Key Market Elements in Farmer Compensation – Opinion

The Government Work Report submitted to the National People's Congress at its annual meeting on Tuesday reiterated the importance of taking comprehensive measures to strengthen the foundations of food security. Meanwhile, the first central document of 2024 proposes to consider strengthening food security infrastructure. Establishment of an interstate horizontal compensation mechanism for major grain production and marketing regions This proposal aims to expand production in major grain production regions by increasing economic incentives and strengthening production capacity. It encourages the role of sales regions. Taking a more active role in ensuring food security by providing financial support to major grain producing states The rationale behind this policy is twofold.

First, major grain producing regions have contributed greatly to China's food security. According to government data, in 2023, the 13 major grain-producing states will account for 78% of the country's total grain production, while the 7 major grain-selling states will contribute only 4%, and the 11 self-sufficient states will account for 18% of the country's total grain production. %. Major grain-producing regions have large grain production volumes, which increases the burden of food-related loans, increases the opportunity costs associated with grain production, and increases fiscal stress.

And second, the economic development indicators of major grain-producing regions lag behind those of major grain-selling regions. Indicators such as per capita GDP, per capita farmers' disposable income, and local fiscal income (especially land revenue) show that there is a large gap between major grain producing regions and major grain marketing regions. There is. As a result, major grain-producing regions are often referred to as “large-grain states, economically weak states, or fiscally poor states.''

Furthermore, protecting arable land in major grain-producing regions is a difficult challenge, affecting local land finances, undermining the economic interests of local governments, and undermining land conservation efforts. Become. Currently, compensation for grain production in major grain-producing regions relies on vertical subsidies from the central government, which fail to offset the corresponding opportunity costs.

Therefore, the proposed interstate horizontal compensation mechanism could provide more subsidies to major grain producing regions. However, more attention needs to be paid to the role of market mechanisms in its design and implementation.

The principle of compensating those who contribute to grain production should be upheld, and monetary compensation should be commensurate with the size of the contribution. Simply put, regions that contribute more should receive more compensation. Ideally, a specialized compensation fund should be established and managed by the central government for that purpose. Of course, major grain marketing regions should contribute significantly to this fund.

However, expecting every state that sells grain to compensate grain-producing states on a one-to-one basis is unrealistic and goes against market principles. Additionally, it is difficult to determine the amount of funds that can be transferred from one state to another. Additionally, allowing states to compensate each other on their own would inherently require government intervention, potentially undermining fair competition and efficiency.

Regarding the use of compensation, it should primarily increase food production capacity, with a particular focus on green box policies that do not distort the market. This includes investing in agricultural infrastructure, research and environmentally sustainable farming practices. However, compensation should not act as a direct subsidy on food prices or inputs.

Provinces in eastern, central, and southern China such as Zhejiang, Hunan, Guangdong, and Fujian, as well as Guangxi Zhuang Autonomous Region, are blessed with abundant natural resources and climate, and can boast high food production. Financial support is needed to increase grain production. production. Compensation mechanisms should therefore encourage eastern, central and southern regions to take advantage of these comparative advantages and increase food production.

For example, the introduction of small machines and the latest technology that are easy to use even in hilly areas and narrow spaces should be encouraged. Furthermore, institutional and policy innovations should be directed towards increasing farm size in southern hill states and regions.

The main grain-producing regions of the north must not only increase grain production, but also prioritize the protection of natural resources and the environment. In 2004, a map of major grain production, marketing and subsistence areas was created. After 20 years, the segmentation will need to be adjusted as demand and supply change due to economic development, advanced technology, and innovation. , as well as climate change.

However, it is important to recognize the limitations of horizontal compensation mechanisms between states. That's because it accounts for only a small portion of the actual cost of food production. Addressing the externalities inherent in food production requires fundamental changes to food prices. Market prices for food should reflect the true cost of production, taking into account ecological factors and other externalities, as well as price adjustments and taxes.

The key to increasing farmers' incomes in major grain-producing regions lies in expanding production scale, improving production technology, strengthening agricultural value chains, and promoting strong regional economic development.

Long Wenjin is an assistant professor at the School of Economics and Management, China Agricultural University. Mr. Van Schengen is Dean of the World Food Economics Policy Academy and Professor at China Agricultural University. The views do not necessarily reflect those of China Daily.

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