Agricultural prices in China

SWP606 Agricultural Prices in China Nicholas R. Lardy WORLD BANK STAFF WORKING PAPERS Number 606 ~ '   HG: WORLD BANK STAFF VWORKING PAPERS LJ7 Number 606 1 4 o Agricultural Prices in China Nicholas R. Lardy IfTERINATIONAL M0oNETARY FUND IOINT LIBRARY MAR 2 ,8 1984 INTERNATIONAL BANK POR RECONSTRUCTION AND DEVELOPMENT WASHINGTON. D.C. 2O4al The World Bank Washington, D.C., U.S.A.  Copyright ( 1983 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. First printing September 1983 All rights reserved Manufactured in the United States of America This is a working document published informally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. 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Both booklets are updated annually; the most recent edition of each is available without charge from the Publications Distribution Unit of the Bank in Washington or from the European Office of the Bank, 66, avenue d'Iena, 75116 Paris, France. Nicholas R. Lardy is associate professor of economics at Yale University and a consultant to the Agriculture and Rural Development Department of the World Bank. Library of Congress Cataloging in Publication Data Lardy, Nicholas R. Agricultural1prtces'in Ch#n^. (World Bank staff working papers ; no. 606) 1. Food prices-Government policy-China. 2. Agricultural price supports-China. 3. Agricultural prices- China. 4. Farm produce" Mbrketing--Govern- ment policy-China. 5. Agricul'ture and state--China. I. Title.' It. Series. HD9016.C62L35 1983 338.1'8 83-10318 ISBN 0-8213-0216-7  ABSTRACT This paper describes the major features of China's agricultural pricing system as they have evolved since 1949, but focuses on adjustments in the 1976-82 period. The institutional setting for price policy is described, price-cost relationships are examined and price ratios from key inputs and outputs are defined. A major portion of the paper is devoted to agricultural marketing policy and consumer subsidies. The size of important subsidies is estimated and their distributional and allocative implications are explored. The paper suggests that state interventions in the agricultural pricing system provide disproportionately high benefits to relatively advantaged urban consumers and may restrict adjustments to more economically efficient production patterns in agriculture.  CURRENCY EQUIVALENTS US$1.00 - Y 1.75 (May 1982) Y 1.00 - US$0.57 WEIGHTS AND MEASURES One jin - 0.5 kg One dan - 50 kg One mou - 0.067 hectare  CHINA AGRICULTURAL PRICES IN CHINA Table of Contents Page No. ABSTRACT SUMMARY AND CONCLUSIONS . . . . . . . . . . . ... . . . . . . . . . 1. PRICE POLICY .... . . . . . . . . . . . . . . . . . . . . 1 A. State of Knowledge . . . . . . . . . . . . . . . . . . . 1 B. Institutional Arrangement and Pricing Principles . . . . . 2 C. Scope of State Price Control . . . . . . . . . . . . . . . 4 D. Price Adjustments . . . . . . . . . . . . . . . . . . . . . 8 E. Unification of Prices .... . . . . . . . . . .. . . 11 2. FARM OUTPUT PRICES .... . . . . ...... . . . . . . . . 13 A. Price-Cost Relationships . . . ..... . . . . . . . . 13 B. State and Market Prices for Agricultural Products . . . . . 19 3. SUBSIDIES OF URBAN FOOD CONSUMPTION AND MARKETING POLICY. . . . 31 A. Food Subsidies . . . . . . . . . . . . . . . . .31 B. Subsidies and Marketing . . . . . .. .42 C. Resource Costs and Distributive Implications of Subsidies . 44 4. RELATIVE PRICE TRENDS . . 50 A. Long Term . .. .50 B. Short Term . . . . . . . . . . . . . . . . . . . . . . . . 52 5. INPUT-OUTPUT PRICE RATIOS. .. . . . .55 A. Urea . . . . . . . . . . . . . . . . . . . . . . . . . 55 B. Ammonium Sulfate .... . . . . . . ...... .... . 59 C. Diesel Fuel .... . . . . . . . . . .......... . 62 D. Electricity .... . . . . . . . . . ......... . 64 F. Machinery . . . . . . . . . . . . . . . . . . . . . . . . . 64 G. Input Subsidies . . . . . . . . . . . . . . . . . . . . . . 66 TABLES IN TEXT 1.1 Wheat and Rice Prices, Various Categories, 1980. 7 1.2 Procurement Price Indexes, 1950-79 . .. .9 1.3 Frequency and Magnitude of Adjustments in Purchase Prices for Agricultural Products, 1950-79 .10 1.4 Interprovincial Variation in Procurement Prices, Category Two Commodities.. . . . . . . . . . . 12 2.1 Procurement Prices of Selected Farm Products, 1952-79 . . . . . 14 2.2 Production Cost and Procurement Price Relations . . . . . . . . 17  Page No. 2.3 Rice Prices in Urban Markets for Agricultural and Subsidiary Products. . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.4 Rural Market Wheat Prices, 1980-82. . . . . . . . . . . . . . 23 2.5 An Index of Average Prices Received by Farmers for Grain Sold to the State, 1976-81. . . . . . . . . . . . . . . . . 25 3.1 Comparison of the Wheat Procurement Price and the Retail Price of Rationed Flour, 1952-81. . . . . . . . . . . . . . 