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Source: Doane Advisory Services

China will gradually let global markets determine prices for grains and other major crops, according to a feature in the China Economic Times that got worldwide attention in early December when Reuters and other wire services picked up on it. Since 2004, Beijing has set floor prices for rice and wheat and stockpiled corn, soybeans, sugar and cotton at fixed prices to ensure profitable and all-out production by farmers.

But Beijing has determined its current policy of setting guaranteed domestic prices often above world levels, buying up domestic production for "government reserves" and placing strict quotas on cheaper imports is unsustainable.

To reassure its own farmers and consumers, Beijing leaders say they will take a "go slow" approach for staple grains like rice and wheat, however, and will "gradually" allow global markets to determine China's domestic agriculture prices.

They plan to maintain a target-price concept, for example, but pay farmers deficiency payments when domestic prices fall short of the target price. Also planned are other types of subsidies and insurance incentives to boost farmer income without distorting market prices.

"Land reform" is another key change coming for China. Ever since the communist revolution, all urban land was owned by the state, and all rural land was under "collective" (village) ownership. That's about to change, big-time. A reform master plan is about to set up a private rural property market allowing peasants to transform their "collective" rights into a shareholding system. A pilot program will even enable the mortgaging and transferring of privately owned "homesteads."

Government could acquire collective land "for public use" by compensating occupants, then sell to private developers. It's been a major engine of growth and development in China's cities, and now they plan to use it to develop a private rural farmland market. The goal? To gradually transfer property rights to all 650 million of China's rural population.

Longer term, we see reason for optimism in U.S. agricultural trade potential in four key tactics revealed in China's master plan for market reform, focused specifically on freeing up exports and imports:

1. The existing "free trade zone" in Shanghai will be replicated at other port cities.

2. The Commerce Ministry will actively increase imports in general, but particularly of "food and energy," due to well-recognized limits on available farmland and energy reserves in China.

3. The Commerce Ministry will also aggressively assist Chinese companies in developing overseas marketing networks and establishing world-class quality and "world-famous brands" of Chinese products.

4. The Commerce Ministry will aggressively pursue bilateral and multilateral trade agreements with both developed and emerging countries that "recognize and complement each other's comparative advantages."

But short term, the reforms may actually reduce U.S. exports of those commodities of which China holds enormous and costly-to-maintain reserves, while it begins to meter these reserves back into its domestic market at globally competitive prices. U.S. cotton exports are the most likely casualty.

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