Agriculture in The People's Republic of China - Challenges - Inefficiencies in The Agricultural Market

Inefficiencies in The Agricultural Market

Despite rapid growth in output, the Chinese agricultural sector still faces several challenges. Farmers in several provinces, such as Shandong, Zhejiang, Anhui, Liaoning, and Xinjiang often have a hard time selling their agricultural products to customers due to a lack of information about current market conditions.

Between the producing farmer in the countryside and the end-consumer in the cities there is a chain of intermediaries. Because of a lack of information flows through them, farmers find it difficult to foresee the demand for different types of fruits and vegetables. In order to maximize their profits they therefore opt to produce those fruits and vegetables that created the highest revenues for farmers in the region in the previous year. If, however, most farmers do so, this causes the supply of fresh products to fluctuate substantially year on year. Relatively scarce products in one year are produced in excess the following year because of expected higher profit margins. The resulting excess supply, however, forces farmers to reduce their prices and sell at a loss. The scarce, revenue creating products of one year become the over-abundant, loss-making products in the following, and vice-versa.

Efficiency is further impaired in the transportation of agricultural products from the farms to the actual markets. According to figures from the Commerce Department up to 25% of fruits and vegetables rot before being sold, compared to around 5% in a typical developed country. As intermediaries cannot sell these rotten fruits they pay farmers less than they would if able to sell all or most of the fruits and vegetables. This reduces farmer’s revenues although the problem is caused by post-production inefficiencies, which they are not themselves aware of during price negotiations with intermediaries.

These information and transportation problems highlight inefficiencies in the market mechanisms between farmers and end consumers, impeding farmers from taking advantage of the fast development of the rest of the Chinese economy. The resulting small profit margin does not allow them to invest in the necessary agricultural inputs (machinery, seeds, fertilizers, etc.) to raise productivity and improve their standards of living, from which the whole of the Chinese economy would benefit. This in turn increases the exodus of people from the countryside to the cities, which already face urbanization issues.