China's grain subsidies and agricultural policies had only a minor impact in raising the 2004 income of Chinese farmers because of strong commodity market prices, the US Agriculture Department said on Wednesday. In a special report, the USDA's Economic Research Service analyzed China's launch of farm subsidies in 2004 aimed at closing the widening gap between living standards of rural and urban Chinese.

Two of the new policies included $1.4 billion in direct subsidies to rice, wheat, corn and other grain farmers last spring, and the elimination of taxes on growers, valued at $5 billion to $7 billion.

Chinese farmers were generally paid a subsidy of about $7.33 per acre for grain plantings in 2004, the USDA said.

China's grain production in 2004 was estimated at about 400 million tonnes, meaning the subsidies paid to grain farmers were equal to less than 2 percent of the gross value of grain production, the USDA report said.

"China's direct agricultural subsidies and tax reduction are symbolically important as a reversal of its historic taxation of farmers, but they only provided a modest increase in rural incomes," the USDA report said.

More important for rural income last year was a 30 percent jump in grain prices and rising off-farm income, it said.

"The subsidies are not large enough to make planting grain as profitable as planting alternative crops such as cotton, vegetables or fruit," the USDA added.

With global grain prices now falling, China recently announced it would offer support payments for the 2005 corn crop. The country could experiment with price- and production-linked subsidies nation-wide if stronger incentives were needed for farmers to produce grain, the USDA report said.

In 2004, the Chinese government also provided $193 million grain and soybean seed subsidies, $5 million in farm machinery subsidies and $18 billion in projects to improve irrigation, electricity generation, roads and other rural infrastructure, the USDA said.

Other new agricultural policies include China's move to privatise the domestic grain marketing system and encouraging rural credit co-operatives and banks to loan more money to farmers.

"Early assessments by observers report that grain markets are more competitive and open," the USDA report said. "Private and individual grain merchants are playing a greater role in grain procurement, state-owned enterprises are improving service and working with village brokers to purchase grain, and farmers have more alternatives for grain marketing."

Copyright Reuters, 2005