Why Are Domestic Grain Prices Higher Than Foreign Prices? An Analysis of Four Major Reasons
In response to the situation of persistently high grain price gaps between domestic and international markets, there are two views“one is to stop producing it ourselves and just import, and the other is to drive all farmers off the land and pursue large-scale agriculture”. However, Chen Xiwen believes that agricultural policy is not merely an industrial policy, but a social policy that concerns farmers' survival and development and the fairness and justice of society as a whole.
While China's total grain output achieved an “eleven consecutive years of growth”, China also faces a situation of “three simultaneous increases”: continuously increasing grain imports, and continuously increasing total social grain stocks.
On July 30, at the “2015 China Rural Development High-Level Forum” held by the Rural Economic Research Center of the Ministry of Agriculture, Chen Xiwen, deputy head and director of the Office of the Central Rural Work Leading Group, believed that there are two reasons for the emergence of the “three simultaneous increases” situation. On the one hand, the structure of production and consumption is asymmetric, and there are structural contradictions in the supply and demand of agricultural products; on the other hand, the most important reason is the price gap between domestic and international grain.
Specifically, in 2014, China's grain imports exceeded 100 million tons for the first time. But more than 70% of that was soybeans; domestically produced soybeans were only just over 12 million tons, while 71.4 million tons of soybeans were imported. This shows that soybean supply cannot meet demand. Therefore, imports were unavoidable, and in recent years imports have continued to increase.
In addition to imported soybeans, China also imported more than 20 million tons of other types of grain. Chen Xiwen said that low-priced grain from the international market entering the domestic market shows, to some extent, that Chinese grain and some other agricultural products are clearly lacking in price competitiveness. As for the three major staple grains, taking June of this year as an example, domestic rice (late indica rice) was 51.8% higher than the price of imported Thai rice after tax, wheat was 56.6% higher, and corn was 65.3% higher.
Complex Causes of the Price Inversion
The emergence of this domestic-international price inversion has long attracted the attention of both officials and the public. Chen Xiwen said that in fact this phenomenon has not existed for long; based on available information, it appeared in less than a year, roughly from the autumn of 2012 to the summer of 2013. Before that, most of China's agricultural products, especially grain crops, were not higher than international market prices. As for why this phenomenon appeared, Chen Xiwen believes there are four main reasons.
First, rising domestic agricultural production costs led to higher prices. Comparing grain prices in 2011 with the 2014 minimum purchase prices, the price of early indica rice rose 32.4%, the price of middle and late indica rice rose 29%, japonica rice rose 21.1%, and wheat rose 24.2%. For corn and soybeans under temporary storage, the former rose 13.1% and the latter rose 20%. Chen Xiwen said that our price increase rate was obviously higher than that of the international market, and it played a certain role in driving the domestic-international price inversion.
Second, international market prices fell. Comparing prices in June of this year with international grain prices in 2011, 2011 was the year with the highest corn prices since the beginning of this century, and wheat prices were also at a high level. In June of this year, international rice prices had fallen 40.4% from early 2011, wheat prices had fallen 39.3% from their highest price in 2011, corn prices had fallen 49.3% from May 2011, and soybean prices had fallen 39.2% from October 2012. Chen Xiwen said that during this period, the decline in international market prices exceeded the increase in domestic grain prices over the same period.
Third, the appreciation of the RMB against the US dollar. In 2014, the average exchange rate was 1 US dollar to 6.14 yuan. But before 1994, the exchange rate was 1 US dollar to 8.62 yuan. The overall trend has been that the RMB has continuously strengthened and kept appreciating against the US dollar. Chen Xiwen gave an example: not counting any other costs, soybeans at 500 US dollars/ton at that time in 1994 were equivalent to more than 4,000 yuan per ton imported. Now, the same ton of soybeans is equivalent to only more than 3,000 yuan. This price difference of more than 1,000 yuan is due to exchange rate changes. “Farmers have no way to deal with it, and this has an enormous impact on producers.” he said.
Fourth, the plunge in global energy prices over the past two or three years led to an obvious plunge in maritime freight rates for goods. Chen Xiwen said that from the rise in crude oil prices during the Iraq War to 150 US dollars per barrel, to less than 50 US dollars per barrel recently, the 100 US dollar difference in between has had a great impact on freight rates. Correspondingly, in May 2005, the freight cost for soybeans shipped from New Orleans on the US Gulf Coast to China was 138 US dollars per ton, while in May this year the freight rate was only 34 US dollars per ton. The price difference per ton was 100 US dollars.
He believes that this analysis is meant to show that the current situation of Chinese grain prices being higher than the international market is very complex, and it cannot simply be said that rising costs in Chinese agricultural production led to price increases. Many factors deserve further analysis. Only in this way can the right remedy be prescribed to solve the problem.
It is worth noting that the formation of this situation is directly related to the 2008 global financial crisis. At that time, in order to save the economy, governments around the world adopted expansionary fiscal and monetary policies, and China invested 4 trillion yuan. Chen Xiwen said that in fact, as long as a country has the capacity, none would fail to adopt expansionary fiscal and monetary policies. Subsequently, inflation and deflation alternated, and prices of global resource commodities showed obvious sharp rises and falls.
Regarding the issue of price gaps between domestic and international agricultural products, Chen Xiwen said that this is in fact a phenomenon brought about by globalization. It must be carefully analyzed, and one cannot hastily say that Chinese agriculture simply lacks competitiveness. Of course, we have areas where competitiveness is insufficient, but there are more complex reasons than that.
“Ministers Do Not Think the Same Way Either”
In response to the situation of persistently high grain price gaps between domestic and international markets, there has been considerable discussion in society, forming two views.
One view holds that since China's agricultural products, especially bulk agricultural products such as grain, cotton, and sugar, are clearly not competitive internationally, while fiscal investment subsidizes agriculture, the gains seem not to be worth the losses. Therefore, some suggest reducing subsidies to agriculture, bringing domestic bulk agricultural product prices in line with international prices, and resolving the resulting gap by increasing imports.
Another view holds that with such a small scale, Chinese agriculture obviously cannot easily be competitive. Therefore, various measures must be taken to encourage more farmers to leave the land, and only then can large-scale operations be pursued and costs be reduced.
As a think tank figure for central rural policy, Chen Xiwen responded that both views are aimed at the reality that domestic agriculture indeed lacks price competitiveness, and from an economics perspective they are of course reasonable. But looking across the agricultural policies of countries around the world, agricultural policy is not merely an industrial policy, but a social policy that concerns farmers' survival and development and the fairness and justice of society as a whole.
He said that when formulating agricultural policy, consideration must be given not only to ensuring supply, but also to competitive relations in the international market, and even more to the more than 600 million farmers still living, producing, and living in rural areas. Without this point, no matter how good an economic policy is, it will not work well. Even if we reduce our own production, expand imports, or move large numbers of farmers off the land and let a small number of people cultivate more land with higher efficiency, the economic benefits gained from this process would be far from enough to make up for the social problems brought about after such a policy is introduced.
How should reform proceed next? All sides have their own propositions.
Chen Xiwen said that when the State Council holds executive meetings, ministers do not think the same way either. At least I have just mentioned three views. One is to stop producing it ourselves and just import, another is to drive all farmers away and pursue large-scale agriculture, and another is my view. “If everyone puts their minds to work and comes up with more ideas, who knows how many views there would be.”
He said that if China wants to be a responsible major country, it must shoulder the issue of feeding more than 1.3 billion people, and through the international market supply what is lacking and exchange what is needed, while at the same time not causing trouble for the international market. This is of course not entirely for the benefit of others; it also includes the interests of the Chinese people themselves.