Farmers are set for a bumper harvest this summer. But as production increases, grain prices may drop, which will threaten farmers' income growth.

Last year, grain production was 469.5 million tons, up 9 percent year on year, reversing the downward trend since 1999. Farmers' per capita net income grew by an impressive 6.8 percent, the fastest since 1997. This year, the strong momentum is expected to continue, according to current statistics.

But bright prospects for the agricultural sector are not necessarily good news for farmers. There are some restraints on farmers' income growth potential.

Grain prices, already at a high level, may drop this year due to increased output.

From a global perspective, the grain stock increased at the end of last year. It is predicted that world grain production will rise this year, sparking concerns that prices may be hammered down.

According to a report on prospects for world grain production released by the Food and Agriculture Organization of the United Nations, global grain stocks increased by 14.3 percent year on year at the end of last year.

The planting acreage of cereal crops and soybean in major agricultural countries has increased by various degrees this year. The two factors combined mean prices of grain, such as wheat, corn and soybean, may head down across the planet, including in China.

Domestically, thanks to the government's favorable policies, farmers have found it pays to farm. Compared to last year, sown areas are expected to grow by 2 million hectares this year. Barring major natural calamities, grain production will continue to rise this year.

More production would bring about price fluctuations in the market, and a price drop would affect farmers' income growth.

It is rare that grain prices continue to climb after reaching a peak in the previous year. This is a result of the supply and demand laws of the market.

Price rises on agricultural production materials and consumer goods sold in rural areas will also affect farmers' income growth.

The government has endeavoured to hold back the rise in prices of agricultural production materials. It has, for example, subsidized chemical fertilizer producers and controlled the prices of many materials to help farmers.

Despite government efforts, the prices of fertilizer, agricultural plastic sheeting and seeds have risen significantly. This spring the price of agricultural production materials nationally rose by 10.6 percent over last year. The price of fertilizer grew by 13.9 percent.

Surveys show the rise of oil and coal prices has led to the price hike of agricultural production materials. Increased demand thanks to farmers' enthusiasm for planting is another factor behind the price movement.

As prices of petroleum rise, the price of diesel oil has also gone up, which has pushed up production costs for farmers in areas where agricultural machinery is widely used.

In central China's Henan Province, grain production costs have risen by up to 405 yuan (US$48) per hectare on average due to the rise in prices of seeds and chemical fertilizer. If price rises for machinery are taken into account, the extra costs would amount to more than 450 yuan (US$54) per hectare.

The extra costs would offset farmers' income growth and subsidies the government grants them.

The prices of consumer goods sold in rural areas are also higher than in urban areas, which is similarly putting a strain on farmers' wallets.

But the government has been left with not much room to manoeuvre or devise new policies to help farmers this year.

The government has issued a number of policies over the past few years to help farmers increase their income.

Last year, taxes on special agricultural products were scrapped and the agricultural tax rate was lowered, which saved 30.5 billion yuan (US$3.7 billion) for farmers. This year, 27 provinces and regions cancelled agricultural tax, which will save farmers another 21 billion yuan (US$2.5 billion).

Besides, the government has decided to downsize the issuance of treasury bonds. The country's macroeconomic regulations may also indirectly affect farmers' income prospects.

Part of the national macroeconomic regulation policy is to control the supply of money and land, two factors that fuel the economy, which is suffering from partial overheating in some industries.

As the policy is implemented, the GDP will be forced down, leading to dampened demand for labour. It is estimated a drop of 1 percentage point in GDP growth would reduce labour demand by 900,000.

Migrant workers from rural areas would be first to fall victim to reduced demand. Farmers would come up against further obstacles when seeking a job in the city.

The government should take instant measures to tackle threats to farmers' income growth. If the market is flooded with wheat, the State should increase its purchases of wheat to prevent price falls.

Meanwhile less wheat should be imported to keep a balance between supply and demand in the domestic market and maintain price stability.

Policies should be devised to encourage the production of agricultural materials, such as chemical fertilizer, so prices of those materials can be kept relatively stable.

The government currently grants subsidies to chemical fertilizer producers. It could consider giving the subsidies to farmers directly. Imports of agricultural production materials can be increased to balance rising demand and stabilize prices.

The government must sweep away restrictive and discriminative policies against migrant workers in cities to improve their employment conditions.

(China Daily July 15, 2005)