Monday, November 22, 2010

China Tries to Keep Commodity Prices in Check

The latest news suggests that Chinese officials are watching commodity prices, hoping they don't go up too fast, trying various measures to cool off markets, and saving direct price controls as a last resort.

Destroy commodity price increases

On Nov. 19, the State Council announced 16 measures for addressing price increases that include boosting agricultural production, "coordinating" purchases and sales of commodities through the "governors' grain bag" and "mayors' vegetable basket" responsibility sytems, waiving tolls for trucks carrying ag commodities, and boosting oversight of prices, costs, and markets.

Vice-chief of the Grain Bureau, Mdme. Zeng Liying, has made one of her usual appearances to reassure the public that China has plenty of grain on hand and there is no reason for prices to be shooting upward.

Ms. Zeng says that it's now clear that the fall harvest was another good one. The supply of corn, rice, and soybeans in the northeast is much better than last year. Grain inventories are "relatively ample." Winter wheat production totaled 217.6 billion jin (108.8 mmt), up 2 billion jin (1 mmt), the seventh increase in row. She says grain supply and demand are basically in balance, and supply-demand factors do not warrant the current increase in prices.

Ms. Zeng says that "complex factors" are behind the rise in grain prices. Increased demand is driving corn and japonica rice price increases. Other factors include rising production costs, inflationary expectations, surplus liquidity, influence of international market effects, and speculation.

She addressed the corn market specifically: "...we are closely watching the corn market price, and will undertake appropriate market controls at the appropriate time to keep corn prices reasonably stable."

"What about corn imports?" asks a concerned individual. Well, she says, customs statistics show that corn imports totaled 730,000 metric tons for January through August. She points out that total consumption of corn is about 150 million tons, so the imports do not play a major role in the market. Importing is a decision made by companies if they need corn and market prices are attractive. Ms. Zeng says the Chinese market doesn't need imported corn to balance supply and demand.

But wait, Ms. Zeng says, the rise in grain prices is not so bad. Higher prices are good for farmers because it raises their incomes and improves their incentives to plant grain. However, the government is watching prices closely and will not allow sharp increases in prices. Thus, officials are holding off on controlling prices, balancing the benefits of rising prices for farmers against the threat of food price inflation.

When questioned about what price-control measures the government may take, Ms. Zeng falls into bureaucrat-speak. The government will monitor the situation closely, sell reserves into the market, preserve orderly markets, publish information, and coordinate the "orderly" purchase by users from grain-deficit regions in grain-producing regions (i.e. northeast).

When asked about whether futures markets can stabilize prices. Ms. Zeng is pessimistic. Chinese farms are too small to utilize hedging strategies and she implies that futures prices in China don't reflect actual market fundaments. More improvement and development is needed.

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