33 3.2 Comparison of the Paddy Rice Procurement Price and the Retail Price of Rationed Polished Rice, 1952-81 . . . . . . 34 3.3 State Subsidies in Food Consumption, 1979-81. . . . . . . . . 39 4.1 Trends in Relative Purchase Prices for Selected Agricultural Products, 1952-79 . . . . . . . . . . . . . . . . . . . . . 51 5.1 Prices of Chinese Agricultural Machinery. . . . . . . . . . . 65 FIGURES IN TEXT 2.1 Administered Prices and the Burden Imposed on Agriculture . . 26  SUMMARY AND CONCLUSIONS 1. Since 1978 China has been engaged in a systematic effort to modify its centralized system of resource allocation through greater use of price incentives and markets. The substitution of economic incentives in place of bureaucratic control has been particularly important in agriculture since the reforms are applicable throughout the sector rather than limited to a subset of producing units, as is the case in industry. Moreover, because of institutional arrangements, farm producers are much more responsive to changes in relative prices and enhanced marketing opportunities than are industrial enterprises. Thus China's experience in price reform in agriculture is of interest not only from the perspective of evaluating agricultural development but the overall reform effort as well. 2. China's State Commodity Price Bureau for the past five years has sought to adjust relative prices of both agricultural and nonagricultural products to overcome the legacy of more than a decade when most prices were frozen and resources increasingly were allocated administratively. During that decade producer incentives were reduced and a range of other distor- tions became embedded in China's system of resource allocation. Consider- able progress has been made in adjusting the relative prices of major crops to induce a mix of output consistent with changing central objectives. For example, China's cotton:wheat and cotton:rice price ratios have been raised and the gap between the Chinese and world price ratios has been reduced. That has improved the efficiency of domestic resource allocation, stimulated domestic cotton production and led to substantial foreign exchange savings. Cotton imports, which had risen rapidly in the 1970s, have now begun to decline. Savings on imports of cotton have been more than sufficient to pay for the increased imports of wheat engendered by the policy. 3. While some improvements have been achieved, the process of price adjustment remains constrained. First, as constraints on marketing have been eased, implicit prices for some commodities either have remained unchanged or changed by proportionately far more than explicit price changes. Consequently there has been under and overshooting in the resulting quantity adjustments. 4. Second, the cost surveys that are said to form the basis of adjustments in state purchase prices seem flawed. They appear, for example, to account inadequately for the growing cost of fixed and working capital. Upon careful examination, price survey data that are published to justify price adjustments do not appear to explain the timing of price changes. 5. Price adjustment is inhibited by more fundamental forces as well. Although state purchase prices have risen substantially in the past five years, agricultural prices are still relatively low. This judgment is  - ii - supported by explicit statements of the State General Commodity Price Bureau which justifies low pricing as a means of transferring resources inter- sectorally from agriculture to industry. There has been only a modest increase in the quantity of grain delivered to the state in response to the sharply higher average and marginal state purchase prices for cereals. Rural market prices for major farm products remain almost double state quota purchase prices and 20% above the state's marginal (over-quota) procurement price; and price ratios of major farm inputs to farm outputs still are substantially above world price relatives. A proposal to raise China's agricultural product prices substantially and increase the direct agricultural tax so as to generate the same revenues as the current system of indirect taxation does not appear to have been given serious consideration. 6. A closely related constraint on price adjustment is the fixity of nominal prices of staple foods for a select group of Chinese consumers who are eligible for food rations. This group, which consists of state employees and their dependents (predominantly urbanites but including state employees in health, education, transport, commune administration, etc. who live in rural areas), numbered 160 million in 1980 (16% of the total population). It is referred to by the Chinese and in this paper as the "nonagricultural population" (fei nongye renkou). State subsidies of the food consumption of the nonagricultural population now are the equiva- lent of about one fourth of state (the sum of central, provincial, and local) budgetary revenues or a third of the wage bill of state employees. The magnitude of these subsidies is so large that it imposes a most fundamental constraint on long-run rational price setting. 