Land Reform. It's A Coming. Sort Of?
Not sure why the huge interest in this subject, but I have probably received more emails/comments asking if I am going to write about this than probably anything else ever. The "this" is China's expected changes to rural land laws. I was going to write about it after speaking with some of our food business clients who work with China, but I figure doing so now will stop the emails, so here goes.
Forbes Magazine did a nice piece on this, and not just because they extensively quoted CLB's own Steve Dickinson in it. The article is entitled, "China Farmers Granted More Freedom On Land Rights," and it calls the anticipated laws a "major initiative to marketize China's countryside." It describes the reforms as follows:
The reforms, approved at a Oct. 9-12 party meeting led by President Hu Jintao, still need to be greenlighted in March by the National People's Congress, China's legislative body, which has traditionally been a rubber-stamp institution. Land will remain owned by "the people," under China's constitution and effectively controlled by the state, with 30-year use rights granted to rural households.The new policy, if implemented, would allow China's 800 million peasants to lease their land use rights to other individuals or companies, such as big farm contractors, or to exchange them.
The article goes on to say that these reforms are intended to increase agricultural production:
The agricultural sector is dominated by households operating on small parcels of land allocated by the state. The new policy likely will open the way for more U.S.-style industrial-scale farming by agricultural companies. The government wants to keep food production steady, a goal that is getting more difficult amid rapid urbanization. The country's agricultural deficit with the United States has ballooned to record levels (see "Fertile Opportunities For U.S. Agribusiness In China"), and China cannot produce close to all the food it consumes.
Philosophically and politically, this looks like a huge deal to me, but I am going to leave those areas to others. My real question is how is this going to affect foreign and Chinese food businesses. I think it will lead to bigger farms in China and increased efficiency, and with that, increased exports of food, but I am not sure. Is there a farm economist out there who can help me on this?
Steve Dickinson had this to say:
But the land system will remain only partially open, as farmers will not lose rights to land that they lease out. "Even though they use the term 'mortgage,' the terms are so restrictive that it is not a true mortgage market," said Steven Dickinson, a longtime China lawyer for Harris & Moure. "There is no mention of 'sale' in the list of transactions. A mortgage on land that cannot be sold is not a mortgage in any sense that we understand it."He and some rural policy researchers worry that farmers may now lease their land for quick, easy cash but will have nowhere to turn if they cannot find or keep employment year-round. "The fact that people can always go back to the farm is a primary source of social stability in China at this time," Dickinson said. Allowing farmers to sell their land, he remarked, is just too risky a move for the party to take.
What do you think?
Comments (14)
Read through and enter the discussion by using the form at the endDavid Oliver - October 14, 2008 1:33 AM
Farmers are already leasing their land use rights to larger companies. In many cases the company has to agree to employ the farmers afterwards.
Aggregating land into larger units to enable western style farming is important for lifting productivity (and quality), but so is having the capital and technical knowhow to grow good crops.
China and the U.S. are a similar size but the U.S. only has a few million farmers while China has between 700-800 million. What to do with all the farmers if large scale farming systems are adopted has always been a major issue.
The transition won't be easy with lots of hiccups along the way but I think large scale, mechanized farms will eventually become the norm for arable crops such as wheat while China will also grow more horticultural crops that are labour intensive and can utilize a lot of underemployed farmers.
Given the recent food safety issues the dairy industry will also have to adopt western style large scale farming.
China may have an agricultural trade deficit with the U.S. but it is a net exporter overall. Horticultural and other labour intensive crops are where they have an advantage.
Glen Wilkins - October 14, 2008 1:25 PM
@ David Oliver,
I still don't see how a country with 700-800 million farmers has any incentive to adopt mechanized farming practices. Assuming mechanized farming reduces the need for x amount of labor, where will these displaced individuals be absorbed? Is a farmer in Gansu province going to work at a high-tech firm in Shanghai? I doubt it.
Also, "Western" style farming has few advantages aside from high yields. It is not sustainable, since ever more chemicals are needed to maintain inherently fragile monocultures, making them precariously susceptible to collapse and has a tremendously negative impact on the environment (imagine more nitrogen/petrochemical runoff into China's already polluted lakes and streams). China needs to leapfrog into a locally produced/locally consumed agricultural system, which was precisely what they did throughout their dynastic history, where small farming villages served larger walled "market towns."
