From Cover, issue no. 359, Mar 17, 2008
Translated by Zuo Maohong
Original article: [Chinese]

After searching two supermarkets for soya oil and failing, 56-year-old Beijing native Li Aiying walked out of Wu Mart empty handed. "It's the first time in my life that I have trouble buying a bottle of oil," she said.

As the two top legislative conventions pressed forward in Beijing, price surges and inflation issues that have hit China in recent months dominated the sessions.

Li did not seem encouraged by their efforts. "I don't know what inflation is, but I think it's time to stock up some oil," Li said.

A shortage of soya oil is sweeping across China. On March 13, shelves designated for soya oil were virtually empty in major supermarkets of most cities, including Beijing, Shanghai, Guangzhou, Jinan, Changchun, and Chongqing. The EO reporters checked out various supermarkets and were told that this everyday commodity, which makes up 60% of the country's edible oil consumption, had been in short supply for over a week.

The government's edible oil price control measures caused losses for producers, forcing some to cut or even cease production, according to the management of some supermarkets.

The EO learned that the government had offered subsidies to three major edible oil producers. Moreover, applications to raise prices from two major Beijing-based suppliers had been approved by the Beijing Municipal Development and Reform Commission in late February.

However, at a time of shortage and increased inflationary pressure on the people's livelihood, how far would the government allow soya oil prices to rise remained an open question.

SOS for Soya Oil
On March 13, the Wu Mart's Xinjiekou branch in Beijing imposed purchasing quotas on soya oil. A sales staff informed grunting customers: "We have the stock [soya oil]. But there's a limit, sales starts at 10 every morning and we will sell at most 100 bottles per day, one customer can only buy one bottle."

Upon hearing the announcement, Li walked out of the supermarket with this thought in mind, "I shall come back early tomorrow and be at the front of the line."

In the nearby Beitaipingzhuang branch of Hualian supermarket, five-liter bottled soya oil had been scarce for over ten days; Carrefour's Shuangjing branch informed customers that "soya oil is out of stock" while Wal-Mart's Zhichunlu branch sold out soon after putting large bottles of soya oil on its shelves.

Since the government's price control measures applied to bottled soya oil but left out loose packaged ones, the latter were priced higher, according to Wu Mart's sales personnel Xiao Wang. This led to restaurateurs and canteen operators who used to depend on loose packaged oil turning to the bottled ones, further fueling the shortage.

In fact, Beijing was not alone in this predicament. Other major cities, such as Ji'nan, Shanghai, and Guangzhou, were also encountering the same problem. "We haven't received any reply on stock replenishment," said a staff of Alldays, a 24-hour store in Shanghai.

In certain regions of Jilin province, China's main soya bean production base, there had been panic rush to buy soya oil due to price surges in the international vegetable oil market. In Changchun, its capital city, soya oil supplies have been scarce since early March.

Dealers' Dilemma
Kerry Oils and Grains, China's leading oil and grain provider, received a government notice on March 13 requiring it to give priority to supply major supermarkets in the cities over other wholesale buyers.

Zhou Junliang, an edible oil dealer in Shanghai, said Kerry's Shanghai office had informed him that soya oil had run out since several months ago. His follow-up orders had been met by the reply of "no stock".

However, Zhang Yin, another dealer working in the same market as Zhou, successfully purchased 100 boxes of two leading brands of soya oil, Haishi and Jinlongyu, through Shanghai Liangnong Trading Company. If not for maintaining regular customers base, he said, he wouldn't have considered ordering any more soya oil because of the narrow profit margin due to high supplier pricing.

Zhang's luck in acquiring the supplies puzzled Zhou, who started to suspect if the producers and suppliers had truly stopped production or were just stock piling for higher profits in the future.

A source from Kerry denied allegation that it had ceased production or was holding back stock. He said that the stock would be in the hands of dealers.

Zhao, a manager of Kerry's Ji'nan office, said the company's headquarters had issued five emails prohibiting soya oil store-ups at branch offices. Recently, only big supermarkets could get some supplies from the company, he said. Supermarkets like RT Mart, which usually could have 500 boxes every week was cut to 50 during this "special time", the manager added. The National Development and Reform Commission had demanded the company to restrain prices, and has also appropriated subsidies, he said.

Rapidly escalating soya bean prices in the global market were mainly to be blamed, said another Kerry's Beijing based sales manager. He said the high prices caused producers to reduce imports, resulting in lack of raw material for production, adding: "A subsidy for 250,000 tons of oil can only ease the situation temporarily."

Producers' Plight
In fact, the Chinese government had recently set a subsidy limit for three major soya oil producers – 130,000 tons of oil for Yihai Group, 110,000 tons for COFCO, and 10,000 tons for Jiusan Oil & Fats. Losses resulted from price control measures within the set quantities would be covered by government subsidies.

According to the projection of a Chinese grain portal – Cngrain (www.cngrain.com) that serves as an electronic business-to-business platform for grains trading - domestic demand for vegetable oil would reach 25.5 million tons in 2008, which required a corresponding growth of 9.5 million tons in soya bean supply. Guo Qingbao, its institutional analyst, said the sharp rise in soya bean imports would push up international soya bean prices further.

According to industry analyst Yi Ling, conditions for soya bean imports from the US, Argentina and Brazil had turned for the worse recently. Last November, she said, Argentina had raised its export tax for soya beans from 27.5% to 35%, and that for soya bean oil from 24% to 32%, which subsequently led to higher global prices. On March 12, Argentina, too, raised its soya bean export tax to 46%, and announced that would adopt a graduated tax on food exports, under which export tax rises along with the growth in export price. According to Argentina's finance minister, the policy would last for at least four years.

Affected by the global markets, domestic soya bean prices had begun rising around the Spring Festival, and it was then when the government began its intervention of edible oil prices.

According to a sales manager of Guchuan Food, only two edible oil companies in Beijing were still providing soya oil, his company being one of them. "We lose more than 2,000 yuan with every ton of oil processed. Except for state-owned companies like Guchuan, who else would be involved in such a silly, losing business?" he said.  

Apparently, local governments noticed the lashback, and begun monitoring soya oil processing factories closely. Heilongjiang local government, for example, had slapped a penalty on a company for shutting down several production lines after the price control measures took effect.

After that, a special team organized by the local government supervised the company's production every day. "Otherwise they will punish us in the name of speculative hoarding and disturbing market order. Now we have to spare no effort. We produce 1800 tons of oil to the market every day," said the head of this company, adding that the company would soon run out of money to purchase any more soya beans.

Under the directive from the State Council, China Grain Reserves Corporation purchased some oil for reserve recently, and that "resulted in an immediate price rise in the global market", said a source with Guchuan. 

To control inflation and secure the people's livelihood; or to free prices and increase supply? Policymakers in China are grappling between the two.

Chong Ang and Wei Liming contributed to this article from Beijing.