Effects on Chinese Agricultural Price Supports

Published on Author mansone18

The Chinese Government has recently announced that “the government will let domestic grain prices be decided by the market, with the state’s price support no longer playing a role” (Terazono 2016). This position differs from a year ago when Chinese price support policy was “moving in the opposite direction from developed countries, which are gradually reducing such support” (The Economist 2015). Staring in the early 2000s, “agricultural support… included tax reductions, direct subsidies, price supports, policy loans, expenditure on infrastructure, and intergovernmental transfers” (Gale 2013). One of the key aspects of these policies were government enforced minimum price of crops like grain and corn. The goal of agriculture support was to help develop and modernize the agricultural sector and reduce rural-urban inequality, yet many economist point out adverse effects they had on Chinese agriculture.

Screen Shot 2016-02-02 at 2.10.36 PM
Due to government policy which implements a minimum price, Chinese corn is almost twice the price CBOT corn

As China’s economy rapidly industrialized, it went from taxing farmers to subsidizing the agricultural industry. Zheng Gu points out that according to “development economics… a nation begins to support agriculture when it enters the stage of industrialization” in order to support its industry based economy. (Gu 2014) While Gu claims that many of these policies had a positive effect on farmer’s incomes, thus accomplishing the goal of helping to developing rural areas, others point out that policies that force crop prices to be artificially high make Chinese crops noncompetitive with foreign crops. Therefore, Chinese farmers cannot export their crops on a foreign market and Chinese markets are encouraged to imports cheaper, foreign products. Emiko Terazono claims China’s new agriculture policy will “reduce the incentive to import alternatives” but “could also affect the incentive to plant”(Terazono 2016).

Cited: http://www.economist.com/new/china/21651272-other-cut-farm-support-china-spends-more-wrong-direction


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6 Responses to Effects on Chinese Agricultural Price Supports

  1. 1. In class I’ll show Zotero and an associated set of research tools to use for citations for things such as this. I’ll use the content of this post rather than pick an arbitrary example.

    2. I can’t put into a comment, graphics aren’t enabled [a basic WP setting, I can’t change it]. But it’s helpful to do a S&D diagram with a price floor. The post has the content, but a simple graphical model helps highlight what’s going on.

    3. Who (if anyone) is hurt by price supports?

    4. What are the fiscal implications of price supports? [cf. the European Union’s CAP].

  2. Artificial price supports harm both consumers and the economy as a whole. Consumers are harmed because they are forced to pay a higher price. For example millers, who turn wheat into flour are harmed, because their raw materials cost more. In addition, everyday consumers are harmed because flour, and all other goods that require subsidized materials, cost more. Also, there is a dead weight loss to the economy, since the quantity produced does not equal the quantity supplied. As a result of these price supports, farmers overproduce and consumers buy less than they would in an equilibrium situation.

  3. Another way of viewing the fiscal implications of artificial price supports is that it does not allow the market to operate at optimal efficiency. Consumer surplus is not at all maximized: they are forced to pay a higher price than many are willing to pay. And while producer surplus is greater than normal at the higher price, less people buy grain because they can’t afford it.

    • CS vs PS: good to see those concepts in use!!

      Here though we may have a case in which producers are (i) poorer than producers and (ii) depend totally on good prices for wheat and so on. In contrast consumers are (i) on average better off and (ii) are only modestly affected by higher grain prices, it’s one part of their food budget which is one part of their overall consumption. Efficiency is only one criterion for thinking about the performance of a market. Be careful not to make it the only criterion just because it’s easy to conceptualize and possible to quantify.

      We’ll read about other side effects in the Wallace book that lead to agricultural subsidies.

  4. As it has been discussed, price supports lead to increased producer surplus. Since the price of the product is higher, farmers try to increase output in order to maximize profit. This then leads to a further flooding of the market. The results are not desired for at least two reasons. One, the system becomes wholly inefficient as the government must buy up the additional products in the market. Two, the environment suffers.

    Pesticide and genetically modified seed use increase, potentially harming the environment. Additionally, as the US National Center for Policy Analysis discusses, agricultural “expansion [could] increase contamination, impairing water quality.” These side effects of producer surplus caused by price supports are perhaps not evident when considering simply the surplus itself. However, they are necessary to understanding the fiscal and ethical implications. The environmental changes that occur could result in health problems down the line – ones that could have been avoided had it not been for the implementation of price supports.


  5. Although there’s price support for farmers, and seemingly it’s a large amount, living condition and wage rate of Chinese farmers are still pretty low. In the most recent CCTV1 show that the price of corps bought from farmers is less than 1/20 of the market price. Especially, as a developing country, capital and technology is still a huge problem. Also, farmers don’t own lands. With the huge immigration from villages to cities, keeping enough farmers needs further support and more specific policies.