Price Responsiveness of Rice Farmers and the Effectiveness of Grain Support Policies in China Yan Jin, Cornelis Gardebroek, and Nico Heerink Abstract
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Price Responsiveness of Rice Farmers and the Effectiveness of Grain Support Policies in China Yan Jin, Cornelis Gardebroek, and Nico Heerink Abstract Declining arable land and yield stagnation challenges China to feed its growing population. To increase national food security and farmers’ incomes, China has introduced various grain support policies since 2004. This paper evaluates the effectiveness of price supporting policies on the Chinese rice acreage. To investigate whether these policies were effective given that global rice prices increased after 2004, we perform our empirical analysis in two phases. First, using data on rice prices and acreages, we test whether supply responses of rice farmers have changed since 2004 because price responsiveness is required for the policy to be effective. Second, we perform Monte Carlo simulations to construct counterfactual acreages to assess the impact of the policy. The results show that acreages respond positively to farmers’ expected price for early, middle, and late indica rice. For early and late indica rice, there is a statistically significant positive change in acreage response to expected prices after the policy intervention in 2004 than before. Monte Carlo simulations show that the probability of effective policy for early, middle and late indica is 75.60%, 72.68% and 53.32%, respectively. Therefore, although there is heterogeneity in different rice varieties, the policy is in general effective in increasing rice acreages given that global rice prices increased after 2004. Keywords Acreage response, price intervention, expected price, price volatility, Monte Carlo, China 1. Introduction The agricultural challenges for China include maintaining growth of farmers’ income, achieving sustainable agricultural development and ensuring national food security (Huang and Yang, 2017). With only 6% of fresh water and 7% of arable land in the world, China has to feed nearly 20% of the world’s population (Wong and Chan, 2016). The population in China reached 1.39 billion in 2019 (World Bank, 2020). Therefore, ensuring food security, especially grain security, is important for economic development and social stability (Li et al., 2013). To increase national food security and increase farmers’ income, China’s policymakers have implemented several policies. The first set of policy measures consists of the abolition of taxes and fees and introduction of subsidy programs since 2004. To promote grain and other major crop production, China introduced the temporary storage program for maize, rapeseeds, and soybean since 2008. A price intervention program was introduced to ensure the minimum procurement price for rice since 2004 and wheat since 2006 (Huang and Yang, 2017). 1 This paper focuses on rice support policies since rice is the main staple food for more than half of the population. China consumes more rice than any other country, with 143.8 million metric tons in 2018 (USDA, 2018). Due to increased grain yield and improved crop management practices such as fertilization and irrigation, rice production in China has tripled in the past three decades (Peng et al., 2009). However, there was yield stagnation in the past ten years. Together with increasing population, China will need to produce around 20% more rice by 2030 to meet the domestic consumption (Peng et al., 2009). Apart from the yield stagnation and increasing population, from 1976 to 2004, there was a declining trend in rice acreages in China (Ricepedia, 2020). The continuously decreasing rice acreages in combination with China’s desire for national food security triggered the introduction of policy interventions since 2004. After 2004, rice acreages stabilized and even increased by 8.3% in the period 2004-2017 (NDRC, 2017). However, at that time international rice prices were also on the rise, culminating in the 2007/08 price peaks. It is not clear whether the increasing rice acreage is due to the policy intervention or due to the increasing domestic rice price in line with the international rice price. In other words, the question is whether this policy was effective given that rice prices increased after 2004. The objective of this paper is to investigate whether the rice support policy had a positive effect on rice acreages in China given the rising global rice prices. In order for the minimum procurement price policy to be effective, there are two questions to be answered. First, did rice acreages before and after 2004 relate to rice prices? If rice acreages did not respond to prices, we would not expect the policy to be effective at all. Moreover, we also examine whether the relation between acreages and prices was different before and after 2004, since the minimum procurement price policy may have reduced price risks and make farmers’ planting decisions more responsive to prices. This will be analysed with a fixed effects panel data model using acreage data and domestic prices for 3 main rice varieties (early, middle, and late indica rice) for 27 Chinese provinces for the period 1988-2017. Second, was there a positive impact of the minimum procurement price policy on rice acreages? To analyse this, we need to construct counterfactual acreages after 2004. These counterfactuals are based on international rice prices. A few econometric studies show the dependence of Chinese rice prices on international prices. Using monthly time series data from 2005 to 2013, Lee and Valera (2016) found a small positive and statistically significant effect of lagged world rice prices on Chinese domestic rice prices. Moreover, their analysis shows absence of Chinese rice price volatility spillovers to global prices, mainly because the Chinese prices are rather stable. Using cointegration analysis and an error-correction approach, Huang et al. (2014) also found that Chinese domestic rice prices were affected by international rice prices in the period 2003-2006. The long-run transmission of international rice price to China’s domestic prices faded during the global financial crunch (2007-2008), but after that, the domestic Chinese rice price in relation to the international trend returned to levels that had existed prior to the global food crisis (Huang and Yang, 2014). Based on the findings in the literature, we assume that Chinese rice prices would have closely followed international rice prices in the absence of domestic Chinese policies as they did up to 2004 (Huang and Yang, 2017). Therefore, we construct counterfactual acreages based on the international prices. Recognizing the inherent 2 uncertainty in constructing counterfactuals, we perform Monte Carlo simulations to include the market volatility and derive simulated counterfactual acreages that are compared with observed acreages to analyse the impact of the minimum procurement price policy. Some literature studying the effectiveness of the price supporting policies focused on grain subsidy programs. Huang et al. (2011) concluded that grain subsidy programs did not distort farmers’ decisions in terms of grain area or input use decisions. Yi et al. (2015) examined the effects of the grain subsidy programs on grain-sown areas. By introducing households’ liquidity constraints, they concluded that liquidity-constrained households were likely to distribute more land to grain production while households that are not liquidity-constrained were not significantly affected by the grain subsidy. There are other measures within the price supporting domain, such as minimum procurement price, which also play an important role. A few recent papers studied the effectiveness of price supporting policies in a broader sense. Li and Chavas (2018) used quantile auto-regression to investigate the effects of China’s price support policy on price enhancement and price stabilization in the Chinese rice and corn markets. The results show that the price support policy increased the price of corn and contributed to stabilizing the domestic rice market. Wang and Wei (2019) developed an aggregate structural econometric model of China’s soybean market to analyse the worldwide impacts of China’s soybean price support policies from 2008 to 2016. The results show that the soybean price support policies played an effective role in stabilizing the domestic price and the welfare distribution. Lyu and Li (2019) used a regime-switching model to evaluate the effectiveness and sustainability of the grain price support policies in China. They found that there is a structural change since 2004 when the price support policies were established, and since then, Chinese grain prices have followed a regime with significantly lower volatility. So far, the literature focuses on the effectiveness of price supporting policies in stabilizing domestic grain prices. As far as we are aware, there is not much research on evaluating the effectiveness of price supporting policies on the acreage through price responsiveness of farmers. Supply response cannot be simply tested by acreage change before and after the policy intervention since structural change does not necessarily mean the policy takes effect. Even though the acreage does not increase significantly after the policy intervention, the policy may still be effective since acreage could have even decreased more without the policy. Considering the increasing global price after 2007/08 due to the global food crisis, it is even more unclear whether the acreage change is due to the policy intervention or due to the increasing international rice price. Therefore, our study investigates