Regoverning Agrofood Market and Transforming Production in

Regoverning Agrofood Market and Transforming Agricultural Production in China: From Smallholders to Pluralistic Large Farms

Xiangping JiaNorthwest Agriculture & Forest University

Presentation at School of Oriental and African Studies (SOAS), London, Dec. 10, 2014

Outline• Background of China’s transformed farm system and

agro‐food chain

• Case studies

– Dairy scandal and transforming dairy production

– Emerging farmer cooperatives

– Direct Farm programs of supermarket

• Concluding remarks

4.5% of annual growth rate of agri GDP in past 30 years

0

1

2

3

4

5

6

7

8

1979-84 1985-95 1996-00 2001-05 2006-10

More than 4 times of population growth rate

Annual growth rate of agri GDP in 1978‐2010

0%

20%

40%

60%

80%

100%

1980 1985 1990 1995 2000 2005 2010

Forestry

Fishery

Livestock

Crop

As growth differs among commodities, agricultural structure has also changed significantly

18%

34%

Rural poverty incidence in 1978‐2007

0

5

10

15

20

25

30

35

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Based on national poverty line

US$ 1/day (in PPP)

Self‐sufficiency of Food in China and the World

• Grain self‐sufficiency– 92% in 2010– 88% in 2012– 100% for wheat and rice– Net importer of maize since 2010

(5.2 million tons in 2010)• Imports of other products

– Sugar (3.7 million tons in 2012)– Edible oil (9.6 million tons)– Dairy products (6.2 million tons

equivalent fresh milk)– Pork, beef and mutton (0.7 million

tons)

Major Drivers of Agri growth in the Past

- Institutional change-Technology -Market reform (including international trade)

- Investment-…

Major Drivers of Agri growth in the Past

- Institutional change-Technology -Market reform (including international trade)

- Investment-…

Challenges: falling farm size

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: NBSC

Ha/hh

With increasing agri. productivity, rural has been undertaking significant transformation: >2/3 of rural labor has off‐farm job now

0

0.1

0.2

0.3

0.4

0.5

0.6

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Full timeFull time + seasonalFull time + seasonal + part time

2011

Age Range 1990 2000 16-20 76 24 21-25 66 33 26-30 71 48 31-35 73 52 36-40 80 57 41-50 79 62

Challenges:Percent of workforce in‐farm, by age range

Source: CCAP’s surveys

20088

Agriculture: elders + middle age women

3

2011

Land policies: enhancing land use‐rights and rental market development

051015202530354045

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(%)

Rent‐out Rent‐inSource: Author’s own survey on 1,175 rural households (in 8 provinces) and land transfer for each plot during 2002‐2012.

Policy Interventions of Promoting Large Farms (2006 ‐ 2013)

•

Year Policies Highlights

2006 No. 1 Policy of State Council“Advice to Promote New Rural Campaign”

• New rural campaign and Modernize agriculture

• Agro‐industrialization by supporting agri‐business enterprises and vertical coordination

2007 Law of Farmers Professional Cooperatives • Provision of service (such as purchasing agricultural inputs, marketing, and technologies etc.) through cooperatives

2008/2011

Ministry of Agriculture (MOA) and Ministry of Commerce (MOFCOM) issued “Advice of Developing Direct Farm (DF) with Supermarket”.

• Reduce market intermediaries by connecting to retailing

• Support consolidated production through agri‐food chain

2013 No. 1 Policy of State Council “Advice of Modernizing Agriculture and Energizing Rural Development”

• Institutional innovations of farm production• Promote and support large farm (specialized

farm, cooperatives, agribusiness enterprises etc.)

2013 The 3rd plenum of the 18th central committee, Nov. 9th.

• Draw up a “profound revolution” to give farmers full rights to their land and housing. Promote ‘family farm’.

Institutional (land) reform:China’s Farmers in Communes … Land

belongs to collectives

40,000 communes [before]

200,000,000+ million farms [after][Every rural resident (900,000,000 of them) has land]

– Farm size: about 0.7 hectare

Decollectivization (1978 to 1984)

The Chinese government promotes to transform smallholder farming to a larger one… But how are these farms organized?

1950‐1970

1980‐2010

2011‐?

Family Farm: Mixed Opportunities and Challenges

• Transaction costs related to individual smallholder farmers are prohibitive.

• New‐wave of transformed agrofood market.• Farmers have to confront a rapidly changing technological

environment in which substantial inefficiencies may arise.• Ecology‐poverty trap (full externalities).

