Grain Market Rescue Package Brewing in China

Published: 2008-11-10

News page 3 issue 392 Nov. 3
Translated by Zuo Maohong
Original article:

tuck with the biggest harvest in a decade while demand slumps under an economic downturn, Chinese grain authorities were studying a market rescue package to make up for falling grain prices. 

Industry observers have long warned that if Chinese grain prices fall, it could drive local farmers out of the profession and impair China's food security.

Though some academics doubted if the limited government funding could effectively prop up grain prices, central grain supervisors said the key would be how the government would assemble the policies.

At a meeting held by the State Administration of Grain (SAG) late last month, local and central grain authorities discussed how the government should intervene in the grain and edible oil markets to stop prices from falling.

In northeast China's Heilongjiang province, soy bean prices were lingering at 1.6 yuan per jin (half a kilogram), far lower than the acknowledged 1.8-yuan cost price. A few months ago, they were over 3 yuan per jin.

In the adjacent Jilin province, corn prices had dropped from July's 0.8 yuan per jin to 0.7 yuan. Crops elsewhere were also becoming cheaper, including wheat in He'nan, cotton in Xinjiang and sugar in Guangxi.

As most grain growers suffered losses from a harvest, some big ones were even at the edge of bankruptcy, said a local agricultural supervisor.

Without government intervention, prices would continue falling, dampening farmers' enthusiasm to grow crops, local officials warned at the meeting.

However, even if the government took action it didn't necessarily guarantee a turn of events.

At an attempt to stabilize prices, the Chinese government announced on October 20 that it would purchase soy bean, cotton and other agricultural products. Despite this, soy bean prices continued to slump after a temporary rebound and cotton prices kept falling.

A source from CGOG (China Grains and Oils Group) Futures said since the factors that previously facilitated price rises, including favorable financial markets, market demand and natural conditions, had changed, a downward trend was inevitable.

He considered the current price drops as the beginning of a periodic adjustment, adding that government intervention could only slow down its pace rather than reverse the trend.

Local officials shared the same concern. Some had doubts over the government's ability to stem the trend, others worried about the risks involved in government intervention, said an SAG official who had attended the meeting.

However, he held that such concerns were unnecessary. "There are many ways for the government to regulate the market. The key is how policies are assembled and how far our regulations go," he said.

According to experts, China's grain and edible oil industry could be regulated by adjusting policies in reserve, trade, and processing.

"When necessary, we can raise considerably the import tax and kick-start grain export. This won't cost much," said the above-mentioned official.

Previously, rumors spread that the import tax for soy bean would be raised from 3% to 9%. Such a policy had yet to come out as of press time.

In terms of reserves, data showed that China's official grain stock house could hold a total of 2.5 to 3 trillion jin, over a half of the country's yearly grain output. This capacity was sufficient if the government made big purchases of grains as a market control measure, according to the official.

A source from the Rural Development Institute under the Chinese Academy of Social Sciences also suggested to re-launch production of products that used grain as an input.

To guarantee food security, China banned certain such projects in late 2006, especially the production of ethanol fuel from corn.

A source in the futures industry told the EO that according to a recent meeting of the National Development and Reform Commission, current policies on such grain-input products may be changed.