7. While there is some empirical evidence that rationing of basic necessities at low prices improves the distribution of consumption in societies where most of the undernourished are the urban poor, the hypothe- sis that China's coupon rationing of staples is part of a basic needs strategy is not strongly supported by the evidence reviewed in this paper. Restrictions on rural to urban migration have prevented the emergence of a significant class of urban poor and indirectly led to what is probably the highest urban labor force participation rate of any major developing country. The poorest component of China's population is the rural poor, a group that is not generally eligible for rationed staples and has received quite modest government subsidies of staple foods and other forms of relief. 8. Furthermore, at least ten million workers in nonfarm occupations are not eligible for rationed food since they are classified as either contract or temporary workers rather than permanent employees. They must purchase food in nonstate markets where prices are two to four times the prices of rationed commodities. The rationing system is targeted on a small share of the total population, a group that enjoys incomes substan- tially higher than those prevailing in the countryside and a broad array of subsidies in addition to those received for food.  9. The distribution of rationed food to a relatively small group at declining real prices distorts resource allocation. The financial burden of maintaining fixed staple prices for China's nonagricultural population now exceeds that of Poland in the late 1970s. The magnitude of the subsidies is so large that the state, since 1979, has felt compelled to freeze the purchase price of cereals and to rely increasingly on economically inefficient quantity controls of farm production. That, in turn, has contributed to a rate of commercialization and marketing of grain that is now less than in prewar China by a significant margin. 10. In short, Chinese agricultural price policy seems designed to pro- vide cheap supplies of basic staples for state employees, the vast majority of whom are urban residents. Although subsidy systems in theory provide the means for simultaneously offering incentive prices to producers and subsidies to low income consumers, the budgetary burden of subsidies in China is now so large that the commitment to fixed nominal prices for staples to urban consumers constitutes a significant constraint on the ability of the state to offer incentive prices to producers. Moreover, it is not clear that the state's market interventions improve the distribution of income since state subsidies are targeted primarily on a relatively high income group that benefits from a broad array of nonfood subsidies, while the disruption of private trade, through procurement at fixed prices and other interventions, intensifies pressures on consumers outside the public distribution system.   CHINA AGRICULTURAL PRICES IN CHINA 1. PRICE POLICY A. State of Knowledge 1.01 Analysis of China's agricultural pricing system is handicapped by shortages of information, both quantitative and qualitative. Unlike other centrally planned economies where detailed price handbooks are sometimes available, data on Chinese prices must be culled from individual articles appearing in national and local newspapers and Journals. Qualitative information in most respects is even more scarce. Individuals responsible for price setting rarely write for newspapers and Journals that circulate in the West. Personal access to these individuals and agencies by foreigners appears to have been very limited. Few visitors to China have been able to meet high level officials from the State General Commodity Price Bureau (guojia wujia zongju), the national agency that supervises price formation. 1.02 In the past two to three years, the availability of information on prices has expanded, but not to the degree witnessed for most other categories of economic data. The most important new sources are Zhongguo Caimao Bao (Chinese Finance and Trade Report) published three times a week, available in the West since the beginning of 1981;/l Jiage Lilun Yu Shijian (Price Theory and Practice), a bimonthly published jointly by the State General Commodity Price Bureau and Nankai University in Tianjin since the beginning of 1981; Shichang (Marketing) a weekly published by People's Daily, available since late 1979; the Chinese 1980 Agricultural Yearbook,/2 released in late 1981 and Caimao Jingji (Economics of Finance and Trade) a monthly published by the Finance and Trade