Study on Financing Issues of Family Farm in Hubei Province

Lu TAN

School of Economics and Management, Yangtze University, Jingzhou 434023, China

Abstract Family farm is an important carrier of realizing agricultural scale management, optimizing rural business organization structure, and impelling agricultural modernization. It could effectively integrate rural resources and impel maturity of rural operating subject. Due to weakness and seasonal factor of current agricultural production and requirements for the scaling of family farm, traditional financial services can not meet the financing needs of family farm, and the shortage of funds has become an obstacle to its further development. To clarify the reasons for the financing difficulty of family farm and seek an effective solution, family farm of Hubei Province is taken as breakthrough point of the research on the basis of relevant research achievements at home and abroad, and status quo of its financing and reasons for financing difficulty are analyzed. Moreover, referring to successful experience of family farm management in the developed countries, some suggestions on solving financing difficulty of family farm are proposed: increasing government’s financial support on family farm, innovating financial products, improving financial services, and enhancing quality education of farmers.

Key words Family farm, Financing, Financial innovation

1 Introduction

Family farm is new agricultural management subject of taking family as basic business unit and management mode of modern production organization as core, and organizing and operating agricultural production activities[1]. It breaks through restriction of traditional family- based small- scale peasant economy, uses market- oriented and modern production and operation mode to the maximum extent, and makes that intensification degree of its reproduction process and the targeting and competitiveness of production are constantly increasing. Meanwhile, it also sufficiently uses link and connection among families, and the adequacy of information and the inherent cohesion of the organization will be better. But family farm needs larger investment in prior period, such as land transfer fee, machinery purchase fee and infrastructure construction cost. Adding to periodic and seasonal characteristics of agriculture, both scale and structure of its capital demand have obvious characteristics of concentration and heterogeneity. It needs appropriate financing modes and channels to meet financing needs of family farm.

Since family farm has been proposed firstly in the Third Plenary Session of the Seventeenth Central Committee of China in 2008, family farm is growing in size, but the accompanying financial problems are more prominent. In financing process, there are many problems, such as fewer financing channels, single financing model, and too high financing cost. Although the state proposes policy support and agricultural subsidies on family farm for many times, long- term sustained funding of family farm is still insufficient. Under constraints of profit maximization, other types of financial institutions have insufficient financial support for agriculture and rural areas. Additionally, informal finance is also facing the problems of high risk, instability and high interest rate. Problems to be solved urgently in the development of family farm is constructing a reasonable and efficient financing system.

Hubei Province is important origin of grain, cotton and oil, and aquaculture base in China, and its family farm develops quickly in recent years. To May of 2017, there were 25 630 family farms which were registered in the administration for industry and commerce in Hubei Province, and 284 model family farms that annual net income was over 200 000 yuan, and various types of family farms with complete categories have been formed. With continuous enlarging of production scale and business scope, capital bottleneck has become an important factor restricting its development. Therefore, Hubei Province is taken as breakthrough point to study financing problem of family farm and seek effective solution, with important practical significance and theoretical value.

2 Status quo of financing difficulty of family farm

2.1 Number of family farms continuously increasing, and scale of capital demand increasing obviouslyThe first family farm of Hubei Province was built in 2004. Over the next few years, the number of family farms continued to increase. Relevant data displayed that there were 52 389 family farms in Hubei Province by May of 2017, and 25 630 family farms have been registered in the administration for industry and commerce, which increased by 28.6% than that in end of last year. Operating area is 1 129 200 ha, accounting for 16.8% of transfer area of cultivated land in the whole province. In 25 630 registered family farms, planting industry accounts for 45%, in which grain production accounts for 43% of planting industry. Average land management area of family farm is about 14 ha, and there are 3 average labor forces and 2 to 3 seasonal employees on family farm. With continuous enlargement of production scale, and increasing of raw materials, labor and logistics costs, family farms need more and more money. Taking rice production as an example, total cost to 2017 was about 18 000 yuan/ha, and investment of 14 ha of land could reach 250 000 yuan, which increased by 1.9 times than that in 2003. With expansion of number and individual scale of family farms, demand for funds is increasing.

