Roller Coaster Food Prices

The May 21 Peoples Daily attempted to comfort citizens troubled by continual fluctuations in food prices. Pork prices have been in free-fall since January of this year. This follows a big build-up of hog inventories last fall when pork prices soared to record highs--prices are falling as the new pigs come on the market. At the same time vegetable prices have been on the upswing due to unusually cool weather in the north, drought in the southwest and cloudy weather in the southeast that has slowed the usual surge in spring vegetable supplies. With falling pork prices and rising vegetable prices, citizens are talking about the unusual situation where, in some places it's cheaper to eat pork than vegetables.

Fluctuations in agricultural and food prices have been a subject of public attention in recent years. Since 2010, prices of garlic, ginger, mung beans, apples and sugar all soared to historical highs only to crash later. Early this year onions rose to 10 yuan per jin.

Chinese agricultural economists explain that price fluctuations result from changes in supply and demand. The article blames the fluctuation on "blind" expansion of production by small-scale farmers when prices are high. This leads to a surge in supply that leads to a crash in prices during the following season.

Professor Li Guoxiang of the Chinese Academy of Social Sciences explains that cyclical fluctuations are a common feature of agricultural prices everywhere. You can anticipate them but you can't completely eliminate the fluctuations.

Nevertheless, the Chinese government is determined to stop fluctuations in pork prices. Earlier this month multiple government departments announced a "new" program for stabilizing pork prices which is actually a slightly revised version of a document that was issued three years ago in 2009. An article last week announced that "each locality will undertake work to build pork reserves at the appropriate time," suggesting that the government is starting to buy up pork to support prices. However, the article gives no indication that such work has begun. The article mainly consists of the director of the National Development and Reform Commission's Price Bureau explaining the "new" program--which has been in place 3 years during which China's pork prices have fluctuated more than ever before. The article notes that the hog-corn price ratio has fallen below 6:1--the breakeven point specified in the hog price program--and farms are starting to lose money.

Hog farmers are starting to lose money even though price are still at a historically high level. The Peoples Daily article notes that agricultural prices have been on an upward trend due to rising costs of energy, chemicals, labor, and land. Even chicken manure used for fertilizer has shot up in price from 50 yuan to 150 yuan. The article also explains that costs of marketing farm products is rising. The article says traders generally add 0.2 to 0.3 yuan to the price of each 500g of vegetables. It gives the example of a retail pork vendor in Henan Province. He has to pay 20,000 yuan annually in stall rent and 1000 yuan per month for electricity to run his freezer and refrigerator. Moreover, he has to rent living space near the market which has doubled in cost, and he says his food cost is over 1000 yuan per month. There are 30 to 40 vendors like him in the market, each one having a hard time making money with costs rising like this.

The Peoples Daily article explains that rising food prices are normal in a period of industrialization and urbanization. Peoples' demand for food is rising since the income elasticity is relatively high. The article says the urbanization rate is expected to rise 1 percentage point a year, pushing food prices steadily upward.

Peoples Daily proposes solutions for price fluctuations that include more planning and coordination between producing and consuming regions. Form cooperatives and other economic organizations to increase scale and reduce unit costs. Encourage direct links between cooperatives and supermarkets and community food markets. Crack down on speculative hoarding and issue more information to guide producers.

The article also calls for giving out food subsidies to low income consumers. Good luck with that. The other day, the Wall Street Journal printed an opinion piece on $41 cakes and other absurdities and abuse in the U.S. food subsidy program.