Setting up a "land bank" may contribute to securing China's grain production.

As a country with a 1.3 billion population, grain security is of paramount importance to China. That is why it is always top of the government's agenda.

To ensure grain production boils down to two fundamental prerequisites. One is the protection of arable land, the other is farmers' enthusiasm for planting grain crops.

Obviously, grain production will be in jeopardy if arable land, a limited resource, is not well protected and preserved.

However, if farmers lack the incentives to cultivate grain crops, grain security cannot be secured even if arable land is well protected and in abundant supply, an argument that has solid numbers to back it up.

In the last decade, for example, when farmers had the incentives to plant grain crops, the annual grain output reached 520 million tons. The lowest record yield was 430 million tons when farmers were less inclined to plant farm crops due to an inability to make profit.

It is crystal clear that farmers' enthusiasm for farming has an immense impact on the country's grain production and therefore grain security.

The key to boosting farmers' willingness to plant grain crops is to raise their income for doing so. The government has in the past taken a series of measures to do that. However, this is not the whole answer to the problem.

The policy of encouraging farmers to get involved in farm processing or trade, for example, is just one way in which they make money. That also means they may be distracted from growing.

Although farmers who are engaged in agricultural trade or farm processing can dramatically increase their incomes, only a small number of farmers have the resources to start up such ventures, with the majority still making their livings through agriculture.

A policy that promotes the restructuring of farming and encourages farmers to plant profitable economic crops also cannot fix the grain problem.

Under such a policy, if all farmers rush to plant more profitable crops while deserting grain production, grain security will be in danger.

In recent years, the central government has had many favorable policies for farmers, trying to reduce their burdens.

Such preferential policies include tax reforms, the phasing out of farm taxes, and direct subsidies for planting certain crops.

However, the increased income resulting from these policy initiatives are now being offset by soaring farming costs due to rising prices of agricultural materials such as fertilizers and pesticides.

And more importantly, the number of policies the government can bring in to help farmers is limited.

Under such circumstances, a workable alternative to help increase farmers' incomes is to introduce economies of scale.

Currently, an individual farmer on average has only 1.5 mu (0.1 hectare) of land, which means no matter what farmers produce, they will only be able to feed themselves but unable to become rich.

However, if arable land, now scattered among disparate farmers, could be put together for large-scale operations, this could greatly increase production efficiency and incomes.

For instance, if one farmer could plough 20 mu (1.3 hectare) of land, and each mu of land could earn him 500 yuan (US$60) a year, then that farmer could have an annual income of 10,000 yuan (US$1,200), which is about the same level as his urban counterpart can earn.

Clearly, the more hectares the farmer ploughs, the more he will earn.

For such economies of scale to work, however, we must persuade farmers to transfer their land into one big farm.

Admittedly, efforts were already made years ago in some pilot areas to promote such operations by encouraging land transfer among farmers.

But little headway has been made in those areas.

The main stumbling block in promoting such an operation is the lack of a framework that will encourage farmers to transfer their land.

The majority of the farmers-turned-migrant workers, fearing the risks involved in finding jobs in cities, are reluctant to transfer their land to others when they leave home to find work in cities. They still view land as their guarantee in case they lose their city jobs.

And in cases where migrant workers are willing to transfer their land, they usually demand a high price, driving away many potential bidders.

The government should step in to break the deadlock involved in land transfers.

Currently, a feasible solution to resolve the problem is to transform the Agriculture Development Bank of China into a national land bank, which could then act as a policy bank.

The proposed "land bank" should have a "high deposit interest rate and low lending rate," a formula that is designed to encourage farmers to deposit their idle land in the bank. This also gives incentives for farmers who want to plough more land and need to borrow from the bank.

Experience from developed countries shows that, as an intermediary, land banks have three major contributions to helping concentrate land.

First, land banks can regulate the current disorderly land transfer market.

Second, they can bring together scattered land into larger chunks, and then lend them to those who want to start big farms, thus creating economies of scale.

And finally, as a national policy bank that is supported by the State, it will build up the trust of the farmers-turned-migrant workers so they are willing to deposit their land in the banks when they go to work in the city. As such, usually idle land will be tended.

Although the proposed land bank has many merits, it faces one technical problem that has to be tackled if it is to work.

Because the bank follows the business formula of "high deposit interest rate and low lending rate," it will result in huge losses, which gives rise to the question of who should foot the bill?

In my view, it is a bill that should be paid by the State.

The government should pay this price in order to maintain grain security.

It is recommended that the government earmark a special portion out of its budget to subsidize the land bank.

If the government's purse strings are too tight, it could consider introducing a grain security tax to cover the bill.

(China Daily May 17, 2005)