Tag Archives: food prices

China’s Inflation Peaks On A High Plateau

With our usual caveat about not relying on one month’s data, China’s inflation seems to have peaked with August’s consumer price inflation (CPI) coming in at 6.2% year-on-year, against July’s 6.5%. The number is considerably higher than target so getting it down further remains policymakers’ priority. August’s CPI figure was driven by food prices, up 13.8%, and contributing 4 percentage points to the headline number, officials say. Stripping that out would put inflation below target, which is making some think that there won’t be a further round of interest-rate rises as food prices aren’t overly susceptible to monetary policy. However, food prices are remaining stubbornly high and this Bystander suspects that the CPI underreports other prices rises that affect the politically sensitive cost of living. Thus another gentle twist of the monetary ratchet is likely before year’s end.

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The Cassava Conundrum: China’s Food Price Spiral

High food prices are a symptom not source of China’s inflation. Excess liquidity still slopping about the system is the main underlying cause. But food prices are politically sensitive. Hence plans to control prices put in place last month. Beijing has to be seen to be in control, even though price controls rarely have a happy history.

High world food prices complicate the picture. China is a leading food grower, but as its population and their incomes grow, it is becoming an ever larger food importer. Its demand has helped drive up world food prices. The U.N.’s Food and Agriculture Organization’s Food Price Index is close to its 2008 peak, having risen unrelentingly since June (pulling fertilizer prices in its wake). China’s imports are not the sole cause; poor harvests and the falling U.S. dollar play their part. But there are echoes of the surge in prices of 2008, which caused food riots in several countries.

The world is better placed now than then. Rice, wheat and maize, three of the most important staples, are in more adequate supply than they were in 2008. Yet still prices are high. Governments, including China’s, will be running down stock piles so the next harvest is important, particularly of cereals, soybeans and sugar. The FAO worries that the increase in supply globally may not be sufficient to match the growing demand. In which case, high global food prices will continue into next year, making Beijing’s instruction to local governments to secure supplies at steady prices more difficult to carry out.

Next year’s cereal crop, particularly wheat and the coarse grains used in feedstock, may be the most critical. This year’s crop has been hit by drought and flood around the world. Although it is the third largest on record, it has come in less than expected. The wheat crop worldwide is 5% less than in 2009. Some growing countries have imposed export restrictions. Stocks have covered this year, but these will need to be replenished on top of the continuing growth in demand. The FAO says that, absent more bad weather, winter wheat plantings should raise wheat production next year to meet the increase in demand, but no more. It is a similar story with coarse grains.

China is the second largest grower of both wheat and maize so its weather and yields will be critical. That makes reports of a two-month drought in Henan, Anhui, Shandong and Hebei on the North China Plain and which produce over half the country’s summer grain, concerning. The drought-affected area accounts for a fifth of the country’s winter wheat planting area. Prices will remain high and volatile.

The global balance between supply and demand for rice is much better. However, the continuing weakness of the dollar and buyers switching from expensive cereals could force up rice prices over the coming months. Domestic prices will be insulated from this to some extent as rice prices, like those of wheat, are controlled.

Corn and soybean prices do track international prices fairly closely, and higher prices for these feed through to meat and egg prices. Oilseeds, sugar, dairy, meat and fish prices are also at or around 2-year highs on world markets.

Cassava may be the interesting story, especially in China where a moratorium on new grain ethanol plants and domestic price supports for maize has boosted the demand for cassava chips as feedstock for fuel production. Roughly half of China’s fuel ethanol and alcohol output are now derived from root crops, namely cassava and sweet potato, and domestic cassava production has doubled over the past five years while Chinese farmers have also invested in overseas production in countries from Cambodia to Liberia. Cassava is now trading at record levels on international commodity markets, and encapsulates the chicken and egg situation, so to speak, that China finds itself in with respect to food of being a big driver of world prices that it is also trying to control.

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Local Officials Lumbered With Making Price Controls Stick

China has formally announced a series of measures to fight consumer price inflation that dump the task squarely in the laps of local officials. The State Council has instructed local governments to boost farm production, stabilize supply and lower food and fertilizer prices, all while ensuring coal, power and oil and gas supplies are uninterrupted. Local officials have also been given authority to impose local price controls where necessary on daily necessities and raw materials. Other measures range from suspending road tolls for vehicles carrying farm produce to clamping down on food hoarding. Most of the measures have been trailed over the past few days.

