Hoarding of grain inventory to receive government subsidies and illegally selling grain reserve to the market to reap a windfall; A recent fire at a storage facility has brought to the fore the problems linked with requiring so much gra

06.06.2013 17:10

Closer Look: Paying High Prices for Food Security Sacrifice

A recent fire at a storage facility has brought to the fore the problems linked with requiring so much grain held in store

By staff reporter Chang Hongxiao

A fire recently engulfed a regional grain reserve in the northeastern province of Heilongjiang has led to many questions, ranging from the cause of the blaze to why the grain was left in the open.

The fact that the fire occurred four days after a Communist Party discipline inspection team started to review the company’s top officials spurred further speculation.The official explanation for the fire issued by State Administration of Grain said: “The stocking of the grain was in the open air with inadequate fire prevention measures, in violation of state regulations.” The local barn operator blamed the overcapacity on the government buying grain cheaply to protect farmers.

While the police are investigating, we should not overlook a more fundamental question: How much grain reserve does the country really need?

Current national policy gives the China Grain Reserves Corp. (CGRC) great incentive to stock grain, the more the better. The CGRC buys grain from farmers and pays them with loans from the Agricultural Development Bank, a policy bank. For each ton of grain put into its barns, the CGRC gets a 500 yuan subsidy from the Ministry of Finance, which also provides funds for it to cover the interest on its loans. If the CGRC is lucky, the market price will be high when it sells the grain, meaning it can turn a profit.

All these benefits encourage the CGRC to hoard. If quantity exceeds capacity, some grain is left in the open under lax fire prevention measures, as was the case in Heilongjiang. The State Administration of Grain admitted in a press release this practice is popular among state reserve branches in the northwest.

So who decides how much reserve grain is needed and how much each state-owned barn should handle? The National Development and Reform Commission (NDRC), the nation’s top economic planner. One of its bureaus charts a grain reserve plan for the national, and the CGRC executes it.

Since 2004, the NDRC has set a bottom price each year for wheat, rice, corn and soybeans, a policy designed to protect grain farmers. In theory, if the market price is lower than the bottom price, the CGRC guarantees farmers a profit.

The country consumes slightly more than 500 million tons of grain a year. Except for soybeans, domestic production of major types of grains basically meets demand. The gap is marginal, what can be called a “tight balance,” and can be overcome by imports. A food shortage is a remote possibility, but unlikely since demographers predict peak population at 1.4 billion, lower than the 1.6 billion official estimate.

By international standards, a nation should set in reserve 18 percent of its annual grain consumption. But in China the ratio is 40 to 45 percent. This means more than 200 million tons of grain are sitting in barns every year. Since the replacement cycle is three years, each year CGRC takes in 70 million tons of grain from farmers, generating 35 billion yuan in subsidies from the MOF and extra interest subsidies. Meanwhile, many government officials illegally sell reserve grain to the market, reaping a windfall.

The unusually high reserve ratio might be traced back to the Great Famine (1958-1961), or simply to inertia among policy-makers. In reality, it is a heavy fiscal burden on the government and a real incentive for the CGRC to hoard. As a result, the quantity of reserves and state subsidies rise in tandem, safety measures are overlooked and corruption among grain reserve officials runs rampant. Food security is indeed important, but isn’t this price too high?