Analysis of Theoretical Basis of Direct Subsidies for Grain Production

Shunqiang SUN，Xiaorong LUO，Hongjing LI

College of Economics and Management，Southwest University，Chongqing 400715，China

Basic foundation of direct subsidies for grain production is discussed，which has great practical meaning in understanding，implementing and perfecting the direct subsidies policy for grain production in China．Social publicity and necessity of grain production should be specially emphasized in socialist market economy．Public finance should be used to effectively implement direct subsidies to promote the safety of grain production in order to guarantee the sustained grain safety as well as healthy，scientific and sustainable development of national economy．Subsidy is used to stimulate economy and agriculture requires subsidies［1］．Based on agricultural basic theory，agricultural multi-function theory，economic externality theory，public finance and other theories，direct subsidies for grain production is reasonable and necessary．

1 Grain production being the basic industry of agriculture

Grain production provides basic means of subsistence for human beings and ensures food safety．Grain is the basic food for the general public and its effective supply is the basis of sustained economic development a swell as social stability．Agricultural production has taken up the primary position and restricted other industries while grain production is essential in food production activities．Besides，grain production industry is the basic industry which ensures reproduction of labor force and determines labor cost．Grain production is an important material production department，whose development is beneficial to transferring agricultural labor force and decreasing labor cost of other departments．Furthermore，grain industry provides support for the healthy development of national economy．As an upstream industry，grain production is the base of national economy and provides raw materials for various processing industries，so the stability of its output and prices is beneficial to the improvement of social economy as well as price stabilization．Grain is an important kind of safety guarantee material and sufficient grain can prevent foreign grain from largely entering into China as well as guarantee national sovereignty security．

2 Public functions of grain production

Grain production provides food products for the society and its economic function represented with the use value is the basic function of agriculture．Social function of grain production is mainly reflected on employment，social security as well as promoting social development．The ecological function is that grain production can exert significant positive effect on developing agricultural economy，improving human's living surroundings，maintaining biological diversity，preventing and controlling natural disasters，ensuring normal operation of the secondary and tertiary industry as well as decomposing emissions produced by grain production．Grain production also has the function of inheriting the culture．Agricultural multi-function means that agricultural economic activities possess positive externality，which causes disparity between private cost and social cost of agricultural production and＂market failure＂，thus value of agricultural products cannot be fully realized in free trade，which results in benefit loss of agro-product producers．In the open market economy，agricultural multi-function and positive externality of agricultural products are the objective reasons for the benefit loss of agro-product producers．In order to support agricultural development in China and ignite the enthusiasm for agricultural production，the government should implement direct subsidies for agriculture，especially grain production．

3 Positive externality of grain production

Externality is generally regarded as external influence and means non－market oriented influence of market transaction on the third party．It can be classified into positive externality（external economy）and negative externality（external dis economy）［1］．The influence and restriction of externality on market mechanism are mainly reflected on the limitation on efficiency optimization of resource allocation and may cause improperness of resource allocation．Governmental measures for externality mainly include administrative regulation and guidance，economic taxation and subsidies，legal rules and universality as well as voluntary negotiation．For positive externality，since the producers cannot get all the benefits from positive external activities，they will definitely decrease these activities as many as possible．On the contrary，since producers do not undertake all the cost of negative external activities，they will increase these activities excessively．Market mechanism cannot compensate and rectify the positive externality，which provides basis for the state intervention．

3．1 Economic positive externality of grain productionEconomic positive externality of grain production is mainly reflected on offering grain products with high quality and low price for the general public as well as benefit loss of grain production．As a special industry，agriculture，including grain industry，shows obvious＂benefit externalization＂．Agricultural development，especially grain production development，plays a fundamental and decisive role in national economy，however the benefits are hard to measure and cannot be compensated accordingly，hence the＂spillover＂of benefits．In China，the price＂scissors＂of agricultural and industrial products is an outstanding expression of this kind of benefit＂spillover＂．The deserved economic，social and environmental benefits of grain production activities have not be fully realized yet．

3．2 Social positive externality of grain productionSocial positive externality of grain production is mainly reflected on decreasing social conflicts and promoting social harmony．As a proverb goes，a family without grain will be in panic and a country without grain will be in danger．Another goes like that agriculture stabilizes the society while business activates the society．This fully illustrates the role of agriculture based on grain production in social stability．On the other hand，compared with other non-agriculture industries like industry and transportation，grain production is more likely to be the receptor of cost externalization of other industries．A case in point is the pollution caused by industrial wastes on grain production environment．The environment of grain production is becoming worse due to the transferred costs from non-agricultural industries．In order to overcome these side effects，managers of grain production have to pay extra cost，which should have been undertaken by those industries．

3．3 Ecological positive externality of grain productionThe ecological positive externality is mainly reflected on protecting cultivated land，maintaining water and soil，increasing vegetation and beautifying environment．Ecological environment and landscape is also a kind of public goods and grain production plays a significant role in the provision of these public goods．The construction of ecological grain industry promotes the sustained and efficient utilization of agricultural resources，improves ecological environment，accelerates the development of harmless agro-products and green food as well as increases quality safety of agricultural products．

Direct subsidies for grain production is the compensation for positive externality．It can be seen from the above analysis that grain is a kind of quasi-public products and grain production shows obvious positive externality，which determines that most investment in grain production depends on governmental input，including political subsidies for major grain producing areas and farmers．In market economy，governmental compensation through compulsory measures has great significance in internalization of positive externality of grain production．

