US Takes on China Subsidies

Officials Claim China Distorts Production, Markets for Corn, Rice, Wheat

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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USDA projects China will produce 128 million metric tons of wheat in the 2016-17 marketing year, but because of 97 mmt of beginning stocks, China will end up with carryover next year of nearly 111 mmt, or more than 4 billion bushels. (DTN file photo by Lin Tan)

WASHINGTON (DTN) -- China subsidized its farmers' production of corn, rice and wheat to the tune of nearly $100 billion last year, the Obama administration claims in a new trade enforcement action at the World Trade Organization.

Administration leaders gathered Tuesday at the U.S. Department of Agriculture for a late-morning press event to announce the new trade case against the People's Republic of China. Agriculture Secretary Tom Vilsack was joined by United States Trade Ambassador Michael Froman as well as members of Congress to announce the complaint, "which challenges China's use of 'market price support' for three key crops (rice, wheat and corn) in excess of China's commitments under WTO rules," the White House stated.

U.S. officials said the case marks the first time an "advanced developing country"(using WTO terms) has been challenged over domestic subsidies. The U.S. filed notification Tuesday with the WTO, which gives China 60 days to respond to the complaint and agree to take action to change its policies. If China ignores the complaint or disagrees, then the case would likely move into the next phase of litigation in the WTO process.

China annually announces the minimum prices the government will pay for rice, wheat and corn in major production areas. By doing so, China has maintained domestic prices for those crops above world market prices since 2012, the U.S. alleges.

The administration claims that in 2015 alone, China's market price support program for corn, rice and wheat was nearly $100 billion more than the levels China committed to when becoming part of the WTO. The subsidies created artificial government incentives for Chinese farmers to increase production.

"The United States is challenging China's government support on behalf of American rice, wheat, and corn farmers to help reduce distortions for rice, wheat and corn, and help American farmers to compete on a more level playing field."

Trade Ambassador Froman said the U.S. will aggressively pursue this case on behalf of American farmers and hold the Chinese government accountable to standards of fair trade.

"These programs distort Chinese prices, undercut American farmers, and clearly break the limits China committed to when they joined the WTO. As this administration has consistently and repeatedly shown, we will not stand by when our trading partners fail to follow the rules like everyone else," Froman said.

U.S. wheat groups have commissioned multiple studies in recent years to examine China's domestic support. One study showed China was paying a minimum price of about $10 a bushel for wheat. Another study by Iowa State University showed China's subsidies were costing U.S. wheat farmers between $650 million and $700 million annually in lost income. Essentially, if China's price supports and domestic stocks were not so high, China would be importing roughly 10 million metric tons of wheat; the U.S. would be expected to capture at least a share of that market.

"They are storing half the world's wheat and they are artificially inflating their prices to $10 a bushel and it is suppressing the entire world," said Chandler Goule, chief executive officer of the National Association of Wheat Growers.

Goule noted he had looked at the CME price for wheat on Tuesday, which was trading at $4.20 for December futures, but he cited at least one local market in Kansas trading closer to $2.77 a bushel for cash wheat.

At the press conference, Senate Ag Committee Chairman Pat Roberts, R-Kan., noted he and House Ag Committee Michael Conaway, R-Texas, held a forum with farmers over the weekend in Kansas. One of the complaints at the event was that Washington was not taking enough action to help farmers with export markets.

"It is our government's responsibility to listen to their concerns," Roberts said. He added, "This enforcement action ... has a long road ahead."

Rep. Kevin Brady, R-Texas, chairman of the House Ways & Means Committee, added that trade has become a tough topic in the current political environment, but such action will show the U.S. is serious about enforcement.

"We have to hold China accountable and our trading partners accountable when they break the WTO rules," Brady said.

Sen. Heidi Heitkamp, D-N.D., noted North Dakota is the nation's top wheat-production state. She too reiterated it was important to defend farmers and their ability to market grain globally. "This kind of action is absolutely critical for trade policy in our country to move forward," Heitkamp said.

Vilsack said China has become a critical market for U.S. farmers since it became part of the WTO, going from $2 billion a year in trade to more than $20 billion because of cuts in tariffs and the removal of other trade barriers.

"But we could be doing much better, particularly if our grain exports could compete in China on a level playing field," Vilsack said. "Unfortunately, China's price supports have encouraged wheat, corn and rice production in China that has displaced imports."

USDA monthly World Agricultural Supply and Demand Estimates show China continues to maintain the highest beginning and ending stocks of corn, rice and wheat.

DTN reported last month on China's high domestic support for corn as the country announced earlier this year it was ending its costly grain stockpiling program. Chinese officials set up the program through price supports as a way to help stabilize corn acreage, boost rural incomes and reduce the need for corn imports. An analysis by Rabobank cited that corn production in China expanded into regions actually not suited for corn, but farmers planted it anyway.

Due to its price-support system, China's spot cash price for corn has been about double the farm-gate price for U.S. corn, Rabobank noted. Over the past four years, the price floor in China's corn policy translated to farmers selling their corn more to the state than on the open market.

The result was a large corn reserve and distorted domestic prices for the crop. Analysts have different views on just how much corn China has in stocks. Rabobank and others argue China's corn reserve could be as high as 250 million metric tons, or 9.8 billion bushels.

The USDA WASDE report on Monday cited China's 2015-16 corn supply and use starting with 110.7 million metric tons of beginning stocks and 216 mmt of production, or 8.5 billion bushels. Total domestic use of corn in China is pegged at 226 mmt, leaving China with a carryover next marketing year of 103.65 mmt. According to USDA, that equates to roughly 47% of the entire world ending stocks for corn.

Looking at wheat, USDA projects China will produce 128 million metric tons of wheat in the 2016-17 marketing year, but because of 97 mmt of beginning stocks, China will end up with carryover next year of nearly 111 mmt, or more than 4 billion bushels. According to the WASDE report, China will hold more than 44% of the globe's ending stocks for wheat.

It's a similar circumstance for rice. China is pegged to produce 146.5 million metric tons of rice in 2016-17, but because of high beginning stocks, its ending stocks will be 69.91 mmt, or 60% of the globe's entire ending stocks for rice.

The trade action comes as the Obama administration is winding down its tenure, but also as the U.S. presidential election campaign has soured Americans on trade. Republican nominee Donald Trump has specifically pointed to the overall trade imbalance with China as one of the problems with U.S. trade policy. The Obama administration has sought to push the 12-nation Trans-Pacific Partnership trade deal -- which does not include China -- as a strategy to boost U.S. trade while providing a way to help offset China's influence in region.

China Provides Domestic Support In Excess of its WTO Commitments
Product

WTO

Commitment

2012 2013 2014 2015
Wheat ≤ 8.5% Over Over Over Over
Indica Rice ≤ 8.5% Over Over Over Over
Japonica Rice ≤ 8.5% Over Over Over Over
Corn ≤ 8.5% Over Over Over Over

Chris Clayton can be reached at Chris.Clayton@dtn.com

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(AG/CZ)

Chris Clayton