2.2 Single financing channel and supply subject lackingSources of funds for family farm mainly contain owned funds, government’s financial support and subsidies, private lending and financing of financial institutions. Due to long investment return cycle, large market fluctuation and high impact of natural environment in agricultural production, whole risk is relatively high. Adding to limited credit conditions of rural families, current development of family farm mainly depends on ownership funds and government’s subsidies. Investment amount of family farm transferring more than 14 ha of land is generally over 250 000 yuan, and it is difficult to accomplish this task with farmers’ own funds. In recent years, the state has indeed introduced many subsidy policies. Relevant data displayed that comprehensive value of agricultural resources, subsidy for rice planting and land transfer fees on family farm of Hubei Province in 2018 were respectively 1 140, 2 250 and 1 500 yuan/ha, and standard area was 5-14 ha. Production and management assessment subsidy of family farm was 1 500 yuan/ha, and it was assessed twice in the whole year, and subsidy standard was determined according to assessment result. Subsidy of green manure planting was 3 000 yuan/ha, and total was about 9 300 yuan/ha. This is still a big funding gap for most family farms. Private lending lacks standardization and has high interest rate and risk. Under double constraints of profit and risk control, profitable financial institutions lack motivation for financial support. Moreover, their targeted customers are agricultural enterprises with higher scale benefit or model family farms. There is lack of support for the developing family farms urgently needing funds at the start- up stage.

2.3 Lack of agricultural financial services, and unreasonable structure of financial productsIn China, family farm is still in the early stage of development, and it is a process of self- employment to run family farm for the vast majority of farmers. It needs lots of money to enlarge scale of land management, buy cultivated species and machinery equipment, and pay employee’s remuneration. Due to seasonality and periodicity of agricultural production and different development stages of agricultural production, its demands for term structure, risk structure and interest rate structure of financial products show differentiation. In early period of family farm development, since it needs transferring land, integrating resources and investment in other infrastructure facilities, a relatively large amount of financial support with a longer term is needed, especially preferential medium- and long- term loans with low interest. At production and sale stages, short- term working capital shortage will appear. For above characteristics, the difference and diversity of capital demand of family farm are obvious. But current relevant product design is single, and it could not meet financial needs of family farm.

2.4 Weaker credit conditions of operating subject and financing abilityOn the one hand, family farmer takes a family as core unit, and internal management systems are not as standard as companies and enterprises. Farmers do not necessarily have the ability to operate and manage, and their abilities in making strict financial management system, organizing financial information and preparing accounting statements are weaker. It affects assessment of credit conditions by financial institutions. On the other hand, most family farms lack effective collateral. Adding to lack of agricultural insurance, higher agricultural operational risk, market risk and natural risk, and the limited credit conditions available, it greatly weakens family farmers’ financing ability.

3 Successful financing experiences of American and Japanese family farms

3.1 Basic situationThe United States is one of the most developed countries in agriculture in the world. Agricultural labor force is relatively less and accounts for 1.8% of world labor force, but feeds about 320 million U.S. citizens. The United States is also the country with the most agricultural products export, and it accounts for 1/2 of agricultural products export. Agriculture in the United States is a farmland management model consisting of various types of farms, containing family farm, partnership farm and agribusiness, in which family farm has always been the dominant position. There are 2.1 million family farms in the United States, and each farm operates more than 80 ha of land on average[2]. The U.S. government has played a role in promoting the development of family farm.

