. Although the government has tried to encourage wheat production in 2004 and 2005, production still appears to be signiﬁ cantly below expected consumption for those years. This could indicate that whereas China was able largely to avoid importing more than small quantities of wheat from 1995 until 2003, it may require larger quantities in future. However, even that conclusion can only be tentative because it depends also on the future of environmental land diversion programs and developments in technology, in particular those in plant breeding and commercialisation that may have the potential to boost future production through increasing wheat yields.

As with policies on incentives for grain production and for land and water management, policies on research and development and release and commercialisation of genetic material could all markedly inﬂ uence China’s wheat production and its future demand for imports.

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trade policies in China

China’s policies becoming more trade oriented Prior to the late 1970s, trade was not considered to contribute greatly to China’s economy. Exports were basically limited to paying for essential imports, with trade constituting only a small portion of China’s economy (Mina and Perkins 1997). Trade was dominated by centrally controlled and state owned foreign trade corporations. However, since 1979, there have been reforms in three main areas that have brought Chinese practices more in line with those in market oriented economies. Those areas were the elimination of central plans and introduction of market competition in import and export areas; reductions in tariff and nontariff barriers; and reform of the foreign exchange system (Centre for International Economics 2000). These reforms have reﬂ ected changes in China’s attitudes toward trade and its roles and recognition of the shortcomings of the previous system.

With accession to the WTO, China reduced agricultural tariffs and expanded access through tariff quotas China’s accession to the WTO in 2001 marked a milestone in China’s trade reforms. At that time, China committed itself to reducing its bound tariffs for agricultural products from an average of 22 per cent to 17 per cent by 2005. Bound tariffs are maximum tariffs that an importing country undertakes not to exceed. As well as reductions in bound tariff levels, China adopted import tariff quotas for a number of major agricultural products and made undertakings to limit the proportion of tariff quota entitlements that would be taken up by state trading enterprises. Where tariff quotas apply, imports that are below the speciﬁ ed tariff quota quantity enter at lower tariffs than the general tariff that applies for quantities beyond the quota. The tariff quota commitments and selected reduction commitments for tariff-only items are shown in tables 8 and 9.

China using tariff quotas to address supply and protection issues The use of tariff quotas as a means of increasing market access provides China with substantial ﬂ exibility in addressing market supply and agricultural protection issues. The above- quota tariffs may be used to protect against import competition, but if the supply situation warrants it the government can choose to impose lower tariffs on imports in excess of the tariff quota. China itself allowed some above-quota imports of cotton at the low in-quota tariff in 2003 following a low production year.

An important characteristic of tariff quotas is that their application does not guarantee that the quotas will be fi lled. It is entirely possible for a country to apply large tariff quotas that are only partly fi lled. It can be seen from table 10 that fi ll rates for Chinese tariff quotas varied widely in 2002 and 2003, ranging from virtually zero for maize, for which China was a net exporter in those years, to a slight overfi ll for cotton in 2003.

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China using tariff quotas for import expansion while maintaining some government controls Tariff quota quantities for wheat, maize, rice and cotton are substantially above imports that applied around the time of China’s accession to the WTO, giving substantial room for increases in imports. Such an increase actually occurred for cotton in 2003 when there was a big increase in cotton imports as a result of a reduced domestic crop. There was also a substantial increase in wheat imports in 2004 following a low production year and a rundown in stocks. The in-quota tariffs for these four items are only 1 per cent, but the ﬁ nal bound tariffs for above-quota imports are high providing an ability to effectively limit imports to the tariff quota quantities if the government deems that necessary. Also, the ability of the Chinese Government to inﬂ uence imports through state trading enterprises and public stockholding is considerable, especially for wheat, where the state share of the tariff quota can be as much as 90 per cent. Under the terms of accession to the WTO, the state share of tariff quotas is also substantial for sugar, maize and rice, giving considerable direct control to the government.

The bound tariff rates for quantities above the tariff quota levels are tariffs that the government has undertaken in the WTO not to exceed. The high above-quota bound tariffs for most products other than vegetable oils have the potential to limit imports to the tariff quota quantities.

There has been wide variation in degrees to which tariff quotas have been ﬁ lled since the tariff quotas have been established. This could reﬂ ect variations in domestically produced supplies relative to demand and/or administrative arrangements, import standards and government controls that may be used to restrain imports within tariff quotas.

