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Speculators Continue to Wreak Havoc with Agricultural Produce Markets

News, page 4
Issue 481, August 9, 2010
Translated by Tang Xiangyang
Original article

Following recent spikes in ginger and garlic prices, markets for other kinds of agricultural produce are now becoming targeted by speculators.

Wang Dongyang, deputy director of the Chinese Academy of Social Science’s Agricultural Economy and Development Institute, together with colleagues discovered that while speculation on ginger and garlic has been uncovered, speculation on the prices of other agricultural products remains hidden. Wang began his research into price manipulation at the end of last year and although he and his colleagues have uncovered some evidence of speculative behavior, due to the difficultly of finding evidence, his investigation continues.

Wang Jin, vice chairman of the China Agriculture Wholesale Market Association (CAWA) and 20-year veteran of the agricultural sector, agrees. He says that since last year, the capital flow of many agricultural distributors and dealers started to increase by significant amounts, and he has no doubt that this is tied to the inflow of capital into the markets due to investors speculating on the price of agricultural products.

“If you observe the long term fluctuations of the agricultural market, you will find that the amount of capital flowing into the market is closely connected to declining property values and the falling stock market” said Wan Jin. He believes that speculators targeted the stock market in 2007, the property market in 2009 and entered the agricultural market earlier this year when policies related to the property market were tightened and a substantial portion of capital flowed out of property and into agricultural goods.

Similar to trends in the stock market and the property market, after the speculators have cleaned up, it is individual investors and consumers that end up footing the bill.
“Shares” in Agricultural Produce

Wang Dongyang has found that it is the large distributors, those with enough liquid assets, advanced storage facilities and often in control of at least 60 percent of the sales channels of a particular product are the players that are dictating prices in the agricultural market.

“These distributors are speculating on vegetables and other agricultural products like stocks,” Wang said.

This kind of speculation is relatively covert or hidden, the price of a single product in certain areas will rise suddenly and dramatically.

“For example,” explained Wag Dongyang, “a merchant who controls 60 percent of say the bitter gourd supply in Tangshan might raise the price on Monday and sell his entire product in the days to come. A week later, the product of speculation may have switched to eggplant.”

The profits to be made on this type of short-term speculation are high and the activity passes practically unnoticed. When governments investigate, they read the fluctuation simply as supply and demand because the price reverts to normal after several days. They have no way of detecting let alone proving, speculation to be real cause.

When Wang Dongyang asked a merchant: “Without natural disasters or a significant reduction in production, why would the price of some vegetables suddenly rise so much only to return to the original price after a few days?” The merchant grinningly replied: "We also need to make a bit.”

Yet it is too difficult to prove the existence of this type of speculation. “Even a light fall of rain in Beijing might be enough to push the price of a vegetable to double. But in fact, the weather did not effect agricultural output or transport costs - the distributors simply use it as an excuse to hike prices. If government departments investigate the cause of the price rise, these distributors are able to attribute the jump in prices to weather causing a drop in supply or adding to the price of production.”

According to Wang Jin, there are 4,300 agricultural wholesale markets across the country with over eight million distributors supplying thouands of types of vegetables, making it the most complicated market in China. Without strict inspection, it is hard to investigate and stop speculation.

Meanwhile, Wang Jin observed that since the start of this year distributors have become very “rich.” He added, “They will continue to buy goods on a large scale . There must be capital flowing into this field. Franchisers have always been lacking in capital.”

Typically, after selling their produce, distributors must wait two or three months to receive payment, though they're still required to continue to stock up on more produce.

We can say that if a distributor earns ten million yuan a year, it is more than likely that by the end of the year, he or she will still be waiting to receive 5 million of those profits. Consequently, in the past, many agricultural product dealers were forced to borrow money at high rates of interest to help them cover their costs.

But this time things are different. Rich merchants are  not merely lending money out, they are  actively speculating on the agricultural market.

“Initially, distributors expected prices of certain agricultural products to rise because of reduced output and then sought capital in order to buy these in-demand products. But then things changed, individuals began hiring dealers to buy and sell agricultural products for them in exchange for a commission fee," said a researcher from the Chinese Academy of Agricultural Science.