Economics Research Institute of the Chinese Academy of Social Sciences since the beginning of 1982. Infor- mation nonetheless remains scarce. In the recently published compendium of economic history and statistical materials, Zhongguo Jingji Nianjian (1981) /1 The predecessor of this journal Zhongguo Caimao Zhanxian (China Finance and Trade Front) circulated internally in China for a year or two but was not available for export on a regular basis. Its contents can be judged only from the articles that originally appeared there but were reprinted in the Party paper People's Daily. /2 Chinese Agricultural Yearbook Compilation Commission (Zhongguo nongye nianjian bianji weiyuanhui), Chinese Agricultural Yearbook 1980 (Zhongguo nongye nianjian 1980). Beijing: Agricultural Publishing House, 1981.  (Annual Economic Report of China (1981)), the contribution of the State General Commodity Price Bureau occupies only three pages in a volume with over a thousand pages of text./l B. Institutional Arrangement and Pricing Principles 1.03 The key central price setting organ is the State General Commodity Price Bureau, re-established in the later half of the 1970s./2 In estab- lishing agricultural prices, the Price Bureau, however, acts only in consultation with the Ministries of Finance, Agriculture, and Food,/3 and its decisions generally must be approved by the State council, the highest governmental organ, and the Central Committee of the Chinese Communist Party. 1.04 The general principles of price formation are well-known but sufficiently vague to serve poorly as a guide to central pricing decisions. The prime principle is preserving price stability./4 The high priority attached to that objective reflects China's very unhappy experience with hyper-inflation in the late 1940s. Price stability has been a critical component of the Communist Party's claim for popular support and legitimacy. However, as will be discussed further below, stability of prices is sought primarily at the retail level, particularly for urban consumers and for staple commodities. /1 Duan Jianke, "China's Price Situation," pp. IV-164 - IV-166 in Xue Muqiao, editor, Annual Economic Report of China, 1981, overseas Chinese language edition. Hong Kong: Hong Kong Modernization Company, 1981. /2 The Price Bureau is the successor to the National Price Commission (Quanguo wujia weiyuanhui) first established in July 1957, revived in 1963, but that ceased to exist as an independent organization after the mid-1960s. I am not certain when the Price Bureau formally was revived. /3 In the spring of 1982, as part of the effort to streamline and reduce the size of the state governmental apparatus, the Ministry of Food (Liangshi Bu) was abolished and its functions subsumed within the Ministry of Commerce. The Ministry of Food had been, since the early 1950s, the agency responsible for the procurement of cereals in the countryside and the administration of the urban rationing system. It maintained its own offices at the provincial, prefectural, and county levels. Offices were even maintained in many communes and were independent of the commune administration. /4 Liu Zhuofu, "Readjust Unreasonable Prices in a Planned Way Under the Premise of Price Stability." Red Flag No. 11, 1979, pp. 36-41.  - 3 - 1.05 The priority of price stability has inhibited relative price adjustment. The official view is that retail price stability should not be achieved through all prices remaining unchanged for long periods of time. Rather, retail price adjustments, whether up or down, must be gradual and not contribute to a secular trend in the overall price index while retail food prices are partially insulated from upward pressure by increased state budgetary subsidies./l In practice, price stability is achieved in large measure, not through offsetting relative price adjustments, but through price rigidity. 1.06 A second major principle is to reduce the disparity between the relative prices of industrial and agricultural product prices, the so-called "scissors price differential." Again that general principle is so broad that it provides scant guidance to actual pricing decisions for it does not explain the timing of price changes or indeed the persistence of the differ- ential for more than three decades. Continued underpricing of agricultural products, according to Price Bureau officials writing in Red Flag, is necessary in order to transfer resources intersectorally from agriculture to industry via the price mechanism,/2 rather than through private savings and investment decisions or government tax and expenditure policy. 