8 Tariff quota commitments on China’s accession to the WTO in 2001 Bound Final Final Final Final Final state Average 2000–02 tariff on bound commit- in-quota in-quota share of Actual accession tariff ment date quantity tariff tariff quota Production imports % % kt % % kt kt Wheat 74 65 2004 9 636 1 90 94 600 763 Maize 74 65 2004 7 200 1 60 113 799 16 Rice 74 65 2004 5 320 1 50 180 009 a 256 Soybean oil 63 9 2005 3 587 b 9 10 4 143 313 Rapeseed (canola) oil 63 9 2005 1 243 b 9 10 3 595 67 Palm oil 63 9 2005 3 168 bc 9 10 217 1 346 c Sugar 71.6 50 2004 1 945 15 70 9 000 1 007 Wool – raw 38 38 2004 287 1 nil 299 227 Wool – tops 38 38 2004 80 3 nil na 35 Cotton 61.6 40 2004 894 1 33 4 887 79 a Paddy. b Tariff quotas are to be eliminated on 1 January 2006 when the ﬁ nal bound tariff falls to the same level as the former within-quota tariff. c Excludes palm stearin. na Not available. Sources: WTO (2001, 2005); FAO, Production and Trade Yearbook (various issues); National Bureau of Statistics of China (2004).

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The fi nal tariff quota quantity for greasy wool, at 287 000 tonnes a year provides some latitude for growth from past actual annual imports that since 2000 have varied between 167 000 tonnes and 250 000 tonnes. The bound tariff for above-quota imports, at 38 per cent, is considerable and could potentially be a major obstacle to above-quota imports if, in contrast to the relatively static or even declining imports in recent years, imports were to rise suffi ciently to fi ll quota availability. Nevertheless, that might not necessarily be the case depending on future applied tariff levels.

9 China’s tariff commitments for selected tariff-only items Final Final Bound tariff bound commitment on accession tariff date % % Vegetables Potatoes, tomatoes, onions peas, beans, carrots 13.0 13 Sweet corn 11.8 10 2004 Caulifl owers and headed broccoli 11.8 10 2004 Cabbage lettuce (head lettuce) 13.6 10 2004 Mixtures of vegetables 11.8 10 2004 Oilseeds Soybeans 3.0 3 Rapeseed (canola) 9.0 9 Sunfl owerseed 15.0 15 Fruit Oranges 28.4 11 2004 Mandarins 28.8 12 2004 Fresh apples and pears 22.0 a 10 2004 Fresh grapes 29.2 13 2004 Cherries, peaches 22.0 10 2004 Dairy products and eggs Butter, dairy spreads 36.7 10 2005 Yogurt 34.0 10 2004 Cheese 34.8 12 2004 Skim milk powder 15.0 10 2204 Eggs 23.0 20 2004 Meat Beef – unboned fresh or chilled 35.0 20 2004 – cuts & boneless fresh or chilled 31.8 12 2004 Lamb – fresh, chilled or frozen 19.8 15 2004 Pig meat – frozen 16.8 12 2004 Pig meat – fresh or chilled 20.0 20 Fish and seafood Fish fi llets – frozen 23.3 10 2005 Prawns and shrimp 17.5 5 2003 Rock lobster 23.3 10 2005 a Excludes ya, hsueh and xiang pears. Source: WTO (2001).

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China’s imports under tariff quotas and percentage tariff quota ﬁ ll rates in 2002 10 and 2003 2002 2003 Quota Imports Fill rate Quota Imports Fill rate kt kt % kt kt % Wheat 8 468.0 631.6 7.5 9 052.0 447.2 4.9 Corn 5 850.0 8.1 0.0 6 525.0 0.7 0.0 Rice 3 990.0 236.3 5.9 4 655.0 257.1 5.5 Greasy, carbonised and scoured wool 264.5 192.2 72.6 275.8 166.5 60.0 Wool tops and combed and carded wool 72.5 45.1 62.2 76.3 27.8 36.5 Palm oil 2 400.0 1 694.7 70.6 2 600.0 2 328.2 89.5 Soybean oil 2 518.0 870.2 34.6 2 818.0 1 884.3 66.9 Canola (rapeseed) oil 878.9 77.8 8.9 1 018.6 151.6 14.9 Sugar 1 764.0 1 183.1 67.1 1 852.0 775.2 41.9 Cotton 818.5 176.7 21.6 856.3 873.6 102.0 Sources: WTO 2001, 2005.