(i) The United States has always adopted an incomplete system of private property rights in land property rights. Via laws and institutional norms, the United States government has clearly and transparently stipulated the rights and obligations of various actors of farmland property rights. It is favorable for declining incompleteness and uncertainty of contract between family farm operators and relevant stakeholders, and transaction cost due to information asymmetry and breach of contract. (ii) The United States government attaches great importance to the protection of agriculture. To avoid agricultural overproduction crisis and family farm suffering loss by agricultural natural disasters, stabilize production and income of family farm, protect environment and farmland, the United States government promulgates theLawofAgriculturalAdjustment, to regulate supply and planting of agricultural products and encourage farmers to participate in fallow plan via policy. (iii) There is perfect credit system. Agriculture is an industry with high risk and investment and long harvest period. Meanwhile, scaling and mechanization of family farm need large amount of money. Therefore, perfect credit system is the basis of guaranteeing stable development of family farm. Since theAgriculturalCreditLawhas been promulgated in 1916, the United States government continuously revises agricultural credit law. To effectively relieve the financial pressure of family farm, the United States government leads the establishment of cooperative and policy- oriented financial institutions, to construct financial system supporting family farm financing. Meanwhile, government also provide subsidies and tax incentives,etc. to farmers. (iv) Agricultural financial institutions with community bank as the main body provide efficient services for family farm. Private financial institution is an important component of American agricultural financial system. According to the statistics by USDA, 53% of bank loans come from commercial banks in external financing of family farm. Different from commercial banks of China, American commercial banks are refined into community banks based on community services. Since community bank provides services specifically for the community, community bank very understands the information of family farm. There will be no information asymmetry, and family farms are more efficient in lending to community banks. There is also an efficient social service system.

Japan is located in eastern Asia and consists of more than 7 200 islands. Due to the limitation of geographical conditions, there is less cultivated field, accounting for 11.8% of total land area[3]. Scare agricultural resources cause that Japan’s mode of agricultural production has shifted to intensive farming. To promote land use rate and production rate, Japanese agriculture transforms from traditional decentralized small- scale peasant economy to intensive and moderately scaled modern agriculture. Family farm plays an important role in Japan’s agricultural development.

(i) New high- tech family farms continue to emerge. Continuous improvement of agricultural science and technology innovation promotes the development of Japanese agriculture, and impels the emergence of ecological and high- tech family farms. Japan has more population and less land. For a long time, the small- scale and high- tech business model has been the characteristic of Japanese family farms. In 2014, Japanese cultivated land reached 45 180 000 ha, and per capital area was 0.04 ha. Continuous progress of science and technology in Japan drives that agricultural modernization production level continuously upgrades, and application of innovative agricultural technology, "organic agriculture" and "green agriculture" better alleviate the contradiction between man and land. It makes that return rate and risk resistance of Japanese family farm are greatly promoted.

(ii) Development model based on agricultural association impels the development of family farm. Japanese agricultural association system has been relatively developed, and Japanese government values legislative protection of family farm, and promulgated theBasicAgricultureLawand theAgriculturalAssociationMergerandAssistLawin 1961, thereby determining agricultural association’s leading position in Japan’s agricultural economy. Relying on agricultural association, family farm obtains many conveniences in information sharing, market expansion and funding, which effectively impels the development of family farm. Japan agricultural association is an unofficial cooperative organization, and forms a three- level system at the central, local and grass- roots levels. New basic agricultural law promulgated in 1999 (BasicLawonFood·Agriculture·RuralArea) enhances agricultural association’s position in Japanese agriculture. Japan agricultural association has a wide range of services, and basic services contain providing production and livelihood materials for members, and helping to sale agricultural products. When its member’s fund has problem, agricultural association will also provide credit, insurance and other services to its members, and set a sound socialized service system of agricultural guidance, life guidance and management guidance. Government values subsidy and supporting for family farms via agricultural association. From 1951 to 1955, government allocated grant 800 million yen to grass- roots agricultural associations, 730 million yen to county- level federation, and 1.9 billion yen to federation at the central level. The government has been implementing a low tax system for agricultural associations, and income tax of general stock company is 62%, while income tax of agricultural association is only 39%.

