Monday, August 8, 2011

Fruit Floods the Market

An article on low fruit prices in Tianjin illustrates the complexity of agricultural markets and the difficulty of measuring "inflation" in China. The article has been posted on dozens of industry web sites, many with a subtitle speculating that the "dive" in fruit prices might relieve upward pressure on the CPI.

The article reports on steep declines in prices for watermelons, peaches, grapes, litchees, and bananas in Tianjin markets. The prices of each of these fruits tend to decline during the summer when new harvests hit the market, but the price declines have been especially sharp this year for various reasons. The manager of Tianjin's Red Flag wholesale market says that, “Due to weather influences, this year most fruit is in excess supply, and this is creating downward pressure on prices.”

In June, ripening watermelons from Shandong, Anhui and other regions hit the market, pushing prices down 60% from their May levels. They came back up a little in July but are down again in August. A wholesale market manager estimates that current wholesale watermelon prices of 0.4 yuan per jin are about 25% less than a year ago.

Peach prices also plunged about 45% in July, but rainy weather blocked transportation later in the month, pushing prices back up. Prices are now about 2.5 yuan per jin. Late-ripening peaches in Beijing and Hebei are about to be harvested and could push prices down again.

Litchees are a fruit from subtropical regions, grown in the far south of China. Yet they are now widely available in Tianjin and other northern-China markets, a reminder of China's rapidly-maturing agricultural markets. This year large volumes of litchees were produced in Guangdong and Guangxi Provinces, and they are now in excess supply. Wholesale prices in Tianjin are down about 30% from last year.

Banana prices were pushed abnormally low because weather-related factors resulted in the spring and summer banana crops coming on the market at the same time, again creating a surplus. The current price is about 2 yuan per jin, down from 5-to-6 yuan in May.

Grapes came on the market at 15 yuan per jin in the spring, fell to 10 yuan in July, and now quite a few merchants are selling them at 7-to-8 yuan. Many of the grapes so far this season were raised in greenhouses. Large volumes of local grapes raised outdoors are expected to come on the market in mid-August, keeping downward pressure on prices.

The article notes that vegetable prices also decreased this week. Eggplant, for example, was down more than 10% from the previous week. Fish and shellfish prices appear to have begun to reverse their upward trend.

The article says the "dive" in fruit prices gives some people hope that the CPI for July might decline. However, some experts say the decline in fruit prices won't offset the big increase in pork prices. Also, some other commodities like cooking oil, milk powder, and mooncakes have rising prices.

This article could be propaganda spread to allay worries about inflation. However, it does highlight the difficulty of separating seasonal fluctuations and microeconomic price adjustments from inflationary trends. The U.S. produces "core" CPI numbers that remove volatile components--chiefly food. A similar "core" CPI number in China would give a very different picture of inflation, but that wouldn't make much sense in China since the population still spends 30%-to-40% of its income on food.

The contrasting trends in grain-cooking oil prices and fruit and vegetable prices reflects the messy transition towards China's comparative advantage. Prices of grains and oilseeds in China are generally at or above world prices and increasing. Prices of fruits and vegetables are still low but they fluctuate a lot from year to year and season to season. Last year at this time, rising vegetable prices were considered a major national concern, but this year prices are falling again. Chinese farmers and traders react quickly to price signals.

According to National Bureau of Statistics data published in May, production of fruits and vegetables increased about 5% in 2010, faster than just about any agricultural commodity. And that was last year, when fruit and vegetable prices were considered to be in short supply.

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