The in-quota tariff for sugar is fairly high, at 15 per cent. The above-quota bound tariff is also fairly high, at 50 per cent, and the ﬁ nal state share of the tariff quota is also high, at 70 per cent. All of these factors are indicative of an ability to control competition that the domestic industry faces from imports and scope for the Chinese Government and its agen- cies to inﬂ uence sources of imports. At the same time, the tariff quotas provide room for expansion of imports above those in recent years.

21 5 abare eReport 05.7

trends in Australia’s trade with China

Australia’s trade with China has been increasing rapidly, with both total exports and imports having more than doubled in nominal Australian dollars between 1999-2000 and 2003-04.

Australia’s total exports to China have been substantially smaller in value than imports from China and have comprised mainly a mix of agricultural products, minerals and energy resources and manufactured products. On the other hand, most of Australia’s imports from China are of manufactured and processed products, with imports of agricultural products having been relatively minor.

In aggregate, the values of Australian exports of agricultural products to China have been variable, with little or no growth since 2000-01. Wool has been by far the largest single item, but it has not shown any growth since 2000-01. The value of exports of grains, which have been the second largest category of Australia’s overall and agricultural trade with China agricultural exports to China, has varied 11 widely from year to 1999-2000 2000-01 2001-02 2002-03 2003-04 year. Exports of sugar $m $m $m $m $m and oilseeds to China Australian exports to China have also been highly Total 4966 6841 7 817 8 803 9 912 variable. Expanding Main agricultural products Australian agricultural Wool 855 1 200 1 320 1 309 1 066 export items to China Hides and skins 82 182 156 131 176 in recent years have Cotton 10 26 28 58 185 Grains 84 339 510 332 265 included cotton, meat, Oilseeds 406 108 137 21 2 dairy products, live Live animals 11 12 13 42 124 animals and seafood. Processed meats 63 75 94 97 115 These items corre- Dairy products 31 64 96 81 74 spond closely to those Seafood 31 36 53 57 56 Sugar 17 24 88 99 44 for which China’s demand levels have Total food and beverages 672 688 1 051 754 636 been increasing. A Total of food, wool, hides, cotton and live animals 1 630 2 108 2 568 2 294 2 186 summary of Australian trade with China and Australian imports from China of the share of various Total 7 515 9 881 11 275 13 789 15 339 Food and live animals 125 152 212 242 264 agricultural products in Sources: Department of Foreign Affairs and Trade (2004); Australian Bureau of Statistics it is given in table 11. (2005).

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concluding comments

Continued growth and increasing diversity in China’s demand for agricultural products has so far been met predominantly from domestic sources. There is clearly a potential for much increased demand for some products, especially meat and dairy products. Whether Chinese agriculture with its already stretched resources of land and water can continue to meet the expected further increases in demand is open to question, and greater reliance on imports is likely. Whether Australian agriculture participates in any such expansion will depend both on the conditions under which Australian and others’ products can obtain access to the Chinese market and on Australian agriculture’s ability to adapt its production to the changes in Chinese demand.

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references

Australian Bureau of Statistics 2005, International Trade, Electronic Data Service, cat. no. 5464.0, Canberra.

Centre for International Economics 2000, Trade and Industry Policies for Economic Inte- gration, Canberra.

Department of Foreign Affairs and Trade 2001, Agrifood Globalisation and Asia, Subsis- tence to Supermarket 11, vol. 1, Agrifood Multinational Corporations in Asia, Canberra

—— 2004, Composition of Trade, Australia: 2003-04, Canberra.

FAO (Food and Agriculture Organisation of the United Nations) 2004, Food Balance Sheets, Rome (www.fao.org/).

Gale, F. 2002, ‘China’s statistics: are they reliable’, in Gale, F. (ed.), China’s Food and Agriculture: Issues for the 21st Century, Agriculture Information Bulletin no. 775, Market and Trade Economics Division, Economic Research Service, US Department of Agricul- ture, Washington DC.

Gale, F., Lohmar, B. and Tuan, F. 2005, ‘China’s new farm subsidies’, WRS-05-01, Elec- tronic Outlook Report from the Economic Research Service of the US Department of Agriculture, Washington DC.

Hu, D., Reardon, T., Rozelle, S., Timmer, P. and Wang, H. 2004, ‘The emergence of supermarkets with Chinese characteristics: challenges and opportunities for China’s agricultural development’, Development Policy Review, vol. 22, no. 5, pp. 557–86.