1.07 In short, prices are expected to bear many of the burdens that government tax and expenditure policy perform in most market economies. Prices in China for most of the past thirty years have been set largely with a view towards determining the allocation of resources between individuals and the state, between industry and agriculture, and among different regions. Thus periodic reforms, in which increased use of prices is viewed as a mechanism to improve the efficiency of resource allocation, have limited effects since relative price adjustment impinges on the ability of the government to achieve other objectives via the price mechanism. If a prior reform is not undertaken to bring prices more into line with opportu- nity costs, allowing enterprises and other decision makers to allocate resources in response to existing prices is not likely to improve allocative efficiency. On the other hand, a price reform in the absence of appropriate tax and expenditure policy to achieve certain distributive aims would have far reaching unintended consequences for the division of output between state and private control and the distribution of income both among sectors and between regions. /1 Liu Zhuofu, "Readjust Unreasonable Prices in a Planned Way Under the Premise of Price Stability," Red !La, No. 11, 1979, pp. 36-41. /2 Ji Long and Lu Nan, "A Discussion of the Scissors Differential Between Industrial and Agricultural Product Prices, "Red Flag No. 6, 1980, pp. 45-48.  -4- 1.08 Much of the history of price policy and price adjustment in China can be understood only in this framework. Unassisted by other policy tools, prices simultaneously have been and still are expected to achieve allocative and multi-dimensional distributive goals. Adjustments essentially represent trade-offes among mutually incompatible goals. It has been proposed that the government shift some of the distributive functions currently assigned to the price system to other policy instruments in order to allow prices to play their comparative advantage role more actively in allocating resources. The proposal calls for the state to increase the direct agricultural tax by an amount sufficient to replace all of the government revenues generated indirectly through the system of procurement at fixed prices (discussed further below), while simultaneously raising farmgate prices substantially, perhaps even substituting market for state set prices./l This proposal appears to have been dismissed as impracticable by government planners and has elicit:ed little response even in academic circles. Since the proposed direct taxc program would generate revenues equivalent to the indirect taxes it would replace, opposition to it appears to stem from the judgment that specifying the magnitude of the tax burden should be avoided. C. Scope of State Price Control 1.09 Since the early 1950s agricultural products have been divided into three categories. Assignment to these categories determines both the nature of price formation and of the distribution and marketing of the products./2 Category one products, those subject to "unified procurement" (tonggou), include only cereals, cotton, and edible vegetable oils. Over one hundred products fall in category two and are subject to "designated procurement" (paigou or tongi shougou). The most important of these include pork, fresh eggs, tobacco, tea, silkworm cocoons, sugarcane, sugar beet, raw lacquer, hemp and flax, animal hides, wool, major aquatic products, and fresh and dried fruit. Category three includes hundreds of distinct subsidiary and native products. 1.10 There are six important prices for agricultural products; four of these can be considered farm-gate prices. Farm-gate prices for category one and two products are based on "procurement prices" (shougou jiage), the basic price that the state pays for quota sales of cereals and most other /1 Sun Yefang, "We Most Boldly and Confidently Grasp Socialist Profit," Economic Research, 1978, No. 9, pp. 2-14. /2 Industrial products also are divided into three broad categories. It should be noted for both agriculture and industry that the number of categories has remained unchanged since the 1950s but the partitioning of the vast array of products among these categories has undergone almost continual readjustment.  products. The prices of 113 agricultural products, falling in nine major classes, are subject to centralized price control./l Almost all of these are in categories one and two. A second far. gate price category is the "above quota grain price" (zhaogou liangshi jiage), reflecting the 30-50% premium paid for deliveries beyond the basic quota./2 Deliveries over and above these quotas occur at "negotiated prices" (i-jia), mutually agreed to by producers and the state commercial departments.73 A fourth farm level price for some products is the price prevailing in rural markets (nongcun jishi) or in urban markets (chengshi jishi). 