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Recalculate Grain Supply Equation

China needs to review its current grain demand and supply equilibrium, which has been overestimated in recent years because of an obsolete method of calculation.

In the late 1980s experts put the equilibrium point at no less than 400 kilograms per capita, a claim that could not be substantiated at a time when China was experiencing shortage economy.

As China sails from a shortage economy to a glutted one, the criterion turned out to be too generous.

Experience shows there was a huge supply of surplus grain in the market when the annual per capita grain was pegged at 385 kilograms.

Although the equilibrium point was later adjusted from 400 kilograms per capita to one ranging between 370 and 385 kilograms in the mid 1990s, it still has deficiency when used as a policy guideline.

The old calculation method has largely been made invalid by the tremendous changes that have taken place in China's grain production patterns and grain circulation system over the last two decades.

Under the planned economy, grain demand forecasting was based on the quantity of the total consumption demand of both urban and rural residents, a formula shaped by the traditional grain security concept.

Now that China is a market economy, such a calculation method no longer works.

With the grain market maturing in China, the old system in which State-run grain reserves were the only source relied on to guarantee urban markets has been diversified, making State grain reserves only one of the safeguards for grain security in cities, along with reserves operated by private businesses and those stashed by farmers.

The diversified structure of grain production and circulation has made the market more stable.

Per capita grain consumption declined after 1993 when China scrapped its grain ration coupon system - a most significant event in China's grain market reform that signalled the end of the nation's grain shortage history.

The reforms in employment, housing, medical care and pension system also contributed to the decline in per capita grain consumption because people started to earmark a large portion of their income for future security.

Per capita grain consumption, however, began to pick up in the last two years, although it is still far short of its record-high level in early 1990s.

The temporary drop in per capita grain consumption has been coupled with scientific and technological advancements in production, which have reduced grain consumption. In husbandry, for example, technical improvements have made it possible to use less grain to feed livestock.

The temporary grain consumption decline triggered a parallel decline in the total amount of grain in the market circulation, largely caused by the phase-out of the family grain reserves after the cancellation of the ration coupon system.

As a result, urban residents' grain consumption is now gradually relying on the market instead of State-run grain reserves, leading to the weakened role of the State grain reserves as the benchmark of the circulation needed in the market.

At the same time, although State grain reserves have been maintained at a high level, its market share has dwindled in the whole grain market, down from 50 percent in 1995 to the current 30 to 35 percent.

If not for the "returning land to forests and grassland" campaign, in which farmers were compensated by grain for their land reclaimed from forests or grassland to protect the environment, the market share would have been reduced more sharply.

Meanwhile, grain imports are beginning to have a noticeable impact on the domestic market.

Although China still maintains grain trade surplus in terms of quantity, grain imports have equaled 3.8 times China's newly expanded grain market demand, which stands at 3 billion kilograms.

For example, the contradictory trade pattern has resulted in a bizarre situation in which there was large amount of wheat imports while a tremendous amount of spring wheat, which is not well-received in the market, sits idle in reserves.

It is predicted that imported grain will primarily affect only the upscale grain market and the newly expanded market in the future.

Under such circumstances the government should still adjust the State grain reserves according to its changed market shares so as to avoid the huge economic losses caused by overblown reserves.

The grain demand and supply equilibrium has been overestimated in recent years by using an invalid calculation method, resulting in huge economic losses.

The old method, using the total consumption as the only index when calculating such equilibrium, should be replaced by one based on a comprehensive set of indexes such as annual total production, annual urban grain circulation and rational reserves in State-run grain organs.

A recalculated grain demand and supply equilibrium will have a great impact in working out a macroeconomic policy and avoiding huge economic losses incurred from a faulty equilibrium number.

The accelerating grain market reform has made such revision even more urgent now.

(China Daily June 16, 2004)

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