Pressure grows on China's grain prices
By Sally Wang
Bumper harvests, subsidies and price controls have helped China, which is
practically sufficient in grain production to meet domestic demand, largely
escape the steep increases in grain prices that have hit other countries in the
Asia-Pacific region. That may not last.
Some Chinese economists say the country's grain production is likely to remain
stagnant in coming years, while demand will grow. Fast urbanization is reducing
the amount of farmland, while the government's policies to restrict grain
exports to keep prices
low diminish farmers' enthusiasm to plant.
In consequence, economists say, grain prices in China will inevitably go up
markedly, perhaps within a year. That would echo the government's limited
success in trying to isolate the country from the impact of rising oil prices,
eventually having to allow price increases for domestic oil products to avoid
spending ever-growing amounts in subsidies to refineries.
While China has avoided some of the big jumps in grain prices seen elsewhere,
it has not been immune from inflationary pressures, notably in food products.
Consumer prices rose 8.5% in April from a year earlier, the National Bureau of
Statistics said recently, after gaining 8.3% in March. Food prices, led by meat
at 48%, jumped 22% in April, up from a 21% year-on-year increase in March.
Global grain price increases are gaining pace. Thailand in March announced a
30% increase in its benchmark rice price to US$760 a tonne from $580. On April
17, the price of Thai rice soared to $1,000 per tonne. World Bank data show
that international rice prices increased 75% in the past two months, as many
countries concerned about domestic price pressures imposed restrictions on
grain exports.
The Chinese government nevertheless is confident it can keep grain prices
stable.
Bumper harvests since 2003 have helped, with production reaching a record 50.15
million tonnes in 2007, according to the National Bureau of Statistics. That
however may paint an overly optimistic picture. A recent Chinese Academy of
Social Sciences study shows grain production this year will be about 50 million
tonnes, while 2007 production was only 0.7% more than a year earlier.
At this level, China could be practically self-sufficient. The grain
demand-supply gap has narrowed to 15 million tonnes from 50 million tonnes in
2003, Xinhua reported, citing Zeng Liying, deputy director of the State
Administration of Grains.
The country also has reserves that might help cushion shortages. Grain
inventories, including the government's, enterprises' and farmers', stand at
about 250 million tonnes, and are at about half the national annual grain
consumption, against the international warning mark of 17-18%, Zhang Xiaoqiang,
deputy director of the National Development and Reform Commission, told an
annual conference of Chinese importers and exporters last month.
In the absence of natural disasters, current reserves plus this year's output
are more than enough to feed China's people, Zeng said.
Not only that, but China became a net exporter of grain last year, Vice
Minister of Agriculture Wei Chao'an said at a press conference in Beijing on
March 10. The country exported 9.91 million tonnes of grain and imported fewer
than 1.6 million tonnes. That excess added weight to reassurances from Beijing
last month that the mainland had sufficient rice to supply Hong Kong when
residents in the former colony, who rely totally on imported rice with 90%
coming from Thailand, became concerned about rising prices and possible
shortages.
Premier Wen Jiabao last month indicated a lack of undue concern over rising
international prices, saying during a tour of Hebei, a major grain-producing
province in central China, "We are unafraid since we have grain in our hands."
Perhaps, but since the start of this year, Beijing has taken tough measures to
restrict grain exports, including an export tax on 57 grain products, with
tariff rates ranging from 5% to 25%. The move, interpreted as a step to curb
inflation, was taken only 10 days after the government scrapped export tax
rebates on grains, including corn, wheat and soybean.
The government has also increased its direct subsidies to grain-growing
farmers. Central government payments will reach 63.3 billion yuan (US$9
billion) this year, according to the Ministry of Finance. Helped by such
measures, the rice price in China is around 2,600 yuan per tonne, only one
third of the current international level.
Still, compared with international prices, the government's subsidies to grain
farmers seem to amount to very little. According to the Ministry of Finance,
the subsidy for grain production is about 615 yuan per hectare this year. In
major rice-growing areas, a hectare could produce at least 7.5 tonnes of rice a
year (fetching, say, a nominal 19,500 yuan at present prices).
"The subsidy is just a token rather than actual help," said Zhang Yuling, a
farmer in Hubei province. In Zhang's home village, most young and middle-aged
people have gone to work in nearby cities or in Guangdong province. "Farmers
cannot earn as much as migrant workers. Only the old stay at home and plant
grains," said Zhang, who now works in the industrial center of Shenzhen.
Restrictions on exports prevent Chinese farmers from benefiting from the big
price difference between domestic and overseas markets, although some Chinese
businesspeople have smuggle out grain. In past weeks, Chinese customs have
uncovered efforts to smuggle grain out of Hong Kong's neighboring Guangdong
province, Zhejiang on the east coast, Yunnan in the southwest bordering
Vietnam, and even Xinjiang, in the country's far west. This prompted the
Ministry of Commerce to issue a circular on April 30 demanding local
authorities to strictly control grain and fertilizer exports.
Many Chinese economists and grain traders believe that the sharp price
contrasts cannot last, as prices in China will tend to go up due to growing
production and transportation costs. Lu Feng, a research professor with Peking
University's China Center for Economic Research, said it is better for the
government to drop prices and export controls and by so doing effectively
encourage farmers to grow more to cash in on rising prices.
Price pressures are also expected to grow from inadequacies in domestic grain
production and stocking. Perhaps even greater pressure will come as farmland
turns to waste as people such as Zhang desert the countryside in increasing
numbers.
In Yihuang county of Jiangxi province, the vice director of the county's
Statistics Bureau estimated that at least 12% of farmland is going to waste,
while a large number of fields are now producing two or even one crop per year
rather than three.
Rapid urbanization also reduces the amount of farmland in use. As of October,
2006, 120 million hectares was the prescribed minimum for the country's
farmland reserve. Last year, 188,300 hectares of farmland were lost
construction and 17,900 hectares destroyed by natural disasters.
Farmers also complain that the "household contract responsibility system", by
which production and management of farmland is contracted to individual
peasants for 30 years, hinders the mechanization of farming and seriously
affects agricultural efficiency.
Economists now believe that since the Chinese government is unlikely to sharply
increase subsidies to farmers, it has to let grain prices go up in some
controlled manner, like oil products.
Wang Qing, chief economist of Morgan Stanley (Greater China) and based in
Shanghai, believed the grain price will remain completely independent from
global markets for the next 12 months at a maximum. Grain trader Li Lei, based
in Anhui province, predicted the government will have to ease its grain price
controls some time after the 2008 Summer Olympic Games in Beijing this August.
Sally Wang is a freelance journalist based in mainland China.
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