Feeding 1.3 billion: Role of Incentives and Technology in Chinese Agriculture Jikun Huang Center for Chinese Agricultural Policy Chinese Academy of Sciences

Population million Despite population growth rate has been declining, China has 1.34 billion now and is expected to reach 1.45 billion or more by 2030 Rural Urban

The rapid economic growth in China GDP in 2010 was more than 20 times as that in 1978

Food consumption: fall in food grain but rise significantly in other food consumption since mid- 1990s; Overall annual growth: about 4.5% Per capita food consumption ( kg/person)

Food trade: export and import (billion US$) during Despite significant growth in demand, China has been a net food exporter in most years in the past 2 decades

Questions: - How to feed 1.34 billion (20% of world population) with 8% of world cultivated land? - What have been major driving forces of agricultural growth in the past? - How China is responding to its food security challenge now and in the future?

The rest of presentation  Performance of agricultural and rural economy  Major drivers of agricultural growth -Incentive -Technology -Investment  Meeting challenges and concluding remarks

4.6% of annual growth rate of agri GDP in past 30 years More than 4 times of population growth rate Annual growth rate of agri GDP in

Production of grains and oil crops Oil crops (1000 tons) Grain (million tons) + 74% + 505%

Vegetables and fruits Vegetable area (1000 ha) Fruit outputs (million tons) + 453% %

Meat production (1000 tons) PorkPoultry BeefMutton

As growth differs among commodities, agricultural structure has also changed significantly 18% 34%

Within crop sector, diversification has also been occurring: moving toward high value crops

With increasing agricultural productivity, China’s rural has been undertaking significant economic transformation: more than 2/3 of rural labor has off-farm job now and more than half of farmers’ income from off-farm 2011

Per capita rural income (1978=100) 2011: Per capita rural income 6977 Yuan or (US$ 1107).

Rural poverty incidence in Based on national poverty line US$ 1/day (in PPP)

Major drivers of agricultural growth and structural changes Demand changes Production: - Incentive - Institutional change - Market reform and policy - Technology - Investment - …

Institutional (land) reform: 1950s / 1960s / 1970s  China’s Farmers in Communes … Land belongs to collectives 40,000 communes [before] 200,000,000+ million farms [after] [Every rural resident (900,000,000 of them) has land] –Farm size: about 0.7 hecatre Decollectivization (1978 to 1984)

Total Factor Productivity for rice, wheat and maize in China, (note: similar trends for other products) Rice Wheat Maize Institutional change (HRS), allocated land equally to all households in each village, was major source of growth in (Lin, 1992; Huang and Rozelle, 1996; Jin et al., 2002)

Market Reforms: Gradual … Self-reinforcing Encourage private market activity and liberalize horticulture and animal sectors in 1980s Liberalize cotton and edible oils and commercialize grain bureau in early and mid-1990s Privatize grain economy after mid-1995, allow complete free grain trade Run state grain reserve to stabilize price since late 1990s Minimal “procurement” price through market operation of state reserve in recent years (P min in year t > P mkt in year t-1).

Government quota and market rice procurement as total production

Dalian Guangzhou (Shekou Port)

Integration in China’s Markets (percent of market pairs that have integrated price series; Note: similar results for other products) Corn Soybean When using statistical tests (on more than 800 pairs of markets), almost all markets move together in an integrated way, up from less than ½ in the early 1990s (when markets were NOT integrated)

Small-scale farmers link with markets

Agricultural tariff rate (%): Prior to WTO accession ( ) : 42%  21% China’s WTO commitment ( ): 21%  11%

Nominal protection rates (%) in China, This slide shows that while the prices of some commodities were much higher than world market prices in the 1980s (those commodities > 0) and many were way under world market prices (those commodities < 0)

Nominal protection rates (%) in China, … by the 2000s, the prices of most of China’s commodities were nearly equal to the prices of the same commodities on world markets … this means that China is VERY OPEN … these numbers are more close to those in Australia and New Zealand than Japan, Korea or Europe

