Rotten business

How speculators cause havoc for Chinese farmers

Rotten business

WiC has written regularly about rising food prices in recent months. But this week, the Chinese media has been talking about the opposite, at least for vegetables. A sharp dip in prices is threatening to ruin some farmers.

Vegetable prices fell more than 21% over the first three weeks of last month, according to the Ministry of Commerce (they are talking about a basket of 18 different types of vegetables). Observers are blaming a variety of causes for the slump but most agree that an unwinding in hoarded stocks by speculators is a principal culprit.

Some readers may have a sense of deja vu here and remember the situation with garlic, one of the main targets for price-gougers last year. After watching prices soar, much of the smart money then moved on to the next opportunity. “There are now signs of a slowdown in garlic prices,” WiC warned in December, “[so speculators] are switching their attention to cabbages instead.”

And indeed, cabbage has now turned out to be one of the crops most affected by the sudden downturn.

Prices jumped late last year when South Korea announced a shortage of the vegetable (required for the national delicacy kimchi), and speculators began filling up cold storage warehouses in anticipation of further shortages to come.

But when the anticipated scarcity failed to materialise, prices were soon dropping fast. “When my wife and I reaped cabbage in the field, we heard that the wholesale price was [$0.05 per kilogram],” Shandong farmer Han Liji complained to Xinhua. “But when we took them to the market, the price had already decreased by 20%.”

Cabbage wasn’t the only commodity affected. “Everything I have grown this year ended up with a loss,” another Shandong farmer, Yan Baofu, told Xinhua. “Prices of tomatoes, cucumbers and peppers keep going down, not to mention celery and green onions. They’re better off rotting on the farm.”

Observers have pointed to other factors in the price slump. Warm weather meant that vegetables in northern farms ripened early enough to compete with supply from the southern crop.

Demand from consumers for some green vegetables is also said to have fallen because of perceptions they are more likely to absorb radiation from the stricken Fukushima nuclear plant in Japan.

So once again the Ministries of Commerce and Agriculture are left struggling to manage the prices of vegetables. They have asked supermarkets to keep prices steady, stock more vegetables and try to buy directly from farmers.

Others have called for the creation of a nationwide agency to assist in cooperative marketing of vegetables (primarily a ploy, it seems, to cut out the middlemen). “The risks of sharp price fluctuations will be increased if producers sell their vegetables separately,” Shandong commerce official Guo Hongwei told Xinhua.

Fan Jianping, chief economist of the State Information Centre cited Japan’s Farmers’ Association as an example to follow. “[It] effectively links farming with distribution and sales,” he explained to the China Daily, “which is more scientific than China’s market-driven planting plans.”

Whether central planning is really going to trump the market is debatable, although the proposals come at a time when the government has been ready to intervene frequently in an attempt to control prices.

Nor does it address other causes of the speculative frenzy of recent months, most notably an excess of credit sloshing through the financial system, as well as low interest rates. But one positive: falling vegetable prices may help to bring down April’s food inflation figure, which is soon to be announced. Food inflation was up 11.7% in March – a statistic that rattled policymakers. But meat, grain, oil and dairy are all components too, meaning falling vegetable prices – on their own – won’t be enough to bring the rate down.

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