Agriculture by nature is an ecological production process, and technological progress can not capitalize very part of farming.

In the presence of positive transaction costs, hired labor has been found less efficient than family labor (Sah 1986; Binswanger, Deininger, & Feder, 1995; Binswanger & Rosenzweig, 1986).

Farmer organizations are primarily subject to family governance (Schmitt, 1993, pp. 155‐157).

Political arguments: justice and equity. Small farmers are “small” but “beautiful” (Schultzian)

Case One:

Dairy Crisis and Transformed Production in China

Dairy Production in Greater Beijing, China

Before 2008, small‐scale backyard dairy farms were dominating.

Year ≤10 10-50 50-500 500

2004 49 25 19 8

2005 44 28 20 8

2006 43 28 21 9

2007 40 27 22 11

2008 35 28 23 13 Source: China Dairy Statistical Yearbook, 2005‐2009

Table. Percentage of Cows by Herd Size in China (2004-2008)

• To procure, transport, and process the milk from millions of small dairy farms, mobile brokers and small milk stations procured most of the milk before the crisis.

Traditional Marketing at Upstream Dairy Chain

Milk Scandal in China

• The largest food safety incident broke out in Aug. 2008 in China. • The chemical melamine was added (by brokers?) to increase the

measured “protein content” of milk.• Impacts:

• Estimated 300,000 victims• Panic of consumers• Inspections revealed the problem existed in milk products of

more than 20 companies• On dairy farmers…

From: ChinaToday.com

From: XINHUA

• Government Response– Subsidize dairy farmers’ losses – not many got…

– Marketing policies– Forbid mobile brokers

– Inspection program to overhaul milk stations

– Upgrading

– Production policies – Moved farmers from backyard to consolidated cow

complexes (“yangzhi xiaoqu” in Chinese)

Impacts on Farmers

• China’s dairy industry was seriously hit by Milk Scandal in 2008

• In the aftermath of the onset of the Scandal, dairy participation fell substantially and herd size declined

• Marketing chain is transformed towards inspection and supervision

• (Jia, et al., 2012; Mo, et al., 2012)

From Backyard to Cow Complexes/hotel: Traditional to Formality

Where to live? Where to farm? Where to market?

1

2

3

Sampled Dairy Farms in Greater Beijing (2000-2010)

Year

Number of sample

households (Total)

Number of dairy farmers

% in cow complexes

Average herd Size

2000 231 85 0 2.9

2004 231 150 0 5.6

2008 231 121 2 9.3

2009 231 104 30 8.6

2010 225 58 43 10.9Source: Authors’ own survey. Jia et al (2012)

Dairy production is consolidated in cow complexes.

Dairy Farmers’ Perception on Cow Complexes

Complexfarmers (N=25)

Backyard farmers(N=33)

Advantages (% of respondents)

With at least one advantage 64 33

- Easy to sell milk 44 27

- Easy to enlarge herd size 36 9

- Benefit from technical support 8 6

- Benefit from purchasing inputs 12 6

No advantage 36 67

Complexfarmers (N=25)

Backyard farmers(N=33)

Disadvantages (% of respondents)

With at least one disadvantage 72 67

- Uncomfortable distance 36 39

- Poor sanitation and epidemic prevention 20 36

- Delay of milk payment 36 3

- Overcharged renting fee 16 3

No disadvantage 28 33

While there are benefits for participating in such complexes, the costs are evident, both economically and psychologically…

pros cons

Questions to the Audience

• Is it equitable to restructure the production system by removing smallholder farmers who might be dependent on agriculture?

• How do you view the ‘innovations’/’anomalies’?– Contract?– Co‐op?– Joint venture?– . . .

• Neo Institutional Economics (NIE) approach?

Related Publications

• Jia, X., Luan, H., J. Huang, S. Li, and S. Rozelle. (2014). "Marketing Transformation at Dairy Farm‐gate after Milk Scandal in China: Evidence From Greater Beijing." Agribusiness: An International Journal.

• Jia, X., J. Huang, H. Luan, S. Rozelle, and J. Swinnen. (2012). "China’s Milk Scandal, Government Policy and Production Decisions of Dairy Farmers: The Case of Greater Beijing." Food Policy 37(4):390‐400.