Decentralizing their implementation is probably the only realistic way of administering the new measures, though it means that the effects are likely to be patchy. It also means that central and local government officials will bear a common political responsibility for their success. Another way of looking at that is that Beijing will have a convenient whipping boy if food prices remain high. As we and many others have noted, for all their political sensitivity high food prices are the symptom not source of China’s inflation. The excess liquidity slopping about the system is the underlying economic cause, and dealing with that falls firmly in the lap of central government.

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Rising Prices. Rising Yuan?

The latest monthly inflation figures showing a 7.1% rise in consumer prices in January, the biggest increase in 11 years, are little surprise given the transport bottlenecks and food shortages caused by the severe winter in the south and west of the country. The question is, how long it will take for their impact to work through the economy, and what proportion will prove to be temporary.

Food prices have been the main driver of inflation over the past couple of years. The damage to winter crops from snow and ice has been severe, and priority has been given to allocating food supplies to the worst-stricken areas, but nature works in seasons and spring plantings and new herds and flocks will, in time, come to market. The all-important grain market is forecast to have a normal year’s harvest. The cost of animal feedstocks is the wild card. But it will take a couple of months for the winter’s effect on food prices to wear off.

Power and distribution networks aren’t expected to return fully to normal until at least mid-year. Even before this winter, industry and commerce was passing on increasing energy costs, spreading inflationary pressures widely in the economy. That is not going to go away anytime soon.

An extension of administrative controls to hold down consumer prices is likely, as is another round of interest rate rises. There were six last year. But the financial system is still rudimentary enough to make monetary policy a blunt instrument, and higher rates will attract more hot money.

The central bank, already struggling with the cost of managing its massive reserves, is likely to increase banks’ reserve requirements. It will also be under greater pressure to step up the rise of the yuan against the U.S. dollar. The currency has risen by about 13% since Beijing loosened is dollar peg in mid-2005, rising more rapidly recently, at an annualized rate of 20%.  At this point it needs all the help it can get in controlling inflation.

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Snowed Under On The Farm

The return of snow and ice to southwestern Yunnan province, leaving clean-up crews struggling to cope with more blackouts, disrupted transport and stranded travelers, highlights both the fragility of China’s material infrastructure and the remarkable depth of its human resources to respond to a civil emergency on such a scale.

Meanwhile, the snow alert has been lifted in seven of the 19 provinces which have suffered their severest winter in more than half a century. Symbolic of the improvement, power has been fully restored to the main rail line between Beijing and Guangzhou, Xinhua reports, after 20 days of interruptions.

The scale of the disaster has been immense. Li Luguo, vice minister of civil affairs, said on Friday that 354,000 homes had collapsed, and a further 1.4 million damaged. That, as we have noted here before, is probably an underestimate. Reconstruction will not be complete until June.

The damage to rural livelihoods is even more immense. “Crops in the disaster areas were ruined en masse and people face serious livelihood difficulties,” Prime Minister Wen Jiabao said last week.

Some 70 million farm animals have died in the bad weather. Two fifths of the rapeseed crop has been destroyed and a third of the land used for growing vegetables has suffered severely from the snow and icy, according to Zhang Yuxiang, chief economist of the Ministry of Agriculture.

That amounts to millions of hectares of farmland. The affected areas grow the bulk of China’s winter fruit and vegetables.

Under those plastic-sheeted greenhouses you see all over is where much of that produce is grown. The have collapsed by the thousand under the weight of snow. Cabbage, broccoli, and similar winter crops and oranges and other fruit have been particularly hard hit. Crops not crushed have been frozen beyond resuscitation.

Beijing has been trucking food into the worst affected areas, as best it can, to alleviate local food shortages and using administrative controls to stop prices rising. The long-term inflationary impact on already surging food prices remains a concern.

Keep a weather-eye, so to speak, on northern China. It grows most of the country’s grain. This year’s harvest, though the spring crop is yet to be planted, is forecast to be about the same as last year, the state grain agency says — absent natural disasters.

Last year’s grain harvest was below normal because of drought. At least the all this winter’s snow, once it melts, will help alleviate a repeat of that.

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