Want a slice of the billions of dollars China spends each year on farm subsidies? Become a middleman and open a toll road.

Operators of the vast network of roads that connect China's fields to cities can earn gross margins of up to 90 percent, making them the most profitable of the supply chain middlemen who reap the most from China's harvests.

So while food prices soared 11.8 percent and China spent more on farm subsidies in 2011 than ever before, the 18 percent rise in average rural incomes still left farmers like Jiang Bo lagging badly behind their urban cousins.

Even when our vegetable prices are at their highest levels, we still do not make much money because there are too many middlemen in the supply chain, said Jiang, a farmer in eastern China's Shandong province, who told Reuters she is weighing whether to quit the fields for factories this year.

Cutting logistics costs -- 10 percent of the nation's gross domestic product in 2010, double that of Japan -- has been pledged for years in the government's annual agricultural plan to increase rural income and spread harmony through society.

It's not easy, given that raising income for producers implies rising prices for consumers, and China's leaders have vowed to fight inflation.

We must support direct selling, clean all kinds of charges and reduce the distribution cost of agricultural products, Premier Wen Jiabao wrote in an essay published in the influential magazine Qiushi, or Seek Truth, in January.

Central government subsidies for seeds, tools, other means of production and plant grains alone totaled 140.6 billion yuan ($22.26 billion) in 2011, up from 134.5 billion yuan in 2010, while 98.6 billion yuan has already been spent so far this year on grain subsidies.

And that is just a part of the overall agricultural spending done by Beijing in a bid to keep farmers like Jiang, tempted by the rising factory wages, tilling the fields while ensuring vegetable prices stay within reach of urban low-income families.

A tax tweak for vegetable distributors abolished the 13 percent levy they paid from the start of this year.

But it's cutting the costs of the middlemen that offers most potential for Beijing to raise the social dividend of its spend.

An investigation by Hu Dinghuan at the Chinese Academy of Agricultural Science showed that the price of tomatoes rose from 2 yuan per kilo leaving the fields to 5 yuan per kilo at the warehouse door of supermarkets in 2007.

The distribution cost must be even higher nowadays because of rising fuel prices, he said.

The government is mulling a cut in highway toll fees and has already started a nationwide check on rampant charges at toll gates. Shanghai made the Hujia Expressway -- China's first highway that opened in 1988 -- toll free on January 1.

China has previously suspended toll charges to curb inflation. When prices soared in 2008, the National Development and Reform Commission scrapped toll fees for trucks carrying fresh vegetables, driving down the annual rate of vegetable inflation from a peak of 46 percent in February to 22.7 percent in March. It was negative 2.1 percent by November that year.


Zhao Yuzhong has his own way to cut through the middlemen.

He and his fellow farmers on the northern outskirts of Beijing are pioneers in delivering fresh vegetables directly to city consumers, getting produce from field to table in fewer than five hours.

We now earn more than twice what we did before and our price is 30 percent lower than what the supermarkets offer, Zhao told Reuters by telephone.

The main challenge when they set up their firm in May was how to reach as many families as possible. Since then the company has already broken even and Zhao reckons annual revenues could double to 2 million yuan ($317,500) in 2012.

Its transportation costs are now less than 1 percent of sales.

Taking the initiative has put Zhao and his partners a step ahead of plans the government has to help farmers connect directly with big supermarkets and chain stores.

But both Jiang and Zhao said the retailers charged high fees to sell farmers' products, despite government support.


Still, squeezing out the middlemen will not completely compensate for the seasonal price swings that can wipe out small farmers.

Jiang suffered big losses selling her Chinese cabbage crop at 0.1 yuan per kilogram after a bumper autumn harvest. Prices in the summer were 1.4 yuan per kilo.

Vegetable prices are very seasonal. The best way is for the government to set a floor at times of oversupply, buy vegetables

directly from us to build up reserves and release them later to even out price fluctuations, Jiang said.

All the central government policies are very good. Yet we are not benefiting much, she said.

Beijing is testing the idea of vegetable reserves, basing its plan on the experience it has had in managing grain stores.

But Dang Guoyin, a senior researcher at the Chinese Academy of Social Sciences, said China had limited room to increase farm subsidies and that urbanization would be a better way to raise rural incomes.

China should make it easier for farmers to sell their produce directly at street lane stands, or cut the cost of their access to urban vegetable markets, Dang added.

The higher the urbanization rate is, the more farmers earn and the narrower the urban-rural income gap becomes.

Other analysts agree, saying that road networks have helped transform China's rural communities despite the profits earned by middlemen.

One of the greatest things the Chinese government has done for the countryside is to build a good road system, said Richard Herzfelder, a consultant on agricultural issues.

Once a town connects to a market you can see the whole mixture of crops change, you see the whole landscape change.

($1 = 6.3165 Chinese yuan)

(Additonal reporting by Lucy Hornby; Editing by Don Durfee and Paul Tait)