Case Two: Emerging Farmer Cooperatives in China

• Atomistic: Smallholder farms Agent/brokers

Aggregator Wholesale

– Efficient and inclusive

– There is little coordination between the chain

partners

– But low traceability and quality assurance

Fragmented Agrofood Chain in China

History of Farmer Coops in China

• Before 1980, planned economy• 1980‐1994, market liberalization• After 1994, farmer associations were established to

– disseminate technology – access to market

• In 2004, a systematic promotion on farmer associations• In Oct. 2006, the “Law of Farmers Professional Cooperatives”

(FPCs) was passed in the Standing Committee of the 24th People's congress, and the law was promulgated in July 1st of 2007.

• Is farmer organization (Farmer Professional Cooperatives, FPC) a solution to mis‐coordination of the agrofood chain?

• How does FPC coordinate marketing?• How does FPC organize production?

Research Question

Data and Sampling

FPCs by starting year (%)Totals (obs.)<=1998 [1999,

2003][2004, 2007) >=2007

Registered toIndustrial and Commercial Bureau 1 3 14 82 94

Non‐registration 7 10 43 40 30

Number of observations4 10 37 106 157

Data were based on a national representative survey in 5 provinces in 2009 (two years after the law in 2007).

FPC and Marketing Channel

Total Traditional Wholesale Modern Mixed

Samples 157 21 35 36 65

Distribution of samples (%) 100 13 22 23 41

Food safety Specify food safety requirement 28 (18) 7 11 54 29Supervise production 18 (11) 0 6 67 28Refuse when poor quality identified

27 (17) 4 7 48 41

Value adding content

Has processing 33 (21) 0 24 21 55

Has own brand 27 (17) 4 19 19 59

Quality certification 28 (18) 11 14 11 64

Agribusiness mode

Is production base (jidi) 37 (24) 3 14 49 35

Dragon‐head‐driven company 42 (27) 0 0 50 50


Samples 157 21 35 36 65



27 (17) 4 7 48 41


Has processing 33 (21) 0 24 21 55

Has own brand 27 (17) 4 19 19 59


Agribusiness mode




Total1 Traditional Wholesale Modern Mixed

Samples 157 21 35 36 65



27 (17) 4 7 48 41


Has processing 33 (21) 0 24 21 55

Has own brand 27 (17) 4 19 19 59


Agribusiness mode





Samples 157 21 35 36 65



27 (17) 4 7 48 41


Has processing 33 (21) 0 24 21 55

Has own brand 27 (17) 4 19 19 59


Agribusiness mode




Econometric Analysis

• DV – Marketing channel (Small brokers; wholesale, agribusiness or supermarkets)

• RHV– Initiation (Time, and person)– Scale– Membership characteristics (% of “core” member)– Agro‐industrialization (Brand, certification, production base)– Product attributes (livestock, fruits, vegetable, grains)

FPC Marketing and Initiation: Regression ResultsTraditional Wholesale Modern

(I) (II) (III)Initiating year ‐1.153 1.185 ‐0.086

[1.271] [1.478] [1.256]

Initiating source of government (D) 6.044 5.654 ‐12.097[10.453] [12.158] [10.332]

Initiating source of government and farmers (D)

2.006 13.136 ‐15.455[9.700] [11.282] [9.588]

Initiating source of farmers (D) 6.519 ‐4.232 ‐2.583[10.244] [11.915] [10.125]

Initiating source of firms(D) – – –

• Initiation source has no impact on FPC’s marketing.

• Economies of scale matter. FPCs with more members access to markets of model channels.

Traditional Wholesale Modern(I) (II) (III)

Spatial coverage: Within village (D) 17.149** 0.492 ‐17.375**[7.834] [9.112] [7.744]

Spatial coverage: Other villages within township (D)

5.111 10.036 ‐15.458*[8.371] [9.737] [8.274]

Spatial coverage: Outside township (D) – – –

Ratio of formal members to total ‐0.062 ‐0.058 0.124[0.081] [0.094] [0.080]

FPC Marketing and Scale: Regression Results

Traditional Wholesale Modern(I) (II) (III)

FPC has own brand ‐13.356 5.478 8.007[9.837] [11.442] [9.724]

FPC certify product to certain quality standards

10.918 ‐3.759 ‐7.020[9.334] [10.856] [9.226]

FPC identified as “production base” (jidi)

‐10.268 1.057 9.331[7.267] [8.453] [7.183]

• The parameters of institutional attributes are not significant, suggesting minor effects of public & private standards and the related government policies.

FPC Marketing and Agro‐industrialization: Regression results

Summary

• Agrofood chain is getting better coordination through FPCs in China.