To resolve the ever widening rich-poor gap in China's rural areas, China must encourage an agricultural economy which brings the most profit back to the farmer, rather than handing it off to the global agribusiness conglomerates who, in the name of "efficiency," have already decimated the rural economies of the United States. I will personally give you a shiny nickel for every independent farmer in my home state of Iowa who is not facing tremendous debt due to a fundamentally absurd corn-based agriculture system that favors businesses and punishes the producer.
The last thing China needs is a agricultural system based on the "Western" model.
Edward Sweeting - October 14, 2008 1:33 PM
Hi, interesting post.
It may be interesting to look at the example of the eastern european and ex soviet countries such as Ukraine and Poland which have a similar ownership structure. They have increased their productivity, especially of livestock and grain but it has taken time, expertise, and investment. But they don't have the population pressure that the Chinese have, and the immediate demand. And not sure if they are as organised and motivated as the Chinese can be.
Paul Denlinger - October 14, 2008 5:26 PM
David:
I don't agree that the idea of large-scale farming and food output is necessarily good and in China's, or the interests of Chinese farmers. I would point you to an article by Li Changping (in Chinese) which argues that support of small-plot farmers in Taiwan, Japan and South Korea have been much more successful than large food aggregation, production and distribution companies on the American model. Here is the link to the article:
http://www.ideobook.net/606/philippine-way-for-chinese-agriculture/
Li argues that large-scale farms for food production will produce a large class of farmers who do not own land. Basically, they are sharecroppers working for serfs. The US pushed this model in the Philippines after the war with Spain in 1895, and the experiment has been a disaster for agriculture in that country.
Li's article was written before the recent national party congress in Beijing where the government announced the new policy changes to agricultural development.
I would also take issue with the small farms and the food quality issues. Quality issues can occur in small and large organizations. There is no reason why it should occur with large or small companies. Please take note that there have been problems with e-coli contamination, and deaths, with beef products sold in the US. These issues were closely examined in the US bestseller The Omnivore's Dilemma.
In short, the Chinese should not take large-scale production as an example for China just because that has been used in the US. The days of blindly following the US should end. Instead, China should find the solution that works best for its society.
Paul Denlinger - October 14, 2008 8:33 PM
David:
One thing which needs to made clear is that while China and the US are nearly the same size in area, China has much less arable land and has to support a population four times larger. In short, the US is underpopulated and has large areas of agricultural land to support its population, which is mostly concentrated on the east and west coasts and parts of the Midwest. The rural population takes up only about 3% of the whole US population.
In contrast, China has much less arable land, and has to support a large rural population (now about 800M) and urban population (about 500M) concentrated on the eastern coast.
The history of China is all about balancing limited rural resources with the needs of an urban population. To a large extent, this explains the policies of each successive Chinese dynasty, including the current regime. When each regime collapsed, it lost control of the countryside first, then the cities. When things get unbalanced, there have been tremendously bloody peasant rebellions with millions killed. (And this was done before the time of modern weapons such as machine guns.)
This is why the large agribusiness model which has been successful in the US would not work in China. Intensively efficient small plot farms have always been successful in China, and likely will be in the future.
David Oliver - October 14, 2008 11:29 PM
@ Glen,
That is why I said how to deal with 700-800 million farmers is a huge issue. Using your example a farmer in Gansu is likely to move to a town or city to work in a non-agriculture job, just as hundreds of millions of migrant workers have done in the last 30 years.
"A locally produced/locally consumed agricultural system, which was precisely what they did throughout their dynastic history, where small farming villages served larger walled "market towns."" might indeed have worked centuries ago, but its not going to work in an era of mega cities that grow ever larger. And like it or not people do want their pineapples in the winter. BTW, personally I think it would be more sustainable if China encouraged the development of smaller towns scattered through the provinces rather than mega cities but that is another discussion.
"Western" style farming seems to have become synonymous with monoculture farming which is not necessarily true. I am from a New Zealand farming background where most farms are still family owned and a range of crops are grown in rotation. Apart from higher yields larger scale operations also allow for the adoption of technology and better utilization of scarce resources. I have seen farmers in China spraying god-knows-what chemicals on their crops, probably because they don't know any better, and wasting water when they irrigate such as by flood irrigating vineyards. Larger scale farms can get access to the latest technical knowhow and can afford to invest in pivot irrigators for arable crops, trickle irrigation for horticultural crops, larger tractors etc. They also don't tend to waste money by applying too much fertilizer or chemicals that then run off into waterways.
