A dealer packs onions at Xinfadi Agro Wholesale Market in Beijing. 

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China’s No. 1 Central Document in 2017 points out that the principal contradiction of China’s agricultural development has transformed from inadequate aggregate supply to a structural contradiction. The principal aspect of this contradiction is supply side, which is strongly characterizedby the coexistence of a periodic surplus of supply relative to demand and inadequate supply.

Promoting agricultural supply-side structural reform should accelerate the establishment of a market—particularly public-welfare wholesale markets—that adapt the agricultural product supply to consumer needs in terms of quantity, variety and quality.

 

More efficient product markets
Markets are where exchange happens. A complete and efficient market system for agricultural products should be established when promoting agricultural supply-side structural reform.

Agricultural production is seasonal and regional while consumption demand is inelastic and nationwide. Producers supply a large quantity of goods in few varieties while every family consumes a small amount of goods in many varieties, which easily causes the coexistence of a periodic surplus relative to demand and inadequate supply.

The basic function of wholesale markets is to distribute goods and coordinate supply. Traditional sales channels, which were mainly dominated by wholesale markets, are being challenged by newly emerging sales channels, such as e-commerce, direct sales from farmers to supermarkets and sales from agricultural cooperatives directly to consumers.

However, research suggests these new sale channels still cannot do without wholesale markets. The supermarkets, cooperatives and e-commerce business also mainly buy from the wholesale markets to speed up circulation and adjust variety and quantity of products. And the construction of infrastructure and systems of wholesale markets, particularly public welfare ones, is still weak in China.

 

Existing problems
The government-operated wholesale agricultural product markets in China, which were partially public welfare, have been transformed into joint-stock or private enterprises through marketization reform since the mid-1990s. In 2015, the Ministry of Commerce restarted the pilot program of public-welfare wholesale markets for agricultural products.

In their current incarnation, wholesale markets in China focus on the regions where agricultural products are sold—in other words, the last mile of circulation. However, the first mile of circulation is equally significant, which affects farmers’ income in this year as well as the planting area and the supply of crops in the next year.

Underdeveloped purchasing markets in the regions where products are produced allow brokers to dominate agricultural product circulation. Small-scale, poorly organized producers are at a disadvantaged position when negotiating the prices of products. In the harvest seasons, some agricultural products, especially fresh ones, sometimes become unmarketable. Meanwhile, consumers living in the cities see rising prices in the case of festivals, holidays or extreme weather.

Sometimes, the situation of products being too difficult to sell is not always caused by the supply exceeding demand, but rather the regional imbalance between supply and demand caused by the congested circulation. If the brokers cannot get expected profits, they will give up purchasing agricultural products. But the channel for farmers to sell their products is limited, and their interests will be substantially harmed if brokers choose not to purchase.

The high rent and other costs in wholesale markets is another severe problem in China’s agricultural product circulation as well as a major contributor to rising prices. The high charge in wholesale markets is caused by the oligopolistic and monopolistic market structure and the profit-pursuing nature of the enterprises operating the wholesale markets.

As a result of administrative regulations on the planning and establishment of wholesale markets, China’s agricultural product markets in reality are oligopolistic, and even monopolistic in some particular areas. The number of wholesale markets established in a particular area is determined by local government departments.

The populations of some areas grow rapidly while the scale and number of wholesale markets stay the same for years, which makes market space a scarce resource, leading to skyrocketing rents. Research shows that in the Xinfadi Wholesale Market for Agricultural Products in Beijing, the bidding fee for some booths for vegetables and fruits has reached as high as a million yuan. The rent at the agricultural trade mall in Yiwu of Zhejiang Province underwent a more than thirty-fold increase from 2003 to 2013. The rising rent compels businesses to raise the sale prices of the products to guarantee their own profits.

The United States, Japan and South Korea all treat wholesale markets of agricultural products as a public-welfare project. By establishing and regulating them, they aim to reduce the circulation cost, curb the rising prices andensure food safety. Take Japan for example. The Japanese Law on Wholesale Markets specifies rules on the planning, establishment and supervision of as well as fiscal support for wholesale markets. Government departments play an absolute leading role in such processes as investing, building and management. The public-welfare nature of these markets, which is manifested in their non-profit nature, is also evident in their low rent and booth fees.

 

Future direction
Currently, there is a lack of an exercisable set of rules for the establishment and regulation of public-welfare agricultural wholesale markets. Research shows some local governments have already initiated the establishment of public-welfare wholesale markets. However, because of sufficient planning and management is insufficient, the established markets attract few wholesalers.

Protecting the interests of the producers should be the policy goal when developing public-welfare wholesale markets for agricultural products. Farmers as suppliers are the first link of the circulation chain of agricultural products and form the basis for fair prices. If farmers’ interests go unprotected, there will be no stable and fair prices.

Under current policies, the “public welfare nature of wholesale markets” functions as a bulwark to strengthen the government’s ability to carry out macroeconomic adjustment and regulation, guaranteeing market supply, stabilizing the market price, promoting food safety and protecting the environment. But protecting farmers’ interests is not stressed as a goal, which makes it difficult to establish a regulatory framework and a trading system targeting the protection offarmers’ interests.

Both these goals and systems are fundamental to the mission of guaranteeing the supply and stabilizing the prices of agricultural products. The 2017 Central No.1 Document requires the normalized establishment of farmer cooperatives and more devotion to comprehensive cooperation in production, supply and sale, and credit, the implementation of which will effectively improve farmers’ position in pricing-negotiation and better protect their interests.

At the same time, China should establish a regulatory framework and trading system for public-welfare wholesale markets for agricultural products. In regard to the public-welfare wholesale markets fully funded by the governments, an agency or a specialized management company should run the wholesale market as a delegate of the governments. The public-welfare wholesale markets, which are semi-official and semi-private, should specify the interests of relevant government departments as shareholders of the wholesale markets, particularly their rights in policy-making on matters such as the charge criteria for using market infrastructure and the establishment of a trading system.

The trading system of a public-welfare wholesale market for agricultural products should include several major aspects. First of all, the trading system should uphold the principle of forbidding the refusal of any proper entrustment. If the products of suppliers satisfy the quality criteria, the public-welfare wholesale market is obligated to provide them with a platform for trade.

Second, an auction mechanism may be experimented with in the wholesale market, the implementation of which will reduce the cost for negotiation and searching for products. The price formed through the auction mechanism will be more indicative, and in this way, the wholesale market may better fulfill its function of “revealing” the prices of agricultural products. The wholesale market should require certain varieties of and some proportions of the agricultural products to be traded in the channel of auction.

Thirdly, public-welfare purchasing markets and purchaser, including transporter should be established in the regions where products are produced, implementing registration system of purchasers. An entrustment-agency relationship should be established between the farmers and the purchasers who do the majority of their business in the producing region, and the agency fees should be paid according to a certain percentage of the auction price of the product.

However, only by combining the establishment of public-welfare wholesale market with the establishment of public-welfare purchasing market and retailing market, in addition, with the help of policies stabilizing the prices, can the quality of the agricultural product supply be comprehensively improved.   

 
Wang Xiujie is from the Rural Development Institute at the Chinese Academy of Social Sciences.