Speculators do not arbitrarily select the targeted product. Some have been monitoring the markets for various kinds of fruit and vegetables since they were planted last year. If there is a natural disaster or some other event and they are certain prices will rise, then they will buy these products in advance and hoard them.

“Ginger and garlic are not the only targets, any produce that can be stored for a period of time is a potential target for speculation,” Wang Dongyang said. If this trend continues, every  type of agricultural produce may be subject to speculative activity, the “capital may even go after soy sauce or vinegar.”

Types of Speculators

Everyone knows who the distributors are but no-one can see where the capital is coming from. In Shandong's Jinxiang County it is rumored that there are ginger speculators from Jiangsu and garlic speculators from Zhejiang. Even former mine bosses from Shanxi are said to be involved.

After the central government began consolidating the ownership of small and often dangerous coal mines in both Shanxi and Inner Mongolia, many of these mine owners sold their coal mines to state-owned mining giants for a tidy sum. Jin Yan, chief economist with Guojin Securities, estimates the total amount of “compensation” paid to the former coal mine bosses in Shanxi Province to be around 300 billion yuan.

This large amount of capital needs to be invested somewhere.

As one former mine boss told the EO, "Mine bosses aren't interested in investing in manufacturing - the returns are too slow, while the stock and property markets are not a good investment choice at the moment, agricultural products seem to be a pretty good direction to move in."

But, instead of investing in the agricultural products themselves, former mine bosses negotiate directly with agents who have access to agricultural produce and storage facilities.

Aside from the agents, big companies are also involved and speculating on the prices of agricultural products has become a major line of business.

“First, they invest a substantial amount of money to purchase and store an agricultural product that they anticipate will be under supplied, after substantial preparation, they hire middlemen to purchase the product at unreasonably high prices and farmers and distributors are forced to raise prices as the market price soars to the level the middlemen had agreed upon,” an anonymous source explained to the EO.

Big companies then sell their original product, which they purchased at a normal price, at the inflated price for a huge profit.

Some distributors say that there are some investors who have over 100 million yuan invested in the agricultural products market. Other smaller time players with hundreds of thousands of yuan to invest also dream of making money in the same way.

A humorous anecdote from Beijing’s Xinfadi Wholesale Market tells of a speculator who bought 350 kg of ginger at a price of 6 yuan per kilo in Sichuan Province and flew the ginger to Beijing in order to sell it at 12 yuan per kilo. But the market price of ginger in Beijing was only 8 yuan per kilo, meaning that the dealer actually lost 1,000 yuan.

Is the Agricultural Produce Market too Free?

“It’s very difficult to trace these speculators. Both the distributors and speculators are very perceptive. They won’t answer if you ask too many questions” said Wang Dongyang. Unlike those who trade stocks, no one can tell you who exactly the specuators are or where they are from. It's also difficult to distinguish price fluctuations caused by speculators  from those caused by regular changes in supply and demand. 

Governments cannot effectively monitor the continuously fluctuating prices of every agricultural product or control trade in produce that is being conducted on such a large scale.

Wang Jin says that all published prices of produce sold at wholesale markets have been gathered through a process of collecting information from each individual stall holder, what ever the dealers tell them, that's the price. If market regulators have no way to verify the market price and volume of trade, how can they be expected to control or investigate the market?

Wang Dongyang also said that his investigative team did not use official data; they collected the prices themselves.

“China’s agricultural market is an 100 percent free economy, a very open and unregulated market. Therefore, it is difficult to detect and discipline speculators” said Wang Jin. He suggests that governments treat the agricultural wholesale market as public facility and play a role in managing the trading system as well as supervising food safety guidelines. With control over the trading volume and prices of the whole market, governments can set a guiding price or a price range for each agricultural product and prevent excessive fluctuations and maintain price stability.

Most developed countries manage the agricultural wholesale market as public facilities. “That’s why in western countries with market economies, the price of agricultural produce is relatively stable, even when the CPI is up,” said Wang Dongyang. He also agrees that the agricultural market should be partly regulated by the governments: “Speculation on agricultural products hasn’t brought any profit to farmers and the consumers end up footing the bill. The only winners are the speculators.”

This article was edited by Ruoji Tang and Paul Pennay


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