1.11 The number of farmgate prices existing simultaneously varies over time and by product category. Certain products, such as cotton, cannot legally be sold in rural markets and are not subject to sale to the state at negotiated prices. The state procures about 98% of all cotton produced at the quota and above-quota prices./4 Most category one commodities may be sold legally in rural markets, but only after quota and above-quota obliga- tions have been fulfilled so all four farm-gate prices may exist within a single crop year in a given locality. Prior to 1979, however, negotiated prices generally were not applied to cereals, so this is a relatively recent phenomena. Category three commodities generally are not subject to /1 Liu Chiguang and Chen Jun, "Many Forms of Price Must be Used to Suit the Needs of Plan and Market Regulation," Wuhan University Bulletin, 1980, No. 4, p. 77. /2 The history of the magnitude of this premium is unclear. Both the magnitude of the premium and the specific products included within the scope of the system have varied over time. Many scholars have the impression that the system was in existence in the 1950s although I am coming to doubt this interpretation because of a lack of documentary evidence. According to the Chinese Agricultural Yearbook 1980, the system was first implemented for grain in 1970 with a premium rate of 20%. The premium for above-quota deliveries was raised to 30% in 1972 and 50% in 1979. In 1980, the state began, for the first time to my knowledge, to pay premium prices for cotton as well as cereals. In 1981, the price of soybeans for quota deliveries was raised by 50% and the over-quota category eliminated. /3 For some products the state is prepared to purchase amounts in excess of the over-quota quota only at the lower quota procurement price. For other products there are specifically established ceilings for negotiated prices. Thus "negotiated prices" are not necessarily free market prices. /4 Chinese Agricultural Yearbook 1980, p. 327.  -6- compulsory state procurement or state price control. These products, with few exceptions, are sold freely on rural markets. State commercial departments purchase the quantities of these products they desire at market determined prices. 1.12 In addition to the four farm-gate price levels for state pur- chases, there are several retail price categories for agricultural products sold by the state. First, there are sales to the nonagricultural population of rationed commodities (essentially category one commodities), cereals, edible vegetable oils, and cotton cloth and cotton products. These pro- ducts, since the mid-1950s, have been subject to coupon rationing, with per capita quantities frequently dependent on age, type of employment, and other determinants of caloric requirements. For cereals, e.g., the monthly grain ration varies from 25-28 kg for workers engaged in heavy labor to 3.5-4.0 kg for children under three years. Rationed commodities are sold at strictly controlled prices that have not changed significantly for three decades./1 The state also sells, at fixed prices, a large number of nonstaple commodi- ties (corresponding by and large to products procured in category two) that are not now usually formally rationed, although local rationing by many urban administrations of pork, eggs, and some other products was widespread in the past. 1.13 There are two retail price levels for rural sales by the state of category one products, particularly cereals. These transactions are referred to as "resales" (fanxiao) since they involve commodities the state has purchased from one segment of the peasantry to sell to another segment. Most such resales are at prices that have risen commensurately with purchase prices but some sales are made at subsidized prices to peasants who are chronically short of grain because of low income or who have suffered natural disasters. There is finally for the years since 1978 a standard internal accounting price for cereals distributed in kind to members of each producing unit./2 Analysis in this paper of this array of prices faced by consumers is limited to the issue of subsidies, taken up further-in Section 3. The range of price variation encompassed by these various price cate- gories for two agricultural products, wheat and rice, is shown in Table 1.1. /1 The official price for cotton cloth has declined from .867 yuan per meter to .840 yuan in 1978. NCNA, July 22, 1978, "Commodity Price Bureau Official explains Price Policy." In Foreign Broadcast Information Service, Daily Report, July 26, 1978, p. E10. /2 This fixed accounting price was adopted so that the officially calcula- ted per capita distributed collective income of commune members, a very large portion of which consists of in kind distribution, would not be inflated upward by the adoption of higher procurement prices after 1978.  