Agricultural product price reform may be imminent, high inventory pressure awaits resolution

The government is worrying about the large quantities of cotton and white sugar piled up in warehouses, bought from farmers at high prices, and now that prices have fallen, they cannot be sold at a loss, and if all the inventory is dumped onto the market, agricultural product prices would clearly face the danger of collapse. According to a reporter from China Securities Journal, although the state reserve was intended to protect farmers' interests, the result has turned out to be “neither one thing nor the other”: first, prices have become rigid and the agricultural product market has been distorted; second, high inventory has brought tight warehouse capacity and fiscal difficulties.

This year's No. 1 Central Document proposed summarizing the experience of the pilot target price reform for cotton in Xinjiang and soybeans in Northeast China and Inner Mongolia, improving subsidy methods, and reducing operational costs; and reasonably determining the reserve scale of important agricultural products such as grain, cotton, sugar, and meat. A number of agriculture-related experts told our reporter that the current situation of the agricultural product market and high inventory is forcing price reform, including vigorously developing the agricultural product futures market, but the path toward marketization must be carried out in a planned and step-by-step manner, rather than being rushed.

High inventory hangs overhead like a “sword”

The government has clearly already noticed the headache caused by high inventory of agricultural products.

On February 3, at a press conference held by the State Council Information Office, Chen Xiwen, deputy head of the Central Rural Work Leading Group and director of its office, revealed that since the beginning of last year's spring planting, various localities had reported to the central government that in some places the original inventory (of certain agricultural products) was already full, and if there were new purchases to put in this year, that would be a relatively big problem.

The most prominent problem is that if domestically purchased goods are to be sold, their prices are higher than those of products on the international market, so marketing enterprises and processing enterprises may be more willing to use foreign imports, causing domestic inventory to keep climbing.

To encourage farmers to grow strategic crops, the Chinese government has always purchased cotton, corn, wheat, soybeans, sugar, and rice at prices above market price. But this has led to overflowing warehouses in China, rampant smuggling, and a growing influx of cheap imported agricultural products from overseas. At present, the cotton stockpiled by China already accounts for 60% of the world's total, and state-reserved white sugar is also as high as about 6 million tons.

In this regard, Liu Yonghua, a researcher at Wanda Futures, told our reporter that the purchase and storage prices of previous years were basically determined by sugar factory costs plus reasonable profit, but in a market environment of oversupply, the purchase and storage price is generally significantly higher than the market price, attracting domestic sugar producers, trading enterprises, end-user sugar enterprises, and even imported processed sugar enterprises to actively deliver to the reserve.

“From the perspective of the normal reserve function, maintaining three months of consumption, that is, a reserve scale of three to four million tons, is relatively appropriate. At present, the state reserve and local reserves are estimated to have reached a level of six to seven million tons, causing disadvantages such as tight warehouse capacity and a heavy fiscal burden, so it is indeed necessary to reduce the reserve scale.” Liu Yonghua said.

To a certain extent, the state reserve has distorted the agricultural product market. Industry insiders pointed out that the price gap between domestic and foreign agricultural products is huge; for example, the domestic and foreign price gaps for cotton, white sugar, and oils were once as high as several thousand yuan; it has hindered the free circulation of the grain and oil market, and the vast majority of the grain and oil market clearly bears the characteristics of a “policy market”; it distorts the market price formation mechanism and is not conducive to the rational allocation of market resources.

As far as white sugar is concerned, the state reserve policy has led to a huge difference between domestic and foreign sugar markets, especially the huge gap in sugar crop production costs, causing domestic sugar prices to be about double international sugar prices. This is also a common dilemma faced by almost all domestic agricultural products.

Zhu Lei, a researcher at Zheshang Futures, said that the previous purchase and storage policy effectively solved the problem of farmers finding it difficult to sell grain, but it caused price rigidity in the soybean market and severely distorted domestic grain market prices, and the policy also failed to effectively stabilize the soybean planting area in major production areas. In fact, at present the planting areas of domestically produced soybeans, cotton, and rapeseed in China are all continuously declining.

State reserve inventory is like a “sword” hanging over the agricultural product market. In particular, under the background of a bear market, prices of agricultural products such as soybeans and cotton face the pressure of high state reserve inventory, suppressing their upward momentum. Some analysts said that if the state releases reserves of related agricultural products, it may cause supply to rise rapidly, causing prices to fall again.

The state reserve also once “shone and gave off heat”

Looking back at history, we cannot deny the important role of state purchasing and storage in specific periods.

Starting in October 2008, the three northeastern provinces and one region began implementing the temporary purchase and storage policy for domestically produced soybeans. Since the soybean temporary storage policy was implemented from October 2008 to April 2014, it has had a profound impact on both international and domestic soybean markets and market prices. Wang Xiaoyu, deputy secretary-general of the Heilongjiang Soybean Association, believes that the soybean temporary storage policy is historic and has profound historical significance, and was the first battle for China's soybean market to fight for pricing power and the right to speak.

China's grain market has gone from unified purchase and unified sale to the dual-track purchase and sale system and then to the current soybean target price reform, roughly more than 60 years. Unified purchase and unified sale lasted 39 years from 1953 to the end of 1992, during which there were also the dual-track purchase and sale system, parity grain, and negotiated-price grain. In 1996, China's soybean market was liberalized, and imports of genetically modified soybeans increased year by year, from 1.11 million tons in 1996 to 37.44 million tons in 2008. In 12 years, China's foreign dependence on soybeans reached 78.7%.

During this period, soybean prices soared and plunged: when new soybeans came onto the market, prices fell so that farmers had no income from selling soybeans; after soybean farmers finished selling their soybeans, soybean prices began to rise again at spring planting time. Due to the lack of pricing power and the right to speak in China's grain market, the soybean industry suffered severe shocks. Therefore, the state implemented the temporary soybean purchase and storage policy. In the early stage of implementation, it effectively played a role in protecting soybean farmers' planting returns. In the following 2009 and 2010, the soybean sown area in our province was within the highest area range.