How are grain prices formed? Chen Xiwen: They should be close to the market while also taking farmers' returns into account

“The formation of grain prices should stay close to the market while also taking into account farmers' lawful returns. This is a very important principle for the future formation of China's grain prices.” said Chen Xiwen, deputy head and director of the office of the Central Rural Work Leading Group, at a press conference held today by the State Council Information Office.

Chen Xiwen said that the current phenomenon of domestic grain prices being higher than foreign grain prices has many causes: first, the competitiveness of China's agriculture itself is insufficient; second, China's protection policies have kept grain prices rising; third, international grain prices are falling. In addition, there are freight and exchange rate issues.

Chen Xiwen explained that in order to motivate farmers and safeguard their reasonable returns, the state has in recent years continuously raised the temporary storage price and the minimum purchase price, while international market prices have continued to fall, resulting in an inversion of grain prices.

But judging from price fluctuations, the rise in domestic grain prices is clearly smaller than the fall in international market grain prices. The grain price inversion is not entirely caused by high domestic prices. Chen Xiwen specifically mentioned changes in exchange rates and freight prices: “The RMB exchange rate has generally remained strong in recent years, which means imported agricultural products purchased with US dollars become cheaper.”

For example, a ton of soybeans costs 500 US dollars. If calculated at the past exchange rate of 1:8, that is 4,000 yuan. Now the exchange rate is 1:6. The same ton of soybeans bought for 500 US dollars is 1,000 yuan cheaper when it enters China than before.

The drop in global energy prices has led to a sharp fall in shipping prices, which is also an important reason for the grain price inversion.

Bulk agricultural products are basically traded internationally by sea. In 2008, the freight for bulk grain shipped from the US Gulf of Mexico to Huangpu Port in Guangzhou, China, was about 135-138 US dollars per ton. Now the freight is 35 US dollars per ton, and calculated in RMB, the freight per ton is more than 600 yuan cheaper.

How should the grain price inversion problem be handled? Chen Xiwen said that for wheat and rice, in places where the minimum price has already been implemented, the price level will remain unchanged. The minimum purchase prices for wheat and rice implemented in 2015 were not raised, and the purchase prices for 2016 are still under study. On September 18 this year, relevant departments announced the corn price. Compared with last year, the temporary storage price for corn in major producing areas was reduced by an average of 0.12 yuan per jin. The previously set temporary corn storage price was 1.13 yuan per jin in Liaoning, 1.12 yuan per jin in Jilin, and 1.11 yuan per jin in Heilongjiang. This time it was reduced by an average of 0.12 yuan, that is, to 1 yuan per jin. But it should be noted that whether it is the temporary storage price or the current market price, it is still higher than international grain prices.

In Chen Xiwen's view, prices and subsidies need to be separated in the future. Prices should mainly be formed by the market, and only then will market participants become active. In the past, subsidies and prices were mixed together, so prices were higher than market prices, and therefore grain traders, grain vendors, and processing enterprises became inactive. After separating prices and subsidies, the market can be activated. Farmers sell grain at market prices, and business entities buy grain at market prices, thus enlivening the grain market. What if the market price is too low? The government should adopt appropriate policies and directly subsidize farmers, but do so separately from prices. This is the basic principle, and the future trend will be the same: separate “prices and subsidies,” with prices close to the market.