4 Particularity of grain supply and demand

4．1 Grain supp ly and demand and equilibrium priceAccording to the principles of western economics，balance of grain supply and demand determines the price equilibrium［2］．Seen from the formation of balanced grain prices，high price of grain will urge grain producers to increase grain supply while decrease consumption，therefore supply exceeds demand．Then，price reduction forces grain producers to decrease grain production or provision and makes balanced supply-demand．Similarly，low price of grain decreases supply while consumers'dem and increases，thus demand exceeds supply，which creates the driving force for grain price rising．This restricts demand and increases supply，hence balanced supply-demand．Balanced grain prices can restrict grain supply and demand as well as maintain stable grain market．

The formation of equilibrium price shows that equilibrium is inevitable and normal in grain market．Prices detaching from the equilibrium point will definitely cause imbalance．Formation of equilibrium price transfers imbalance between supply and demand to balance，which is the price mechanism in market economy．Price mechanism can effectively regulate irrational resources allocation and stabilize the balance between supply and demand．

4．2 ＂Failure＂of grain market mechanismIn market economy，unbalanced supply and demand of grain is the result of price regulation system．However，there are failures in grain price mechanism．For example，when grain supply falls，the price will surge while price will slump and farmers will suffer from economic loss when grain supply is abundant．Therefore，direct subsidies for grain production from the government are required and can be regarded as social input for balanced supply and demand in order to remedy the＂malfunction＂of grain market mechanism．

4．3 Grain supply and demand cannot singly depend on market regulationDue to the characteristics of grain，its supply and demand cannot be regulated singly by the market．Grain can be regarded as basic quasi-public product．Because of the specialty of grain supply and demand，it should be clearly observed that grain product is in a relatively unfavorable position in market economy system．Many problems should be realized，such as weak market position of production subjects caused by household operation，high natural risks due to the features of grain production，loss of production factors caused by low added value and decreasing enthusiasm for grain production due to low benefits．Therefore，government should carry out special policies to support grain production，which is widely adopted in countries throughout the world，especially those developed countries［3－5］．

5 Grain safety being closely linked with national security

Firstly，grain is one kind of basis strategic materials in the country［3］and is significant for wars，more important than steel，petroleum，rubber and rare metal．Secondly，grain determines social stability．Data of the United Nations World Food Program me show that prices of all grains generally increased dramatically in the past few years，which has affected all the countries in the world，especially the developing countries．Increase of basic means of subsistence caused by the surge of grain prices in many developing countries has resulted in turmoils and directly threatened social stability．Statistics of FAO suggest that food consumption expenditure in industrialized countries accounts for just 10%－20%while the percentage in developing countries reaches 60%－80%，which shows the huge influence of grain price surge in developing countries．Lastly，grain affects the domestic and foreign polices in a country．Grain transaction or assistance is frequently used as means of political diplomacy by some powerful countries like America in order to interfere in the internal affairs of other countries．

6 Service-oriented government and public finance

Public finance means to provide public service and products by the government in market economy．The construction of service-oriented government should depend on the performance of public financial functions．Richard Mus grave，famous financial expert in A-merica，divided the economic or financial functions of the government into three categories in his classic Theory of Public Finance，namely stabilizing economy（maintaining economy under the condition of sufficient employment），allocating incomes and redistributing resources．Irreplaceability and social guarantee of grain make it a kind of quasi-public product．Grain production shows fund a mentality，publicity and necessity while it is also confronted with relatively high natural risks and market risks，therefore single market regulation will inevitably lead to huge fluctuation of grain supply and price，causing benefit loss of farmers．So，supporting grain production and ensuring grain safety should be one basic function of national public finance．Grain subsidy method changing from price support to direct subsidies is in accordance with economic efficiency principles as well as the international trend of political adjustment in agricultural subsidy．Direct subsidies can increase the transparency of subsidy policy implementation，avoid the capital outflow in intermediate links，improve the utilization efficiency of financial subsidies and satisfy the interest demand of both government and farmers．Meanwhile，canceling price support in circulation link is beneficial to cultivating farmers' awareness of being the subject of market economy．Farmers can make rational agricultural production management according to normal price information in grain market from the perspective of economic efficiency maximization［5－7］．Reasonable existence of grain market is the combination of governmental manipulation and market regulation．However，modern financial theory believes that subsidies can solve the problem of positive externality，but abuse of subsidies should be avoided［7］．

From the perspective of the construction of service-oriented government and performance of public financial functions，it should be realized that grain production requires state protection and support．It is the requirements of protecting grain industry，ensuring stable grain supply and people's basic life，protecting farmers' benefits，avoiding the side effect of market regulation on grain production as well as solving problems in grain production which cannot be settled by farmers themselves and need governmental assistance，like infrastructure construction，capital input，technology innovation and promotion as well as service supply．

It can be concluded that direct subsidies for grain production is a kind of direct governmental financial support in order to achieve grain safety as well as political，economic and social goals．Its essence is to compensate the reasonable profits of grain producers or compensate positive externality of grain production and also the social in put of balancing grain supply and demand［9］．It can be observed from the above analysis that implementing direct subsidies for grain production in China is in accordance with economic theories and agricultural production features，so it is necessary and has positive meanings in improving the basic conditions of grain production in China，promoting land productivity and labor productivity as well as increasing farmer's incomes．More perfect system of direct subsidies for grain production should be established．

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