China Lifts Farm Subsidies

SHANGHAI—China's government outlined farm subsidies and other new support on Wednesday aimed at encouraging grain production as the country braces for the possibility of a weak wheat crop that could further exacerbate a global food inflation scare.

The State Council, China's highest administrative organ, issued a 10-point plan pledging small amounts of cash to irrigate wheat fields, plant wheat and corn sprouts, and treat crop disease, as well as a $180 million fund to buy equipment and more than $1 billion for drought-alleviation works. Beijing also said it would raise a symbolic minimum purchase price for rice by almost 40%.

The bulletin, following days of warning from Chinese bureaus about drought over northern parts of the county, and a special wheat-production alert Tuesday from the Rome-based United Nations Food and Agriculture Organization, reflects growing anxiety around the world about food prices. As the measures are rooted in encouraging production, they may not have much effect in the short term.

The immediate risks were underscored by price gains on Wednesday of as much as 7% on wheat contracts traded in central China on the Zhengzhou Futures Exchange. Globally, wheat traders have bid prices higher in recent weeks on factors as disparate as protests in Egypt and snow in the midwestern U.S.

A damaged Chinese crop would raise the likelihood that China would enter world markets to import more wheat, an uncomfortable proposition in Beijing where leaders in recent years have appeared to fail in efforts to achieve self-sufficiency in grain production.

The effects of unexpected new demand from China for wheat would cause wide ripples, especially hitting the poor by driving up costs of flour for bread and noodles. China's rising demand for crude oil, which boosted crude prices, was a factor in encouraging cultivation of corn and sugar for biofuels, instead of food, that contributed to higher prices and food riots in 2008 from Bangladesh to Kenya.

Social stability in China, too, always has depended on grain. Much of the ritual in the ancient Chinese court revolved around ensuring a strong crop. During the 1950s and 1960s, exaggerated grain-production figures were published to please Mao Zedong. An ancient Chinese adage says, "Raise sons for old age, pile grain for times of famine."

Yet, China's grain imports have expanded rapidly, undermining Beijing's long-running target of achieving 95% self-sufficiency in grains, namely wheat, corn and rice.

China made its first sizable imports of U.S. corn in a decade during 2010 and in total bought 1.57 million metric tons on world markets, an 18-fold increase from 2009. Wheat imports expanded 36% in 2010 to 1.2 million tons, and China's rice imports grew 8.6% to 366,171 tons.

A closely watched source, the U.S. Department of Agriculture, won't update estimates of China's wheat production until May. Currently, it forecasts negligible imports by China this year because of the country's large stockpiles.

Wednesday's policies to support production aren't the first in recent weeks, and they may take time to have an effect.

President Hu Jintao's administration came into office hoping to solidify support in the countryside with increases of around 40% in the minimum buying price for grains in both 1994 and 1996. It also ended a grain tax, which had existed thousands of years. But China's challenge is to feed more than 20% of the global population with perhaps half that percentage of Earth's arable land.

Now, drought has affected primary wheat growing areas at a time when inflation—led by food prices—is a global worry. In its notice Tuesday, the FAO said the winter crop, due to be harvested by June, is at risk if especially cold weather arrives this month or dryness persists as China's weather bureau is forecasting through at least Feb. 20.According to Gao Xiuqi, a 58-year-old in Henan Province's Pingxi County, the problem on his wheat farm isn't limited to a lack of rainfall since Oct. 1. Mr. Gao is also worried about the $6.40 or so he needs to spend to power a diesel pump to irrigate each hectare. "The cost is increasing while the production is curtailed," he said by telephone on Wednesday. Wheat prices were markedly higher Wednesday as Chinese wholesale markets reopened after Lunar New Year. On the Zhengzhou Futures Exchange, strong gluten wheat for September delivery surged 7%—the limit—to 3,051 yuan ($465.50) per metric ton. While Zhengzhou was closed for the holiday, soft winter red wheat for March delivery gained around 4.5% in Chicago.

During China's New Year holiday last week, the Ministry of Agriculture issued a report that said around 35% of the plantable area for winter wheat is affected by the drought. The FAO cited some of the same figures.

In its 10-point plan, the State Council said the government will spend small amounts, such as 10 yuan per mu, or about $2 per hectare, in subsidies for wheat-field irrigation, as well as allocate just over $1 billion for infrastructure to address the drought conditions. The government said it would educate farmers and also launch a grain-production campaign. It is unclear whether the spending is all new, as the Ministry of Agriculture last week also announced new spending plans.

The farm policy was the top story on the main China Central Television news broadcast Wednesday, taking up about a third of the report. Before addressing key details of the State Council plan and the risks to production zones, the report kicked off with a survey of advanced corn- and rice-farming techniques being employed in the arid, southern province of Hainan.

(Source: http://online.wsj.com/article/SB10001424052748703716904576133961987047574.html?mod=googlenews_wsj)