@ Paul,
Thanks for the article but I can't read Chinese. I would ask how the author defines success? As far as I know in Japan and Korea farmers receive huge subsidies and have managed to block the import of cheaper food products meaning that the price consumers pay for staples such as rice is way above the world price. The average age of farmers is also climbing as young people don't want to enter the industry. It doesn't seem very sustainable to me.
I agree that China shouldn't blindly follow the U.S. model but parts of the Western model have to be adopted if China wants to make the best use of its limited resources. Giving farmers easier access to bank loans using their land as security would be a big step forward. There is huge potential for growth here in horticultural and tree crops that are labour intensive.
Quality issues can occur in all sizes of operations but from what I have seen are far more prevalent on smaller farms that don't have the scale to invest in proper equipment. Recently I have been acting as a corporate adviser to agricultural businesses here, including helping a dairy feedlot operation with their next round of fundraising. I have also written stories about the state of Chinese agriculture and being interviewed extensively by the international media about the melamine milk scandal. Last week I took an international TV crew around some local farms to show them some of the problems the dairy industry has with small milk suppliers. This scandal will push the industry towards larger scale feedlots.
My point about the U.S. and China being of a similar size yet having a massive difference in the number of farmers is to show the challenges they face here. The agriculture industry here won't go totally the way of the U.S. but it does have to change. Chinese consumers want safer, higher quality food and, as recent developments have shown, the current system isn't doing a good job of delivering that.
Paul Denlinger - October 15, 2008 12:28 AM
Li Changping argues that farmers in Taiwan, Korea and Japan have been encouraged to organize into credit cooperatives to finance their own farming needs. This is instead of allowing large food processing businesses such as ADM to basically turn the farmers into sharecroppers for corporations. As you know, food processing is profitable, but not for the farmers. Li argues for the credit cooperative system and allowing small scale farmers to self-organize and self-finance instead of allowing the large food processing companies in to exploit the farmers.
It would be very ironic if China went in the direction of profitable large food processing and distribution companies just as that model is under attack, especially in the US, for producing large amounts of unhealthy food, and destroying local farmers and farms in the process.
As for excessive use of chemicals in agriculture, that is something which is caused by the sales practices of major fertilizer makers, which encourage sales without caring for the repercussions. In the west, companies such as Monsanto have been criticized for these practices.
Since you are someone who is involved in agriculture, I would encourage you to take a close look at the role of credit cooperatives in Asia, specifically in Taiwan, Korea and Japan. The system may not be perfect, but it offers another choice to Chinese farmers for development.
The only real argument against this system I have heard is a political, not agricultural, reason. This is that farmers would then organize in opposition to the party, and a new breed of politician would rise, one which has its base in the countryside and is financed by a credit cooperative system, as is the case in Japan. The critics of this system are party members, who still want the party to retain a tight grip on political control by keeping the farmers weak. In my article here:
http://www.chinavortex.com/2008/10/why-china-wont-throw-lifeline/
it is apparent that even the rulers in Beijing are aware that this system of central control of the countryside is no longer tenable.
If we take the American model of large food processing companies, then we get a system of large corporations which collude with the government to exploit local farmers, and keeping them working as rural corporate employees. This is achieved by making "donations" to politicians at the central government level.
Glen Wilkins - October 15, 2008 9:14 AM
@ David
I didn't realize New Zealand practiced a more diversified approach to farming. I tend to view agricultural subjects through the lens of where I grew up: thanks for the enlightening info.
Good point about larger farms having more purchasing power for technology; perhaps farmer-owned cooperatives could provide better economic leverage as compared with the individual farmer of a small parcel of land. The social accountability that comes with belonging to an organization such as a farming co-op may also discourage malfeasance. Hmmm, maybe that's just wishful thinking
Duncan - October 15, 2008 5:35 PM
@Paul
I can't speak for Japan or Korea, but I know that in Taiwan the rural credit co-operatives were a cesspit of NPLs at the turn of the century. Internationally they tend to be highly problematic as the heavy political weighting given to rural constituencies makes them very prone to bail outs/moral hazard.
Interesting aspect of the latest reform to me is that in order to get farmers to do bolder things with their land you have to first reassure them that they have other fall-back options. Clearly the Hu-Wen government thinks the health and education reforms have progressed far enough for this...
