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Premier Wen Jiabao urged the formalization of the experimental reform of directly subsidizing farmers at a State Council meeting last week.

The high-profile call from the premier sets the scene for the next stage of the rural reform concerning farm subsidies.

Price subsidy used to be the major form of subsidies for farmers. To protect farmers' enthusiasm to farm, the government ordered State-owned grain purchasing firms to procure farmers' grain at a "protective price.''

The policy was well-intentioned. In reality, however, many farmers cannot sell their grain at the pre-set price due to the sluggishness of the market and failure of grain purchasers to fully implement the policy.

Agricultural economists from both home and abroad have concluded that only a small part -- one quarter in some cases -- of such indirect subsidies actually goes to the farmers.

The low efficiency of the old practice propelled the government to kickstart an experiment to directly subsidize farmers in some regions last year.

Initial results have been encouraging. Subsidies are transferred from the circulation links to farmers, who have seen an extra increase in their income.

In Northeast China's Jilin Province, for example, farmers' income may grow by 6 per cent as a result, according to the province's agricultural affairs commission.

Direct subsidy policy can foster an orderly market since it does not intervene into the pricing mechanism of the market or farmers' production process, which will distort agricultural trade.

This abides by the World Trade Organization "green box'' policies, namely, those that are not trade distorting.

However, it is not an export-oriented policy. The major significance lies in its role in domestic agricultural restructuring.

With the price subsidy in place, farmers are blocked from the real supply-demand market conditions.

If the market is open to them, they can adjust more promptly their production to accommodate market demand, which will enhance the competitiveness of their products.

Given the preliminary results of the experiment reforms and the envisioned benefits for farmers, the central government is poised to push the reform plan across the country.

Against the backdrop of farmers' slow income growth and the country's sliding grain output, the policy is a good choice in every sense.

The primary task facing the government is to devise feasible implementation procedures -- whether through deducting agricultural taxes or directly giving cash to farmers -- to ensure that the policy is a success.

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