• However, the coordination of agrofood market through FPCs in China is maintained by impersonal rules and relational agreements.

• It is challenging to assuring traceability and safety.• Brand becomes an important asset specificity of reputation

for FPCs to achieve vertical coordination with contracts. • Certification to food safety and quality standards, however, is

not facilitating the vertical contracts.

Summary• China’s Farmer organizations are being backward integrated by

agribusiness companies (of processing, trading, agro‐chemical, etc.).

• Decision‐making within FPCs in China is still decentralized to individual farmers.

• However, there is a trend that the decision rights of marketing rights tend to be collectivized in high‐value sector.

• The governance structure of FPCs in transition China presents hybrid forms of both hierarchy and family farming, and there exist dynamic and multiple trajectories.

• Government policies (direct subsidies on initiation) are limited in promoting.

Related Publications

• Jia, X., J. Huang, and Z. Xu. 2012. "Marketing of Farmer Professional Cooperatives in the Wave of transformed agro‐food market in China." China Economic Review 23(3): 665–674.

• Jia, X., and J. Huang. 2011. "Contractual arrangements between farmer cooperatives and buyers in China." Food Policy 36(5):655‐665.

• Jia, X., Y. Hu, and G. Hendrikse. 2015. “Centralized versus Individual: Governance of Farmer Professional Cooperatives in China”. (Eds) J. Bijman, R. Muradian, J. Schuurman. Cooperatives, Economic Democratization, and Rural Development. Edgar Elgar.

Case One Dairy Crisis and Transformed Production in China

Case Two Emerging Farmer Cooperatives in China

Case Three Direct Farm through Supermarket in China

About 30% farmers being engaged in land consolidation through farmer cooperatives or agribusiness enterprises, based on a large scale survey in 90 villages of 8 provinces (1,175 rural households) in 2012.

0

20

40

60

80

100

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(%)

Farmer cooperatives or agribusiness companies

Through village committee

Between farmers

Chain Governance of Fresh Produce by Supermarket

Brokers

Vendors / Suppliers

Supermarket

Individual farmsOthers

Wholesale

Vendors / Suppliers

Others• (A) Own (or jointly own) PB

• (B) PB owned by intermediaries

• (C) Contract farm

Land Consolidation into Production Base (PB)

• (D) Spot market procurement

• (E)Wholesale

Before 2008

After2008

Supermarket

Organizational Forms of Production and Labor Contract

Land Consolidation Organizations of Production

Labor ContractWage Sublease Share‐

croppingowner‐operator

YesA. Own (or jointly own) PB + + +

B. PB consolidated by intermediaries + + +

No

C. PB with Contract Farm (coops) + +

D. Spot market procurement +

E. Wholesale

Organizational Forms of Grain Production

Land Consolidation

Organizations of ProductionLabor Contract

Wage Customservice

Tenancy Owner-operator

Yes

A. Super-large farm + +

B. Medium large + +

C. Family farm (large) + +

No D. Traditional smallholder family farm +

Why It Is An Issue?

• Of course, organizations matter! (Ménard, 1996)• Contradictory theories and facts….

– Family farming of owner‐operator has been found the efficient system of agricultural production because of incentive problems of hiring labors (Schultz, 1964; Cheung, 1968; Eswaran & Kotwal, 1985; Binswanger & Rosenzweig, 1986; Allen & Lueck, 2002)

– Why the farm system transforms to a pluralistic one? How family farming posits itself in the hybrid forms of pluralism?

Why It Is An Issue? • Policy implications

– Production and technologies– Inclusiveness– Credit market– Environmental sustainability– Political structure of interested groups– Organizational knowledge is a source of competitive advantage (Loasby, 1999; Teece et al., 1997)

• Economic structure is affected!

Ongoing Research

• Procurement of fresh produce and quality assurance of the supermarket

• Vender survey• Production base survey• Farmers

Land Consolidation Organizations of Production Walmart Carrefour Auchan

YesA Own (or jointly own) PB

B PB consolidated by intermediaries

No

C PB with Contract Farm (coops)

D Spot market procurement

E Wholesale

Conclusions

• Family farm is still the dominant system of ag. production in China

• However, a variety of new forms of production are emerging, leading to a pluralistic system

• Family farm travels on multiple trajectories with local viability

• China faces mixed opportunities and challenges to transform the smallholder farming to a large one

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Regoverning Agrofood Market and Transforming Production in