International Grain Prices Fall: How Can Grain Enterprises Share the Benefits?
A report recently released by the World Bank states that international market grain prices fell 14% between August 2014 and May 2015, dropping to a 5-year low. The report, titled "Food Price Watch," says that affected by low oil prices, global grain supply was ample in 2014, and bumper harvests of wheat, corn and rice were in sight in 2015; these factors caused international grain prices to fall sharply.
Data show that between August 2014 and May 2015, wheat prices on the international market fell 18%, rice prices fell 14%, and corn prices fell 6%. “The sharp fall in international grain prices is conducive to lowering costs for domestic grain traders and is a favorable factor.” said Li Guoxiang, a researcher at the Rural Development Institute of the Chinese Academy of Social Sciences.
Li Guoxiang pointed out that at present, enterprises should make good use of both foreign and domestic markets to maximize corporate profits. Some large enterprises with capital and strength can position their vision in the international market and make greater use of foreign markets to achieve corporate development.
In fact, some large domestic enterprises have already begun to open up foreign markets. At present, COFCO Group's assets and institutions cover more than 60 countries and regions, and its business involves more than 140 countries and regions. Ning Gaoning, chairman of COFCO Group, told China Youth Daily that COFCO is currently accelerating its internationalization strategic layout, building a full industry chain from field to table in the global market.
How the inverted pattern of domestic and international grain prices formed
“The decline in international grain prices can reduce enterprises' purchasing costs, and enterprises need to make good use of the two markets.” Li Guoxiang told reporters.
At present, domestic grain prices, supported by the minimum purchase price policy, have long remained at a high level, placing domestic grain prices on a “high ground.” At present, in Guangdong port, each ton of domestic corn, rice and wheat is about 750 yuan, 900 yuan and 500 yuan higher respectively than the duty-paid import price of the same variety, and the corn price gap even once exceeded 1,000 yuan.
Agricultural analyst Ma Wenfeng told reporters that globally, in 2014 the average price of corn in the world's major corn producing and consuming regions of Europe, the United States, Japan and China was 260 US dollars/ton, down 14.04% from the previous year, showing a clear decline for two consecutive years. The declines in the United States, France and Japan were all above 15%, falling 19.88%, 18.16% and 16.39% respectively; China's corn was 398 US dollars/ton, up 3.51% from the previous year, becoming the only country among major global countries where the price rose. China's ratio of world corn price to the international average price was 1.53, and the price gap reached a record high.
“Because of trade restrictions and policy protection, the price gap with foreign countries opened up all at once.” Lu Feng, a professor at the National School of Development at Peking University, told reporters.
Lu Feng believes that, on the one hand, international grain prices follow the market, the downward pressure on the economy is global, and in addition prices of bulk commodities are relatively low, strengthening the downward trend. On the other hand, considering food security, China implements a minimum purchase price for grain, and the prices of agricultural products subject to quota restrictions already differ considerably from those abroad.
“Whether from the perspective of efficiency or China's future comprehensive opening up, as well as its position in the world, how much benefit has the domestic and international grain price gap formed by protection policies brought? What opportunity costs has it brought? These questions need to be discussed and reflected upon.” Lu Feng told reporters.
Because the minimum purchase price policy causes domestic grain prices to be higher than imported grain in the same period, some analyses have raised the question of whether the minimum purchase price policy should continue.
Li Guoxiang believes that the positive significance of the minimum purchase price is to stabilize prices and protect producers' interests, but the impact of the international market has exposed the serious inadequacy of the policy's ability to resist risks. He suggests that policies cannot be designed according to closed environmental conditions; taking international market factors into account, future policies must be adjusted.
At present, some provinces have already begun target price reform for cotton and soybeans, bringing price formation closer to the market. Li Guoxiang said that letting local governments carry out target price reform is closer to local realities, and there should be no one-size-fits-all approach; local governments should formulate corresponding support policies in light of local agricultural characteristics. This is the future direction of target prices.
“Each place is different; some have target prices, some have upgraded versions of target prices, or targeted target prices, or financial support. Local agricultural development goals should be combined with local policy measures.” Li Guoxiang said.
Demand determines the need to make good use of the two markets
From the demand side, the domestic market also needs to import part of its grain from abroad.
“In 2014, China's imports of cereals, soybeans, oilseeds, vegetable oil, sugar, meat and dairy products reached nearly 130 million tons. Affected by factors such as upgrading of the consumption structure and resource and environmental constraints, it is conservatively estimated that in the next 10 years imports of the above agricultural products will exceed 200 million tons, accounting for 20% of total domestic consumption.” Ning Gaoning said.
On the other hand, under the protection of grain purchase prices, domestic grain prices are higher than foreign grain prices. Yet grain processing and trading enterprises want to expand scale and achieve profits, so more and more enterprises are beginning to turn their eyes overseas.
Grain is related to national security and market stability. Ning Gaoning said that the country's new food security strategy proposes relying on itself to ensure food rations, concentrating domestic resources to protect key priorities, and achieving “basic self-sufficiency in grains and absolute security of food rations.” This requires that, on the premise of “taking self-reliance as the main approach, basing ourselves on the domestic market, and ensuring production capacity,” there must also be “moderate imports” to effectively safeguard national food security. The biggest change in the new food security strategy is from “restricting imports” to “moderate imports,” the essence of which is how to coordinate and make good use of the two markets and two types of resources to meet domestic consumption demand.
In fact, as the main channel of China's grain import and export trade and the largest market-oriented operator in grain and oil circulation, COFCO bears the corporate responsibility of using global resources and trade advantages to adjust surpluses and shortages, safeguard domestic grain supply, and meet domestic market demand.