Can the target price system break the inversion of domestic and international grain prices?

“In 2012, Australian wheat was 2,600 to 2,700 yuan per ton. In the same year, China's domestic wheat price was somewhat higher, about 200 yuan more per ton. Now the price has risen again. The delivered price of the domestic wheat that came in this time in Shandong has already climbed to 2,900 yuan per ton.” Recently, while a China Youth Daily reporter was conducting local interviews at a grain storage depot, a staff member at a grain storage depot directly under a certain province in southern China said.

In fact, foreign grain prices being lower than domestic ones has long been nothing new. Li Guoxiang, deputy director of the Rural Macroeconomic Office of the Rural Development Institute at the Chinese Academy of Social Sciences, analyzed: “Domestic grain prices are higher than foreign grain prices because China has implemented a market-supporting purchase policy for many years. In order to increase farmers' enthusiasm for growing grain, it has kept raising the purchase price of grain.”

It is understood that the market-supporting purchase policy, which has been implemented for more than 10 years, includes two policies: the minimum purchase price and temporary storage. Since 2004 and 2006, the state has respectively implemented a minimum purchase price system for rice and wheat in major producing areas; since 2007, it has successively implemented a temporary storage policy for corn, soybeans, rapeseed, sugar, and others.

“The original intention of these two policies was to prevent cheap grain from hurting farmers, but in reality they raised domestic grain prices and increased grain inventories.” said Ma Wenfeng, a senior analyst at AgroChina. A large amount of grain purchased under the market-supporting policy cannot be sold because of high prices, and grain processing enterprises lack interest in it, so it can only be piled up in warehouses.

Regarding the market-supporting purchase policy, industry insiders pointed out that the reform of agricultural protection policies should be accelerated, the grain purchase and storage policy should be adjusted as soon as possible, and the grain price mechanism should be straightened out.

Domestic grain prices are higher than foreign ones

Domestic grain prices being higher than foreign ones has already attracted attention from many parties. Chen Xiwen, deputy head of the Central Rural Work Leading Group and director of its office, has repeatedly mentioned the bottleneck faced by market-supporting grain purchases. He once pointed out that in the second half of 2013, domestic prices of wheat, corn, and rice were all higher than the domestic landed duty-paid prices of imported grain, with wheat 5% higher, corn 6% higher, and rice 25% higher. If China continues to raise grain prices, it will stimulate grain imports and deal a shock to domestic agriculture and grain production.

Data from the General Administration of Customs show that in the first 7 months of this year, China's grain imports, including wheat, rice, and corn, increased by 80% compared with the same period last year. In response, the General Administration of Customs analyzed that, first, domestic demand is strong; second, international market prices of agricultural products are at a low level.

Taking wheat as an example, data show that since November last year, the domestic market price of wheat has been higher than the post-tax landed import price for 9 consecutive months. Last month, the post-tax landed price of U.S. hard red winter wheat from the Gulf of Mexico was about 1.35 yuan per jin, still 0.12 yuan lower than the selling price of high-quality wheat in China's domestic sales areas.

“Competition in the food processing industry is fierce, so enterprises will use lower-priced imported grain as processing raw material as much as possible.” Ma Wenfeng said. Previously, China's wheat imports mainly came from the United States, Canada, and Australia, but in order to reduce production costs, enterprises were not satisfied with importing wheat from only those countries.

According to media reports, the port of Shenzhen imported French bulk wheat this year for the first time. The low price was an important reason domestic enterprises chose to import French wheat. It is reported that imported French bulk wheat was about 20 U.S. dollars per ton cheaper than wheat imported from Canada, the United States, and other countries during the same period, and a whole shipload of grain could save enterprises about 1 million U.S. dollars.

The growth in imported grain is not only due to its low price, but also due to the needs of domestic production.

Although imported grain is cheaper than domestic grain, it cannot benefit all domestic processing enterprises. Li Guoxiang said that according to relevant state regulations, for enterprises to import wheat, the prerequisite is that they have relevant licenses and processing qualifications in order to obtain wheat quotas. Therefore, to enable more enterprises to reduce production costs, relying only on importing low-priced foreign grain is not a long-term solution.

Market-supporting purchases create an inversion in grain prices

On the one hand, international grain prices continue to fall; on the other hand, domestic grain prices remain high. The inversion in grain prices has made domestic grain storage increasingly tight and made it impossible for enterprises to bring production costs down. In the view of many grain experts, the reason for this is the market-supporting purchase policy that has been implemented for many years.

“The regulatory measures formulated in the past, including the minimum purchase price and temporary storage systems, were all established against the background of domestic prices being lower than international prices.” Ye Xingqing, director of the Rural Economy Department of the Development Research Center of the State Council, previously told the media that in a normal year, the price formed by the market should be higher than the market-supporting purchase price, and the market-supporting purchase plan should exist without being activated. However, since the introduction of policy-based storage, rice has been subject to storage purchases in all years except 2008, 2010, and 2011; wheat in all years except 2011; and corn in all years except 2010; soybeans and rapeseed have been subject to storage purchases for 5 consecutive years; cotton for 3 consecutive years, and sugar for 2 consecutive years.

Continuous market-supporting purchases pushed prices up sharply. Statistics show that in 2013, the minimum purchase prices of rice and wheat were 1.39 yuan and 1.12 yuan per jin, cumulatively 0.67 yuan, or 93%, and 0.42 yuan, or 60%, higher than in 2004 and 2006 respectively; corn and rapeseed increased cumulatively by 60% and 38% respectively; the temporary storage price of soybeans had increased cumulatively by 24% by 2013.

And this year's major grain prices have not been lowered because of increased grain imports from abroad. Peng Chao, a senior market analyst at the Rural Economic Research Center of the Ministry of Agriculture, recently said that the price of early indica rice in China's major producing areas has risen from 1.28 yuan per jin in January to 1.34 yuan in August, the price of late rice has remained at about 1.35 yuan per jin, and the price of japonica rice has risen from 1.49 yuan per jin at the beginning of the year to 1.53 yuan per jin in August. He believes that the main reason for the rise in rice prices is that the state raised the minimum purchase price of rice in 2014.

“When the minimum purchase price becomes the market's highest price, and if purchase costs and storage costs are also taken into account, the price for selling at a profit will be even higher. With increased imported grain, selling market-supporting grain at a profit will become even more difficult.” Ma Wenfeng pointed out.