(iii) There is perfect agricultural policy finance system. In 1953, Japanese government established farmer fishery finance public treasury with full investment, and it indicated that Japan gradually perfected agricultural policy finance system. Operation mechanism of public treasury is as below: the initial capital is provided by the government, and preferential agricultural credit is provided. When public treasury has loss of funds, the loss is supplemented by government. Moreover, farmers could self determine loan term, and interest rate is also relatively low. The establishment of farmer fishery finance public treasury supplements the deficiencies of Japan’s agricultural finance system.

(iv) It vigorously impels the development of agricultural insurance. For agricultural insurance held by agricultural solidarity federations at all levels, government gives policy guidance and lots of subsidies. In agricultural insurance, subsidy given by government accounts for 50% of insurance premiums paid by farmers. In the latter 1970s, agricultural insurance planned to spend about 150 billion yen a year in the government budget.

3.2 Reference significanceSeen from development process of family farms in the United States and Japan, it takes time for family farms to maturity in the developed countries, and its development process can not separate from legal protection and financial support from various countries. Perfect social service system improves degree of specialization of family farm, declines risk and cost, perfects rural financing system, and enlarges financing channel of family farm. In endogenous financing, it promotes quality and technological innovation ability of farm operators, decreases internal management costs, and improves use efficiency of owned funds. In exogenous financing, it needs government playing a promoting role, vigorously constructing non- governmental financial cooperation organization and policy finance organizations similar to Japan public treasury, promoting interaction among cooperative financial organizations, policy finance organizations and commercial finance organizations, and perfecting rural financial system.

4 Countermeasures

4.1 Establishing and perfecting multi- level financial subsidy mechanismOn financial subsidy, government could give family farm concessions from credit and tax, and improve the registration of family farm, making that family farm becomes more standard. Meanwhile, government should support infrastructure construction of family farm, and improve production and operation conditions of family farm, such as water conservancy and electricity. China also could refer to Japan government to set finance public treasuries of agriculture, forestry and fisheries, establish policy finance institutions, perfect rural financial system, and expand financing channels of family farm[4].

4.2 Innovating financial productsFamily farm has large financing demand, but lacks proper collateral, which restricts family farms’ financing ability to financial institutions. For family farmers, land management right is the most valuable. Trading platform of land contracting and management right could be established, and land exchange and transfer service institutions of rural land should be as supervisors. It should perfect transfer system of land management property rights, cultivate special personnel and institutions assessing land contracting and management right, improve evaluation mechanism, and establish standardized, institutionalized and legalized evaluation system for land contracting and management right. For family farm with high degree of specialization, it could consider taking agricultural products or farm futures as collateral, and widen the scope of pledge via supply chain finance. It should innovate agricultural insurance, establish rural financial mechanism of financial compensation and agricultural risk credit compensation to perfect agricultural risk guarantee and solve risk compensation for family farm loans. Farmers could loan to financial institutions by insurance policy[5].

4.3 Perfecting the agricultural socialized service systemPerfect socialized service system could help family farm to decrease transaction cost, decline market risk, and guarantee farmers’ income. Agricultural cooperatives can be formed on farms, which is similar to Japan’s agricultural association. Agricultural cooperative could provide a series of services for members and decline transaction cost, and mutual financing and experience learning could be conducted among members. Information platform could be established to transmit up- to- date market news. It also could specially set a sound socialized service system of agricultural guidance, life guidance and management guidance for members.

4.4 Improving the comprehensive quality of farmersMost of family farms are established by farmers, and farmers’ knowledge levels may not be high, and their understanding on operation and management may not be strong. To obtain sustainable and healthy development, family farm needs a leader good at operation and management, and healthy development of family farm needs perfect financial management system. Therefore, knowledge lectures on family farm can be held from time to time in the town with family farm, to improve knowledge level. Meanwhile, professional training courses can also be carried out in conjunction with universities and training institutions, and professional training on farmers could be conducted, containing planting and breeding technology. Meanwhile, it should encourage college students to return to home and start business, which could not only improve management quality of family farmers but also relieve employment pressure.