China must abandon its policy of paying high prices to farmers for grains if it is to create a sustainable farm sector, said the director of Washington-based think-tank the International Food Policy Research Institute (IFPRI).

The world's top producer of wheat and rice, and second biggest corn grower, buys domestic grain at prices far above the world market for state stocks.

The policy, aimed at supporting farmers and ensuring self-sufficiency in key grains, has led to a huge financial burden on the country and warehouses overflowing with surplus grain. Corn stocks are currently estimated at more than 80 percent of annual domestic consumption.

"China is in a trap right now. On the one hand, it purchases agricultural products from farmers at a very high price, but in meantime it cannot sell to the market [at such high prices] so all the purchases go into stocks, and that's very costly," said Fan Shenggen, IFPRI director general, in an interview.

Beijing has recently abandoned its stockpiling system for cotton and soybeans, replacing it with a direct subsidy for farmers based on their output. Fan, whose institute works closely with Chinese government advisors, said the new system was also "a mistake".

"Many countries use a similar approach but in the long run it is not sustainable," he told Reuters.

China should gradually shift from a subsidy system to offering income support and helping farmers expand their scale or exit the sector, he said.

Fan said there is growing recognition at high levels that China's farm policy needs to change, with a new emphasis on achieving security in staple foods, rather than a rigid focus on self-sufficiency in all major crops.

The change in thinking is set to be integrated into China's new five-year plan for 2016-2020, which is currently being drafted, he said.

Fan also warned that attempts to make Chinese agriculture more environmentally sustainable may be undermined by the lack of co-ordination between ministries.

Increasing grain output in recent years has been at the cost of the environment, with excessive pumping of groundwater for farms exacerbating water shortages and overuse of fertilisers causing severe pollution.

Fertilizer prices and water fees will need to increase to remedy such problems, said Fan.

(Editing by Tom Hogue)