Diversification of Agricultural Production in China: Economic Rationality of Crop Choice under the Producer Subsidy Program

Dietary habits of Chinese people have transformed drastically over the past few decades, due to rapid economic growth, urbanization, and globalization. In order to maximize agricultural income, farmers have to diversify their product from staples towards food groups with positive income elasticities of demand, such as vegetables and fruits. This paper examines the economic rationale of the diversification, using an output distance function approach. The empirical results show that, as compared to vegetables and fruits, grains have been produced excessively, since the Producer Subsidy Program was implemented in 2004. In addition, the Program has a negative effect on technical efficiency. Our empirical findings suggest that China's policy goal of grain self-sufficiency is to the detriment of agricultural production in terms of technical and allocative efficiencies.