By Han Jun, Xu Xiaoqing, Cui Chuanyi, Chen Jianbo, Yu Baoping, Pan Yaoguo & Qin Zhongchun, Research Department of Rural Economy of DRC

Research Report No. 041, 2007

I. Characteristics of Current Rural Economy and Some Problems Calling for Attention

1. Soaring demand for grain consumption for non-food purposes

As a result of production increase for three consecutive years, the gap between supply and demand of grain in China has been greatly reduced. Based on the estimated total grain demand of 515.5 billion kilograms in 2007, the gap between grain production and demand for the period from 2006-2007 stands at about 18.05 billion kilograms, a drop of 6 billion kilograms compared with the previous year. Looking into different categories of grain, soybean production significantly lags behind consumption, resulting in the need for large amount of soybean imports; wheat production outstrips demand; the amount of production and demand of rice are basically equal; and maize production exceeds demand.With the rapid increase of grain consumed for non-food purposes and the robust development of maize-based ethanol processing industry, the demand for grain, both from home and abroad, is undergoing a significant transformation. As investment in bio-energy development increases, the United States, a major maize producer and exporter, has contributed 22% of its total maize consumption to fuel ethanol production. This figure is expected to reach 60% in 2010 as more maize and less soybean and cotton are planted in 2007 and more maize will be consumed by the bio-energy production in the country. With investment becomes overheating, maize-based fuel ethanol also enjoys a rapid development in China. As the grain demand for non-food purpose consumption soars, its influence on the grain market will be profound and far-reaching.

The price hike of grain in the country since October 2006 is directly driven by a series of factors including the rise of production cost, the increase of consumption and processing demand, the continued rise of grain price in international market and the government's policy of buying grain at a minimum support price. Currently, the higher grain price has provided incentives for farmers to grow grain. Over the past two months, the movement of grain price has stabilized somewhat. Judging from the trend in the first six months, the grain price will continue to remain stable and the room for further price rise is quite limited in the coming six months. At present, most wheat and rice sources are controlled by the government. The state grain reserve amounts to about 40% of the total grain consumption in 2007. In particular, wheat reserve has been greatly increased. The government's capability to regulate and adjust the grain market has been greatly enhanced.

Currently, the major factor that affects grain production is the upward pressure on the price of agricultural production materials, which leads to a decline of the profits gained by grain-growing farmers. Another problem is the prominent imbalance in the grain variety structure. The gap between soybean production and consumption is expected to reach 27 billion kilograms in 2007. And, as a result of robust demand from maize processing industry, the three northeast provinces, now providing 80% of the country's total maize consumption, will soon find themselves unable to meet the soaring demand. In the short term, the balance between grain supply and demand can be basically maintained. However, there are both long-term as well as immediate concerns about the stability in the grain market, with maize being the focus. Due to the drop in maize supply for food consumption and animal feed, the general grain supply and demand situation will undergo a sweeping change, accordingly pushing up the prices of other grains to a new height.

2. Profits for cotton-growing farmers remain stagnant despite production increases, largely because of increased imports

China's cotton production and sales have witnessed a dramatic rise as the country's export of textile products grows. Total cotton consumption in 2006 has reached 10 million tons. The total cotton growing area for the period of 2006-2007 is expected to stand at about 80.65 million mu with an expected output of 6.73 million tons, up 6.2% and 17.8% respectively. However, the gap still exists between production and demand and the return of growing cotton is declining. According to a survey jointly conducted by the Institute of Cotton, Chinese Academy of Agricultural Sciences and the Program Team of National Quality Scientific and Technological Services, the return of major cotton products per mu is RMB 440.6 yuan in 2006, a decrease of RMB 36.6 yuan compared with the previous year.

The direct causes to the current problem are the drop of seed cotton prices as well as the increase of production cost, which offset the expected extra income from the yield increase of cotton per unit growing area. At the same time, the ratio between the prices of grain and cotton has also changed. The most fundamental cause, however, was the large amount of import of low price cotton, which greatly affected the domestic market. China imported 3.8062 million tons of cotton in 2006 worth of $4.922 billion, a year-on-year increase of 43% and 53% respectively. Despite of the great amount of import, the average CIF price for imported cotton, which stood at $1,293 per ton, was still lower than the domestic cotton price. In the first 2 months of 2007, China imported 248,000 tons of cotton, down 60.1% compared with the same period of last year.

At present, China consumes and trades almost half of the world's cotton. It is still difficult to predict now whether there will be fundamental changes related to the supply-demand situation and the price of cotton in 2007. Since the regulation and adjustment of cotton supply and demand involves interests of different parties, there are different opinions and standpoints on this issue. As a result, a single, efficient and comprehensive controlling mechanism is yet to be established in China, making it difficult to identify the best way and timing for adjusting the cotton market, which is consequently subject to drastic fluctuations.

3. Employment environment has improved for migrant workers, but farmers in central and western China still face difficulties in finding jobs in neighboring cities

Recent development shows that the situation is improving for migrant workers from rural areas to increase their income. China's economy continues to grow rapidly in the first quarter in 2007, leading to a strong demand for labor force. The government's great emphasis on the issue concerning migrant workers also helps to improve the employment environment for farmers. The wage level of migrant workers is on the rise. Surveys on enterprises indicate that the average wage per month for new employees in 2007 is expected to reach 985 yuan, an increase of 36 yuan, or 3.8% over 2006. Shift of rural labor force and rise in wage rates continue to be the important factors that drive income increases for farmers. In 2006, income from wages contributes around 60% to the net annual income growth of migrant workers. In order to protect the legitimate rights and interests of migrant workers, local governments have further implemented related policies in 2007 to address the issues of delay in wage payment and low wages. Efforts have also been made to promote the development of township enterprises to create more job opportunities for farmers in neighboring cities and increase their income.

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