Tuesday, May 10, 2011

Price policy erodes grain quality

A blog post on the China Grain Net site points out that support price policies create a mismatch between the types of grain Chinese farmers are supplying and the types of grain that the market demands.

When China was just worried about pumping out enough carbohydrates to feed the population, "grain" was a generic commodity. As the food system became more sophisticated, flour millers needed different kinds of wheat with varying degrees of gluten and protein to make instant noodles, breads, crackers, pasta, etc. Rice also has become differentiated--long grain, short grain, "fragrant," etc.

Traditionally, policymakers focused on getting maximum volume of grain. The blogger points out that this tradition continues with the minimum support price polices for wheat and rice that have been in place since 2004 (it actually started in 2005 for wheat). The policy sets support prices for low-quality grains but does not offer premium prices for high-quality grains. Consequently, there is not much of a price premium for high-quality grains. The premium is critical since high-quality grains tend to have lower yields per hectare. The policy gives farmers incentive to plant high-yielding low-quality grains instead of high-quality grains that have a growing demand. The blogger concludes that, after 6 years, the policy has pushed quality grain out of the market.

Several years ago a drought in Henan produced poor quality wheat crop which the government bought up at the support price. This year the government has been pushing farmers to plant more early season rice in southern China. Early rice has long been supported by the government even though people don't like to eat it--it often ends up as animal feed. The moisture level in corn is usually too high, resulting in high levels of mycotoxins in Chinese corn that sickens or kills livestock.

This year grain prices are generally well above the support prices and rising. The blogger says that the faster rate of increase in price of quality grains shows the erosion of their supply due to the policy. Inventories of imported high-gluten wheat are nearly exhausted and the price is rising faster than the price of common wheat. Japonica rice is in short supply and its price has risen faster than any other grain this year.

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