Agricultural Trade Balance by Factor Intensity, 1984 to 2002 (mil US$) Labor intensive crops Land Intensive crops Net exports Imports – soybeans, cotton, hides Exports – fruits, meats, aquaculture

To protect farmers’ income from the likely fall in market prices: minimal “procurement” prices for paddy and wheat since 2004 (also temporarily for cotton and maize in 2011) Minimal price (P*) through market operation of state reserve (P* t is about P t-1 ) 6.3 yuan = 1 US$ in 2012 Yuan/ton

Total Factor Productivity for rice, wheat and maize in China, Rice Wheat Maize TFP growth at about 3% After middle 1980s, technology has been major factor affecting productivity growth

Source: Jin, Huang and Rozelle Total Factor Productivity Rises Mostly Technical Change (rising of production frontier) … China is already operating efficiently (at frontier) Total Factor Productivity for major crops, Crop yield (tons/ha) in 2010: paddy (6.55); wheat (4.75); maize (5.45)

Source: Jin, Huang and Rozelle Same story for livestock and dairy!! TFP annual growth rate, and Decomposition of TFP for Livestock and Dairy Products ( )

Expansion of irrigated land in China Million ha About 50% of cultivated land

Investment into agricultural sector Central government budget support (billion yuan in 2008 prices) (note: the local government investment in agriculture has a similar trend)

Challenges Food security Famer’s income

China’s net export of agriculture and food (billion USD) under baseline in

Policy responses to challenges Food security - Invest in technology - Invest in land and water - Grain reserve and minimal price - … Small farm and income - Land tenure, rental market, cooperative - Subsidies (income transfer)

Agricultural research investment intensity (%) in China. Government fiscal investment in agricultural research (billion yuan in 2005 price) Since 2000, the rise in research investment has been keeping high

Invest in technology - Annual growth rate of agricultural R&D expenditure in real term was more than 16% in the past 10 years, and about 20% in recent years #1 Policy document: Growth in agricultural R&D should be further increased in the coming years… - If the above trends continued, public agricultural research investment intensity will reach 1.4% in 2015 and 2.0% in 2020.

Agricultural biotech research investment Huang et al., Science, 29 April 2005: (million yuan in 2003 price) 2003: 1.65 billion yuan = US$ 200 million or US$ 950 million in PPP New GMO program: 26 billion yuan (US$3.8 billion) in

Major findings on Bt cotton impacts in (By empirical study ， per hectare) Increase yield: 9.6%930 yuan Reduce pesticide use:34 kg923 yuan Reduce labor input:41days574 yuan Increase seed cost:570 yuan Increase net income: 1857 yuan (US$ 225) Increase in the household income (average sample household): 14% Sources: Huang et al., Science, 29 Jan 2002:

Huang et al., 2005, Science Major findings in : Pesticide: - 80% Yield : + 4~8% Labor : - 5.5% Net income: US$ 82~100 /ha GM rice

Invest in water In the past: invested in water has been the largest component of public investment in agriculture in the past 2011: - Double investment in water conservancy: invest 4000 billion yuan (630 billion US$) in next 10 years; - Institution and policy reforms to improve efficiency of water use in both agricultural and non-agriculture sectors

Small farming: Challenges for labor productivity, modernizing agriculture and food safety Average farm size (ha/farm) Source: NSBC

Policy responses: 1) Land use rights: 30 years  longer 2) Rental market 3) Farmers’ cooperatives Shares of villages with FCs

Agricultural subsidies (100 million yuan) Total subsidy in 2010 was billion yuan (21.1 billion US$), about 3.29% of agricultural GDP. Most subsidies (except machinery) are decoupled, no distortion In market.

Concluding Remarks China’s experience shows that incentives to farmers, technology and investment are crucial to agricultural growth and food security. Given challenges ahead, China will continue to heavily invest in technology and rural infrastructure to ensure its national food security