Table 1.1: WHEAT AND RICE PRICES, VARIOUS CATEGORIES, 1980 Paddy Wheat Rice --(yuan per kg)-- State quota purchase price .3296 .2312 /a State above quota purchase price .4944 .3468 /a State negotiated purchase price/b ca.5940 ca.5460 Rural market price .5940 .5460 /c Urban market price - /i .620 State rationed price, retail sales to nonagricultural population .333 /d .2128 /e State resale price, retail sales to agricultural population /f .3560 .2497 State resale price, retail sales to low income peasants and those suffering from natural disaster /g .2094 .1469 Internal accounting price, for in-kind distribution within production units /h .2722 .1904 /a /a Indica. 7i Presumed to be near the market price since "negotiated prices must be in line with the market trend." People's Daily Commentator, "Purchase more grain at negotiated Prices," People's Daily, January 20, 1981, p. 1 in Foreign Broadcast Information Service, Daily Report February 3, 1982, p. L26. /c A market price of .780 for milled rice converted to a price for paddy, assuming a 70% milling rate. /d The retail price of rationed flour converted to a price for wheat, assuming a 90% milling rate. /e The retail rationed price of milled rice converted to a price for paddy, assuming a 702 milling rate. /f An 82 premium over the quota purchase price. This is the price paid by peasants engaged in production of economic crops, vege- tables, animal husbandry, aquatic products, salt, timber, etc. /g Seventy percent less than the usual resale price. )hl The 1978 quota procurement price. 71 Data not available.  -8- D. Price Adjustments 1.14 The long-term upward trend in the procurement prices of most agri- cultural products is well-known and reflected in the official procurement price index, shown below in column one of Table 1.2. Average farmgate prices doubled between 1952 and 1979. As is shown in the separate indexes for cereals, industrial crops, animal products, and other products (columns two through five), the price increases were broadly distributed across pro- duct categories. Industrial crops, however, rose the least while other agri- cultural and subsidiary products rose by relatively larger amounts, primarily because of the more rapid rise in prices of these products between 1950 and 1952. 1.15 The data in Table 1.2 obscure two important points concerning the timing of price increases. First, a large share of the long-term upward trend reflects market forces, not state policy. Prices rose by more than a third between 1950 and 1953. Since unified purchase of category one commodities was not instituted until the fall of 1953 and was based on the then prevailing prices, rising prices up to 1953 largely reflect market forces. Agricultural products had declined in value relative to industrial products after 1933 and part of the large agricultural price increase after 1949 represents a reversal of war induced distortions in the relative demand for and supply of agricultural commodities. Following the institution of compulsory state procurement, prices rose only 13% in the remaining four years of the first Five-Year Plan (1953-57). Second, almost all of the remaining 80% price increase that took place between 1953 and 1979 actually occurred in 1961-62 and 1978-79. Prices were adjusted upward by 20 to 30% in 1961-62, in the aftermath of the collapse of the Great Leap Forward, and by another 25% in 1978-79. Thus the long-term upward trend in the general level of prices paid to farmers in the first three decades of the People's Republic of China was almost entirely accounted for by the market-led increases in 1950-53, the price changes instituted in 1961-62 to induce recovery of production from the depths to which agricultural output had fallen in 1960, and the price adjustments made in the post-Mao era. There are some long periods in which prices of major products were not adjusted. Following a 1966 adjustment, the prices of wheat, rice and corn were unchanged until 1978./1 /1 Chinese 1980 Agricultural Yearbook, p. 380.  -9- Table 1.2: PROCUREMENT PRICE INDEXES, 1950-79 Other agricultural and Aggregate Economic Animal subsidiary index Cereals crops products products /a 1950 100 100 100 100 100 1952 121.6 121.4 113.0 105.7 160.6 1957 146.2 141.4 126.4 145.5 210.2 1965 185.1 190.9 152.8 192.1 251.4 1975 201.3 222.8 165.1 200.6 267.0 1979 242.7 271.3 200.4 247.4 302.5 /a Includes lumber, oils with industrial uses, silk, fruit, vegetables, medicinal herbs, native products, and aquatic products. Notes: See note 1 to para. 1.16 for a discussion on unexplained differences between the data in Tables 1.1 and 1.2. Source: Annual Economic Report of China (1981), p. VI-24. 