Tuesday, July 20, 2010

Garlic Prices Keep Rising

In May there was a lot of attention on garlic as one of the commodities with soaring prices. At the time, there was some expectation that the price would fall after newly harvested garlic came on the market. The government introduced a 2-million-yuan fine for anyone caught speculating or hoarding.

Two months later, garlic prices have risen even higher. According to a July 19 article, since mid-June the price has gone up 21.2% as of July 18 to 6.57 yuan/jin ($.97/jin or $1932/mt). In an earlier post on this blog, the price was about $.50 per lb. in May.

The upward momentum in garlic price is still strong. The price increased 17 days in a row during July.

Bad weather during the winter and spring cut the harvest. According to government surveys in Shandong's Jinxiang County, production there is down 13% this year. Traders anticipated the production shortfall and in the winter started trying to contract with growers to buy their harvest in advance. The price per mu went from about 2800 yuan per mu around the spring festival to 5000 yuan per mu in May.

At the Xinfadi wholesale market in Beijing, the price did fall after harvest, from early April's 11.8 yuan/kg to 7.4 yuan in mid May, but the price has risen sharply since early June. The price was up to 13 yuan on July 17, the highest in many years. Articles indicate garlic prices are soaring everywhere.

The chain of events began back in 2008 when there was a massive increase in garlic production and prices plummeted. Overseas markets were saturated and exporters cut prices to compete. In one region of Shandong, the volume of exports was up over 40% in 2008, but the value was actually down slightly.

After prices crashed, growers cut back on production in 2009. Prices went up again and plantings rebounded this year, but bad weather dampened the recovery of production.

Soaring domestic prices are pushing export prices higher now. According to Shandong customs statistics, the average price of garlic exports from the province are up 170% from last year. The volume of exports has fallen 24% year-on-year. This suggests that export demand is price-inelastic.

Domestic demand seems to be more price-elastic. Garlic is not a necessity, so people stop buying it when the price is high. In May, at least one article reported slow sales. A lot of garlic is being held in warehouses, limiting the volume available on the market. In Beijing's Xinfadi market, the volume of sales is said to be less than one-third the usual amount.

A trader named Zhou says his profit per-jin is fixed, so his profit depends on the volume he sells. According to Zhou, he buys garlic in production areas at 12.6-13.0 yuan per jin. Adding labor, packaging, transportation, the sale price in Beijing is 13.6-14.0 yuan. Zhou says, "I hope the garlic price will go down."

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