Huang, J., Otsuka, K. and Rozelle, S. 2004, The Role of Agriculture in China’s Push to Modernisation: Advances in Biotechnology, Market Accessibility, and Land Rentals, Chinese Academy of Sciences, Foundation for Advanced Studies on International Devel- opment and National Graduate Institute for Policy Studies and Department of Agricul- tural and Resource Economics, University of California, Davis.

ISTA Mielke GmbH 2004, Oil World Annual, Hamburg (and previous issues).

Lohmar, B. and Hansen, J. 2003, China’s agricultural water scarcity: effects on international markets’, Paper prepared for the 2003 Annual Meetings of the American Agri-

24 abare eReport 05.7

cultural Economics Association, Montreal 28–30 July, Economic Research Service, US Department of Agriculture, Washington DC.

McDonald, D., Nair, R., Rodriguez, G. and Buetre, B. 2005, Trade ﬂ ows between Australia and China: an opportunity for a free trade agreement, Paper presented at the 49th Annual Conference of the Australian Agricultural and Resource Economics Society, Coffs Harbour, New South Wales, 9–11 February.

Mina, G. and Perkins, F. 1997, China’s Transitional Economy: Between Plan and Market, Brieﬁ ng Paper Series no. 5, Department of Foreign Affairs and Trade, Canberra.

National Bureau of Statistics of China 2004, China Statistical Yearbook: 2004 (no. 23), China Statistics Press, Beijing (and previous issues).

People’s Daily 2000, ‘Grain for Green project takes off in west China’, 17 April, Bejing (english.peopledaily.com.cn)

Uchida, E., Xu, J. and Rozelle, S. 2004, Grain for Green: Cost-effectiveness and Sustain- ability of China’s Conservation Set-aside Program, University of California, Davis, and Chinese Academy of Sciences.

US Department of Agriculture 2005, PSD Online, Foreign Agriculture Service, Washington DC (www.fas.usda.gov/psd/).

WTO 2001, Report of the Working Party on the Accession of China, WT/ACC/CHN/49/ add.1, Geneva, 1 October.

—— 2005, Integrated Database, Geneva.

Zhou, Z.-Y. and Tian, W.-M. 2003, China’s Regional Feedgrain Markets: Developments and Prospects, Australian Grains Research and Development Corporation, University of Sydney and China Agriculture University.

25 Research funding. ABARE relies on ﬁ nancial support from external organisations to complete its research program. As at the date of this publication, the following organisations had provided ﬁ nancial support for ABARE’s research program in 2003-04 and 2004-05. We gratefully acknowledge this assistance.

Asia Pacifi c Economic Cooperation Secretariat Forest and Wood Products Research and Development AusAid Corporation Australian Centre for International Agricultural Grains Research and Development Corporation Research Grape and Wine Research and Development Corporation Australian Gas Association GHD Services Pty Ltd Australian Greenhouse Offi ce Horticulture Australia Australian Quarantine and Inspection Service Institute of National Affairs, PNG Australian Wool Innovation Limited ITS Global Batelle Pacifi c NW Land and Water Australia Canegrowers Meat and Livestock Australia Chevron Texaco Melbourne University Private Commonwealth Grants Commission Ministerial Council on Energy Commonwealth Secretariat, London National Land and Water Resources Audit CSIRO (Commonwealth Scientifi c and Industrial National Landcare Program Research Organisation) National Oceans Offi ce Dairy Australia Natural Heritage Trust Department of Agriculture, Fisheries and Forestry New Zealand Ministry of Foreign Affairs and Trade Department of Business, Industry and Resource New Zealand Ministry of Prime Minister and Cabinet Development, Northern Territory Offi ce of Resource Development, Northern Territory Department of Environment and Heritage Organisation for Economic Cooperation and Department of Foreign Affairs and Trade Development Department of Health and Ageing Plant Health Australia Department of Industry, Tourism and Resources Pratt Water Department of Infrastructure, Victoria Primary Industries, Victoria Department of Natural Resources and Mines, Queensland Rio Tinto Department of Primary Industries, Queensland Rural Industries Research and Development Corporation Department of Prime Minister and Cabinet Snowy Mountains Engineering Corporation Deutsche Bank Terrapin Australia Pty Ltd East Gippsland Horticultural Group University of Queensland Exxon WA Global Ocean Observing System Fisheries Research and Development Corporation Woodside Energy Ltd Fisheries Resources Research Fund Woolmark Company Pty Ltd Food and Agriculture Organisation of the United Nations