Thursday, May 5, 2011

Apple Bubble Bursts

In the fall of 2010 prices of nearly all agricultural commodities in China were surging upward. But now prices are starting to crash downward. One of the most prominent examples is given by an article about the apple market in Yantai of Shandong which describes the bursting of an "apple bubble."

Describing the frenzy after last fall's harvest, the head of an apple association in Yantai said, "Seemingly overnight traders came from all over the country calling out for Yantai apples." The head of an apple company described it as "unbelievable," and prices reached levels he had never seen before in 20 years. Others described the prices as "outrageous."

In the fall of 2010 it seemed inevitable that apple prices would keep rising. There was a general inflationary trend, and a drought in apple-growing areas of China's northwest had reduced the quality of the crop in that region. Everyone was getting into the apple business, including people who formerly raised pigs or traded garlic. Traders from the northwestern provinces came to Shandong looking for apples. Small farmers speculated on apples too. Some traders bought apples while they were still on the trees.

What the article doesn't mention is that the price of exported apple juice skyrocketed to near the record levels reached three years ago.

Many of these people bought up apples and stored them in warehouses, thinking the price would keep going up. Many of the people who jumped into the business didn't know the industry. They bought apples with little regard for quality.

People with experience in the business say there is a cyclical pattern in the apple industry: two years of profit followed by a year of losses. True to form, apple prices fell this spring. Apples that were purchased for 3 yuan per jin last fall and put in storage can sell now for only 2.7 yuan.

The high prices have slowed the demand for exports. One Shandong company that sells apples mainly to southeast Asia, has exported only 4000 mt this year, down from their usual pace of 7000 mt by this time of the year.

Chinese consumers also balk at the high prices. One Shandong entrepreneur noticed that consumers in Shanghai were bypassing large apples for cheaper small ones.

The crash in prices of apples, cabbage, garlic and other commodities undermines many of the inflation stories. People interviewed in China call for more "coordination" in the industry between farmers, traders, and consumers. There is a notion of "three spaces" bandied about in China--that consumers can accept higher prices and higher revenue is to be shared between farmers and middlemen.

How about getting the government to put out accurate agricultural statistics? Last year there were rumors of a bad apple crop in the northwestern provinces but provincial officials insisted that the crop was good. If accurate information about the crop had been disseminated for traders and farmers to make informed decisions, maybe there would have been less chaos and confusion in the industry last fall.

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