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Policy brief

On Chinese government’s purchasing policy of rice in 2012

For decades, china is the biggest rice producer, exporter and consumer in the world, now became an big importer in 2012. China has net import record of rice for four times in the past 50 years. 2011, china imported 575,000 tons of rice, while in 2012, it remarkably purchased 2.6 million tons of rice[i].

Last year, the Chinese government had increased minimum purchase price of paddy by around 9% to 17%. According to the UN’s Food and Agriculture Organization (FAO), rice prices in China have increased over 18% in the last two years and the purchasing price has been increasing 5 years in a row. Because of this policy, price of the indica variety in Hubei, China, is at $ 625 per ton in September, 2012. By contrast, Vietnam’s price is $451 and Thailand’s $598[ii].

To farmers: The purpose of minimum purchase price is to largely boost the domestic supply also pushed up the domestic price of rice. This indeed can increase the farm income on the consumptions of no import involved and all the rice output can be purchased at minimum price.

However, minimum purchase price wasn’t apply to every rice farmers. The scheme of purchasing policy is plan to be done by the ” market”[iii], government mandated the lowest price that processing companies ( not by government itself) pay for the farmers. While facing a much lower rice price from countries such as Thailand and Vietnam, Processing companies undoubtly choose to buy imported rice rather than local rice. This policy turnout pushed rice price down, rice farmers and small scale millers will be hurt by this. In this logic, government’s announcement about increase minimum purchase price will further hurt farmer’ welfare[iv].

To world market:

Rice consuming countries are normally large producing countries, hence the international trading volume of rice is only a small fraction of world production. According to FAO data[v], the world trading amount is 37.3 million tons which is 7.7% of world production.  Average rice consumption of china is 0.14 billion. Any surge or decline in major production/consumption country may lead to violate in world rice prices. A sudden increase of rice price in 2008 had caused prices of other agricultural commodities and lead to a food crisis.

Keeping this pace, people may worried that whether the rice production of other places can feeds the need of Chinese market. If exclude food security issue, not in a far future, international market price will reach to the same level of domestic price Importing may shrink.

To society:  Consumers now have access to larger amount of cheaper foreign rice, consumers’ surplus has been increased. However, for the farmer, larger output but lower sales leads to not only opportunity cost and inventory cost. The average storage loss is 7%~10% which equal to 300~340 million tons.  Thatr is a dead weight to the society.

This model illustrate the minimum rice purchase price policy (externalities and storage loss are not included).

Pw: representing importing price

Pp: represent purchase price

P: is the domestic price, which is the selling price from trader. The optimum selling price for trader is at pp with all information known. But which is impossible, I assume they sell at equilibrium price to meet market demand which on the other hand also pushed down domestic price assumed to be.

Stimulate by government policy, the producing amount increase from D to C.  With importing, market equilibrium is at O, making the ABCD the dead weight loss for the society. Traders get the amount of surplus POPw. Farmers’ loss the assumed surplus of PpABOP.

Recommend: aside of food safety issue, to make this policy benefit farmers, government should put a restriction on import such as quota or import tax. Or, the government should undertake the purchase responsibility, instead of “ market” . With direct payment from government, rice producers will have more incentive to push up output.

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