Monday, January 28, 2013

Bread Prices Rising in Shanghai

China has long been able to count on farmers to churn out cheap food, allowing city consumers to spend their discretionary income on cell phones, hair-dos, trips to the cinema, etc. However, the days of cheap food in China are coming to an end now that farmers have lucrative alternatives to the age-old cycle of planting and harvesting crops.

On January 28, a Shanghai newspaper (Xinmin Bao) reporter observed that many snack and bread shops have been raising prices to pass on the increased cost of flour. The boost in flour cost, in turn, is attributed to the government's policy of supporting wheat prices.

At one snack shop, the reporter found that the price for four fried bread sticks had been raised from 2.5 yuan to 3 yuan. The price is still equal to less than 50 cents in U.S. dollars, but the price boost represents a 20 percent increase. When asked about the price increase, the proprietor replied explained that his cost for a bag of flour had gone up from 80 yuan to 90 yuan.

In another shop, the boss said he plans to raise the price of 8 steamed pork buns from 5 yuan to 6 yuan after the spring festival--another 20-percent increase. In a shopping mall the reporter found that the price of fancy bread had been raised from 7 yuan to 8 yuan. In a French-style bakery, the price of a large cake was raised by 5 yuan and small ones were raised 1-to-2 yuan.

According to the manager of a Shanghai flour company consulted by the reporter, the increase in flour price is due to the increased price of wheat. In 2012 the government set the minimum price at 1.02 yuan/500g.

In Hangzhou, not far from Shanghai, the government has been selling wheat reserves into the market to cool off the "bull market" that has prevailed over the past four months. The price of flour is reported to be a little more than 15 percent higher than a year ago. In Jiangsu, it is also reported that rising flour prices have been stabilized.

In Shenyang, a northeastern city, it is also reported that flour prices have been rising for several months. A reporter found last Friday that prices for flour had gone up about 2 percent since Monday. In the supermarket he found that a 5-kg bag was 47 yuan (about $7.50 for 11 lbs), up 2 yuan from a year ago--a 5-percent increase.

A person from Shenyang's Price Bureau attributes the increase in flour price to peak demand ahead of the spring festival holiday and to the government's increase in the minimum wheat price for 2013. In other words, the government's announcement of a higher price for the wheat crop that will be harvested next June is increasing  flour prices in January.

It's easy to see why an announcement of a future price increase affects today's price. If you have a few thousand tons of wheat in a warehouse and you know that the price will go up 10 percent next June, you will  hold on to the wheat with the prospect of a guaranteed 10 percent profit. In fact, you will go out and try to get even more wheat, but everyone else knows the price is going up so they will be trying to buy too. Anyone holding wheat will demand a 10-percent higher price from potential buyers. Maybe the efficient markets hypothesis works after all.

Experts in the industry consulted by the Shenyang reporter expect flour prices to stay high. They say farmers have sold most of their wheat and the market supply is tight. When students and migrants go home for the holiday in early February flour demand will be robust, keeping prices high. The article notes that prices of rice, eggs, sugar could also go up. Prices of steamed bread, fried dough sticks, and pork buns at breakfast stands could rise.

An article from Qingdao in Shandong Province, "Will Flour Prices Increase Before the Holiday?" notes that wheat prices have risen from 2060 yuan/metric ton last August to 2640 yuan now, but flour millers have been trying to add to their wheat inventories. It says wheat supplies have been tight since the end of minimum price procurement in August. The article provides several reasons for rising prices. First, while Shandong had a good wheat harvest last year, Anhui had heavy rains around harvest that seriously affected the quality of wheat. Consequently, more buyers came to compete for the wheat that was available. Second, many feed mills have been using wheat as a substitute for corn, so flour mills have to compete with feed mills for wheat. Third, many farmers are unhappy with prices that fail to give them a reasonable profit, so they are holding their wheat off the market.

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