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UPDATED: September 3, 2012 NO. 36 SEPTEMBER 6, 2012
The Price Goes Up and Up
Global grain price hikes challenge China's grain trade policies
By Lan Xinzhen
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BUMPER HARVEST: A reaping machine works in a field in Shanxi Province. China has had nine consecutive bumper harvests of summer grain production (ZHAN YAN)

The rising cost of grain in the international market has forced China to take action to stabilize prices.

On August 13, the Department of Pricing of the National Development and Reform Commission (NDRC) ordered top grain and edible oil producers to establish a reporting mechanism to provide updates on post-production prices, wholesale prices and retail prices of edible oil.

Since July 24, the NDRC has been encouraging Yihan Kerry Group and COFCO Ltd., the two biggest edible oil producers, to stabilize prices for their lines of products.

The NDRC made two attempts in one month to regulate edible oil prices. Reporting mechanism on edible oil prices is the first step adopted by the Chinese Government to cope with soaring international grain prices.

Reduced output

Due to serious droughts in the United States and Russia, world grain output fell markedly. According to figures from the U.S. Department of Agriculture, during the week ending on August 5, U.S. soybeans rated 39 percent very poor to poor, surpassing the lowest conditions observed during the drought of 1988; 50 percent of the U.S. corn crop was rated very poor to poor.

In June, the Ministry of Agriculture of the Russian Federation announced reductions in its expected grain output from 94 million tons to 85 million tons.

Reduced grain production has caused global grain prices to surge. According to figures released by the Food and Agriculture Organization (FAO) of the United Nations on August 9, the FAO Food Price Index climbed 6.1 percent in July to 213.1 points. The index, which measures the monthly change in the international prices of a basket of food commodities, averaged at 200.8 points in June.

According to figures from the Beijing Orient Agribusiness Consultant Ltd. (CnAgri), corn prices grew the fastest. In July, corn prices soared more than 100 percent over 2010.

Financial institutions such as Goldman Sachs, Credit Suisse and Macquarie also said the price hike of farm produce may continue in the short term.

The United States produces half of the world's corn exports. Price hikes of U.S. corn crops may pass off inflation on the rest of the world, therefore U.S. supplies will affect prices of staple agricultural products. If food prices continue rising, the price hike will likely have a negative effect on other sectors, increase purchasing cost of grain importing nations and strengthen the pressure of imported inflation to developing countries.

The CnAgri report says grain price hike will worsen the impact suffered by poor countries, influence their food security and may even cause rises of market speculation and trade protectionism. For the poor global harvest, the first grain crisis for the past 30 years occurred in 2008.

Cheng Guoqiang, a researcher at the Development Research Center of the State Council, said in the short run a grain price hike will not lead to a grain crisis. At present, rice prices are stable, different from conditions in 2008. From 2005 to mid 2008, rapid expansion of biofuels increased global demand of cereal, sugar and vegetable oil, pushing up grain prices.

Although the present grain prices will not lead to a grain crisis, the situation should not be treated lightly. Many countries are closely watching the influence of the grain price hike. The French Ministry of Agriculture recently said as the global food security problem is exacerbated, the country will convene according to the framework of the Group of 20 to discuss food security issues and to seek common responses.

Soybean and corn

In China, 85 percent of soybean supplies and 40 percent of corn supplies are imported. Both crops are mainly used to produce edible oil. Chinese are highly dependent on vegetable oil. Soybean and corn are important raw materials to produce edible oil, and bean dregs, a by-product of edible oil production, are important materials to make feedstuff.

Among the corn imports by China, 90 percent come from the United States, and 50 percent of soybean imports are also from the United States. According to the Dalian Commodity Exchange and Zhengzhou Commodity Exchange, China's two major grain futures markets, by August 27, the prices of imported soybean by China had risen from 3,750 yuan ($591.47) per ton at the beginning of this year to 4,972 yuan ($784.23), up 32.5 percent. Price increases of soybeans and corn have directly affected production costs and prices of edible oil in China. Prices of bean dregs are also affected, enhancing the pressure of feedstuff price hike. Under such circumstances, China may face a new round of price hikes of meat, eggs, oil and flour.

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