David Oliver - October 15, 2008 5:50 PM
@ Paul,
I agree totally that without access to credit its very hard for farmers to invest in their business. In the west farmers can use their land ownership as security for a loan, China either needs to reform its land ownership structure or devise a system that gives farmers better access to credit. Even the dairy farm I advise which is profitable and well run can't get access to bank loans which is one reason they need outside funding. With more land use rights must also come stricter zoning laws and enforcement of these regulations, otherwise you will see golf courses and high rise apartments popping up everywhere.
Not all food processors exploit farmers but you're right that it does happen, especially in developing countries. Actually the Chinese dairy industry is a prime example where the big processors have focused on marketing and market share and neglected their supply chains by exploiting small farmers. Mengniu, Yili and other large companies have a lot to answer for out of this melamine scandal. If they didn't know what was going on at the milk collection stations then they certainly turned a blind eye as long as they got cheap milk and no consumers complained. The farm I advise is big enough and produces high quality milk so they get paid a substantial premium above what the average farmer makes, the industry has to move in this direction although it won't (can't) happen overnight simply because of the nature of dairy farming. FYI, Fonterra in NZ is a farmer owned cooperative and this is a model that could develop in China although the incumbent processors would no doubt fight against that. Farmers have to buy shares in the cooperative to supply it and milk goes directly from the farm to the factory with no middleman in between.
Recently I wrote a piece about the fruit & vege industry for a NZ farming magazine. China is a net exporter of agricultural produce, mainly horticultural products such as fruit, juices and veges. Due to its abundant labour resources China has a comparative advantage in growing these labour intensive crops. Given its limited arable land resources other countries can probably grow crops such as wheat and corn more efficiently, however food security is very important to the government and I accept that. That's why I said in my first comment that arable farming will likely become more western and mechanized as, when properly done, it uses water, fertilizer, machinery etc more efficiently. I can see China becoming an even bigger horticultural producer & exporter - labour intensive crops, tree nut crops grown on hillsides that can't grow arable crops etc.
I will leave aside the political argument but no doubt the leadership is worried about farmers becoming organized and too powerful. You make some good points in your article, China definitely needs to focus more on the countryside rather than a privileged minority who live in the big cities. The money that has accumulated as foreign reserves would be far better spent at home although I think that China will discover that it isn't so easy to repatriate this money without causing problems globally. It reminds me of what my father used to say - if you owe the bank $100k you have a problem but if you owe $1m the bank has a problem. China has loaned so much to the U.S. that they are the ones with a big problem, the U.S can always print more money or keep pushing China to appreciate the RMB causing them to lose money on their USD.
@ Glen,
Most farmers in the west who own their land have a vested interest in looking after it so follow sustainable farming practices. Although sometimes the system gets thrown out of balance when policies such as corn-for-ethanol are announced, the price for that crop jumps and everybody tries to grow more of one crop than they normally would.
rationallad - October 15, 2008 8:25 PM
I'm Chinese!I believe this reform is the greatest reform in China history.It means that Mao's soul is dead forever.Cause land collective owned system were Mao's soul.
Twofish - October 16, 2008 1:13 PM
Duncan: Internationally they tend to be highly problematic as the heavy political weighting given to rural constituencies makes them very prone to bail outs/moral hazard.
This also makes the rural credit cooperatives in Taiwan reliable sources of iron votes for the KMT in rural areas. This is something that I'm sure isn't lost on the CCP.
Neil Hardie - October 16, 2008 11:50 PM
I am wary about this rural land reform. I suspect that, as with so many issues in China the leadership doesn't have access to the independent, academic thinking that underlies major policy decisions in the west and therefore the policy change hasn't been properly thought out.
I live and work in Nanning and this city is growing outwards at a staggering rate. The process is based on the acquisition by various means, legal and otherwise, of farmers' land use rights. Leaving aside the morality of the methods used the economic effect is to drive food production further from the city centres and markets. But China lacks the transport or distribution infrastructure to cope with this without creating both food price inflation (higher transport costs)and food safety problems (lack of refgirerated trucks, warehouses etc).
I fear that the new reforms will accelerate the process of urban sprawl, possibly based on promises that farmers can lease land for, say 20 years, then reclaim it for their families later. This of course will not happen.
outcast - October 18, 2008 1:13 AM
People who oppose "western farming" methods and favor going back to the traditional, small scale way don't seem to understand that, at least for the US and Canada, this wouldn't work. You would need many more farmers than we currently have because it is more labor intensive, where is this going to come from?
Traditional ways of farming, because they require more people, limit the development of a society. True, China has 600+ million farmers now, but it isn't going to stay that way forever, especially since that number is quickly dropping.