China is expected to maintain a farming trade deficit in 2005, although its growth may be slow, according to agricultural trade analysts.

"Demand for imported wheat, corn, soybean and cotton is likely to remain strong this year, while exports will be little improved. This gives us reason to expect an agricultural trade deficit in 2005," said Liu Xiaohe, an agricultural economist with the Chinese Academy of Agricultural Sciences.

In 2004, China experienced an unprecedented deficit in agricultural trade. Ke Bingsheng, director of the Ministry of Agriculture's Research Centre for Rural Economy, estimated China's agricultural trade deficit may reach US$5.5 billion in 2004.

China's farming industry has seen a sharp trading reversal since the country entered the World Trade Organization (WTO) in December 2001.

According to statistics from the Ministry of Agriculture, in 2002, China's farming trade reached US$30.58 billion, accumulating a US$5.7 billion surplus. In 2003, total farming trade increased by 31.9 per cent to US$40.36 billion with a trade surplus of US$2.5 billion.

The surging grain price in the Chinese market and strong demand for cotton and soybean have contributed to skyrocketing imports of farming produce and less exports over the past year, Liu said.

Thanks to continual reductions in agricultural output over the past five years, the prices of major agricultural products in the Chinese market have increased some 30 per cent since late 2003.

Internationally, the 2004 harvests of major grain exporters led to a huge decrease in the market price.

This sharp price contrast has caused soaring imports.

According to Chinese customs' statistics, in the first 11 months of 2004, China imported 6.61 million tons of wheat, 671,200 tons of rice, 1.62 million tons of barley and 2.26 million tons of corn. The import volumes of the four major grain products increased year-on-year by 1,780 per cent, 236 per cent, 24.3 per cent and 2,160 per cent respectively.

In the same period, China's cotton imports increased by 160.3 per cent to 1.84 million tons.

Soybean is the only major agricultural product whose import volume decreased. The imports of soybean between January and November 2004 declined by 6 per cent to 18 million tons, but in 2003, China's soybean imports increased by 83.3 per cent to 20.74 million tons, worth a total of US$5.4 billion.

In the face of surging prices, the end of textile quotas under the WTO has stimulated Chinese textile producers to eagerly buy and stockpile cotton for fear the cotton price may increase rapidly after 2005, Liu said.

He also ranked the throwing up of trade barriers by developed nations against China's farming products particularly fruit, seafood and poultry as a factor impeding the country's agricultural exports, causing an expansion of the deficit.

In 2004, China's summer grain output, after four years of continuous decline, rose by 4.8 per cent year on year. The annual output of grain is expected to grow from the previous year's 431 million tons to 455 million tons.

The increased output has led many to expect a decrease in the cost of agricultural produce this year, which should help stymie imports.

But Lu Feng, a professor at the China Centre for Economic Research at Peking University, said imports are unlikely to reduce in 2005 due to strong demand within China.

In the long term, it is natural that China becomes a net importer of grain, due to its limited land resources, Lu told China Daily.

If the exchange rate of China's currency appreciates in coming years, which has long been expected by international investors, the possibility of a larger agricultural trade deficit will grow, Lu added.

Because the higher price of the renminbi will make foreign grain and cotton cheaper, China will be moved to import more produce, Lu said.

Wen Tiejun, dean of the School of Rural Development under Renmin University of China, echoed this opinion.

"The grain price hike between 2003-04 showed a resumption in growth from the abnormally low price of the past five years. The price in 2005 is unlikely to reduce sharply after the harvest this year," Wen said.

Liu said in the past year, the State sold a great deal of its grain and cotton reserves when market prices were high. The move was meant to depress market prices while reaping profits for the stored grain and cotton.

In 2005, the State depositories will buy more grain and cotton to supplement its stocks, leading to strong demand for imported grain and cotton, Liu added.

The implementation of China's commitments to the WTO, which pushed agricultural tariffs down to little more than 15.4 per cent in 2004 and led import quotas of grains and cotton to rise to 5 per cent of China's total output in 2003, will also bolster imports, Liu said.

Ding Shanshan, an analyst with China International Futures Co Ltd, said more cotton is expected to be sold to China due to the strong demand of domestic textile manufacturers.

It is widely believed that the end of the textile quotas will increase China's exports of garments and other textile products. China has long been the world's largest exporter of textile products. In the first 11 months of 2004, China exported US$103.6 billion in textile goods, increasing 19.74 per cent year on year.

Zhang Xiaoping, vice-president of the China office of the US Soybean Association, said China's strong demand for imported soybean is expected to resume in 2005 after soybean oil makers polish off stockpiles.

A Shihua Financial Information report also indicated China is expected to add 6-7 million tons to its soybean processing capabilities in 2005, making its total processing capability 70 million tons. This will lead to further imports of soybean.

On the other hand, it is impossible for China to increase exports of its main agricultural currency - seafood and fruit - in 2005, due to remaining technical trade barriers and a limited growth in demand, Liu says.

Although most experts and analysts expect China's farming imports will increase in 2005 and lead to a larger deficit, they do not believe it will grow as rapidly as in the past year.

The import volumes of wheat, corn and cotton have grown too sharply, and they are unlikely to grow as strongly as last year, Liu from the Chinese Academy of Agricultural Sciences said.

He added that in terms of wheat, the imports are mainly used to supplement food reserves. Therefore, growth in wheat imports will not be very large.

Ding said that despite the end of the textile quota, two factors are restricting the rapid growth of cotton consumption.

From this year, China started imposing a 0.2 yuan (2.42 US cents) export tariff on each textile item exported. This measure is believed to be able to curb the spiralling growth of low-end textile products.

"In addition, many developed countries are expected to establish new import barriers against inexpensive Chinese products after the textile quota is lifted, so the export growth rate of China's textile products will not grow as rapidly as people expect," Ding said.

As for soybean, China's largest agricultural import, its import growth will be restricted, because major soybean processors have built up large soybean stockpiles and some of them even face capital shortages due to massive imports in 2003, according to a report released by COFCO (China National Cereals, Oils and Foodstuffs Corporation) Futures.

While imports of agricultural products are expected to grow, their impact on China's agricultural sector and farmers' incomes will not be large, say economists.

Imported grain will still only account for a small portion of China's total grain consumption around 5 per cent in the long term, and their impact will be limited, said Lu from Peking University.

He added that the farming industry has never been totally liberalized within the WTO, so China can maintain import quotas where necessary to protect its farmers.

Many economists worry increasing imports will narrow the profit margins of Chinese farmers, weakening the government's efforts to increase rural incomes.

Wen from Renmin University agreed imports will affect farmers' incomes, but he said the impact of agricultural imports will not be too large, as Chinese farmers do not traditionally enter the profession to become rich.

"Basically speaking, the limited land and huge amounts of surplus labour in China's countryside means most farmers are kept from becoming wealthy," Wen said.

In 2003, farmers' per capita income stood at 2,622 yuan (US$316.67) while that of urban residents was 8,500 yuan (US$1,026). Accounting for more than half of farmers incomes' are non-agricultural businesses, such as the salaries of migrant workers.

In 2004, increased agricultural output, rising grain prices and the government's series of beneficial policies including gradually abolishing the 8.5 per cent agricultural tax within five years and subsidizing grain plantation have increased farmers' incomes by 6 per cent, the highest rate of growth since 1997.

But none of the above can play a long-term role in improving farmers' incomes, Wen said.

To improve their financial wellbeing, farmers must be made permanent urban workers. Only then will the impacts of imported farming goods be minimal, Wen concluded.

Source: China Daily