China's non-compliant domestic subsidies and TRQ administration create artificial incentives for its farmers to grow even more wheat.

March 25, 2016

4 Min Read
China subsidies costing U.S. wheat farmers $653m

Over the past few years, the U.S. Wheat Associates (USW) and the National Association of Wheat Growers (NAWG) have demonstrated how the policies of a few advanced developing countries are distorting world wheat trade and hurting farmers in the U.S. and other wheat-exporting countries. A new study found that the impact to U.S. farmers is becoming more costly.

In 2015, an Iowa State University study sponsored by USW showed that China’s excessive wheat subsidies alone were costing U.S. farmers almost $550 million per year. Now, just one year later, a January 2016 update of the study demonstrated that the decline in world prices has increased the projected annual loss in U.S. wheat farm revenue from China’s policies by 16% to $653 million.

A 2014 study by DTB Associates showed that China effectively pays its farmers a minimum procurement price of more than $10/bu. for wheat and subsidizes input costs. In wheat alone, China provides an aggregate measure of support of at least $15.4 billion, or 36% of the value of production, which far exceed the 8.5% de minimis limit set when it joined the World Trade Organization. China also agreed to allow wheat imports at a 1% tariff rate, up to a quota of 9.64 million metric tons. The out-of-quota tariff rate is 65%. China rarely administers this tariff rate quota (TRQ) as agreed, and imports invariably fall far below the quota, even when its domestic prices are far above world market prices.

The evidence strongly supports the conclusion that China’s non-compliant domestic subsidies and TRQ administration create artificial incentives for its farmers to grow even more wheat at a time when China already controls almost 40% of world wheat stocks. In turn, the policies suppress wheat import demand in China and put additional downward pressure on global wheat prices, USW said.  

“Considering all the trade-distorting policies U.S. farmers face in the world, the wheat subsidies in China and in other developing countries have the most serious effect on farm-gate prices and trade flows,” USW president Alan Tracy said. “The studies we have sponsored clearly show the problem is growing more serious at the worst time for farmers, who are already facing unprofitable prices.”

“We have seen prices collapse to unsustainable levels in just a few seasons, partially as a result of some of our trading partners not playing by the rules” said NAWG president Gordon Stoner, a wheat grower from Outlook, Mont. “The decline in income of every wheat farmer in the United States will accelerate if China’s policies are not brought back into compliance with the commitments China’s government made to its trading partners.”

According to Iowa State University agricultural economist Dr. Dermot Hayes, who conducted the 2015 study and the latest update, the results confirm that removing China’s domestic wheat support would have significant benefits for farmers in wheat-exporting countries. The study used a proven econometric method to determine a world wheat “base case,” including China’s current wheat input subsidies and price support. Researchers then removed the factors represented by China’s policies, ran the model again and compared the resulting scenario to the base case. Hayes said the results showed that China's farmers, over time, would grow less wheat because domestic prices would fall and input costs would increase.

“In our comparison, China would need to increase its imports to more than 9.6 million metric tons per year — a volume that is about equal to the Chinese wheat tariff rate quota” Hayes said. “That would increase wheat exports and farm revenue in the United States as well as in Europe, Canada and Australia (see Table 1)." He added that in the U.S. specifically, farm income from wheat would rise by 19 cents/bu. compared to the base scenario.

Stoner said NAWG supports free trade as well as congressional ratification of the Trans-Pacific Partnership trade deal, "but trade agreements cannot meet their promise if other countries ignore the rules. It is time for the Administration to seek enforcement through the WTO.”

“Since these harmful policies are the acts of sovereign governments, our farmer organizations cannot battle them alone,” Tracy added. “At the direction of the USW and NAWG boards, we are working with the Office of the U.S. Trade Representative and (the U.S. Department of Agriculture) to develop a possible WTO challenge.”

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