1.16 More detailed information on the price adjustments made between 1950 and 1979 for specific commodities is provided in Table 1.3./1 All of /1 There are some unexplained differences between the data presented in Tables 1.1 and 1.2. Data in Table 1.1 is from a chapter of the Annual Economic Report of China 1981 prepared by the State Statistical Bureau and seems most authoritative. Data in Table 1.2 are taken from the Chinese Agricultural Yearbook 1980. For example, with 1950-100 the index of purchase prices for cereals is 271.3 in the economic report but 231.7 in the agricultural yearbook. While this discrepancy may be due to a printing error, the indexes for cotton are 162.4 and 150.13. A larger number of comparisons is not possible because the data in the Economic Yearbook are for aggregations of commodities while the Agricultural Yearbook data are generally for specific products.  - 10 - Table 1.3: FREQUENCY AND MAGNITUDE OF ADJUSTMENTS IN AGRICULTURAL PRODUCT PURCHASE PRICES, 1950-79 Index of Number of Adjustments total change upward downward (1950-100) Cereals 13 1 232 Rice 9 183 Wheat 9 4 222 Corn 12 2 236 Millet 12 1 259 Sorghum 10 3 256 Soybeans 13 3 379 Economic Crops Cotton 12 5 150 Peanuts 10 3 314 Rapeseed 10 4 353 Hemp 12 2 354 Sugarcane (since 1952) 10 1 202 Sugar beet (since 1952) 9 1 127 Jute 9 7 110 Hemp 21 280 Lemon hemp (? ningma) 11 2 247 Silkworm cocoons (since 1952) 12 2 182 Tussah silk cocoons (since 1952) 9 2 244 Flue cured tobacco 15 5 159 Red tea 14 1 253 Green tea 20 1 241 Jilong tea 9 0 177 Jinya tea 9 2 184 Apples 7 6 123 Oranges 13 5 161 Animal Products Pigs (since 1952) 23 2 236 Sheep (since 1952) 17 4 259 Beef cattle (since 1952) 15 2 191 Eggs (since 1952) 14 3 276 Ox hides 10 4 215 Cattle hides 9 5 255 Sheep hides 13 4 135 Goat hides 13 6 152 Wool of improved varieties of sheep (since 1952) 6 6 91 Fine native wool 0 6 172 Coarse native wool 8 6 163 Source: Chinese Agricultural Yearbook, 1980, p. 379-380.  these commodities fall into categories one and two and are subject to the most centralized form of price control. Two key points emerge from this data. First, the frequency of price adjustments is greater than has sometimes been thought or presumed by many outsiders. With few exceptions the prices of the most important commodities have been changed a dozen or more times. The procurement price of pigs on average has been adjusted virtually annually. Moreover, not all of the adjustments have been in an upward direction. Only rice among the major products has not been subject to at least one downward adjustment. Since the longterm upward price trend can be traced to a few large upward adjustments, the corollary of this observation on the frequency of price adjustments is that most adjustments must have been very small. That in turn rises questions that will be discussed further below. Second, there is considerable dispersion in the price changes. Dispersion would be less surprising if Table 1.2 included large numbers of category three products which generally have not been subject to centralized price control. Relative procurement prices have in some cases changed quite markedly. At the extremes, the price of soybeans has almost quadrupled while jute has increased only 10%; the price of wool from improved varieties of sheep declined almost 10%. E. Unification of Prices 1.17 Official procurement prices for category one commodities, by and large, are unified - that is the same price prevails for a commodity throughout China. The uniformity of these prices is confirmed by the data from several widely separated provinces, the consistency of local purchase prices for major product categories with national data for identical products, and the similarity of provincially published procurement prices. 1.18 One exception to this principle of unification for category one commodities is cotton. Official procurement prices were raised success- ively by 10, 15, and 10% in 1978-80. But in 1979 and 1980 provinces in north China received an additional 5% premium. Thus over three years cotton prices rose 39% in central China and 50% in north China. 1.19 Procurement prices of category two products frequently do vary from province to province, although apparently within centrally specified constraints. Data on animal product prices and their changes in 1979 for several geographically widely separated provinces are assembled in Table 1.4. While price increases for live pigs were quite uniform across provinces (increasing almost without exception from 49-50 yuan per dan in 1977 and 1978 to 60-62 yuan in 1979), more significant variation in price increases is evident across provinces for cattle and especially goats and sheep. Prices in Yunnan for pigs and beef cattle were raised substantially more than elsewhere. In Hebei Province the Provincial Commercial Bureau even instituted intra-provincial procurement price differentials by paying a 5% premium for sheep and goats in all but the two most northern prefectures.  - 12 - Table 1.4: INTERPROVINCIAL VARIATION IN PROCUREMENT PRICES, CATEGORY TWO COMMODITIES (Yuan per kg) Hebel Province Hubei Yunnan Heilongjiang 1978 1979 % - (% change)