What factors affect the inverted grain price gap in China?
The phenomenon of inverted domestic and international grain prices has become one of the hottest topics in government departments and the agricultural economics field recently. In July this year, Chen Xiwen, deputy head and director of the Office of the Central Rural Work Leading Group, mentioned “the unprecedented changes China faces today since reform and opening up”; the “changes” here refer to the impact of grain import pressure on domestic grain prices against the backdrop of a sustained inversion between domestic and international grain prices.
Research data show that the inversion in grain prices has gradually strengthened in recent years. Since April 2014, the soybean price gap widened significantly and peaked in September, rising from 178.1 USD/tonne to 414.4 USD/tonne, then falling back to around 340 USD/tonne, where it has remained to this day. The corn price gap also rose by 73.9% between April and September 2014, increasing from 160.6 USD/tonne to 278.3 USD/tonne, and fell sharply to 161.3 USD/tonne between July and November 2015. At the end of 2012, the wheat price gap also showed a growth trend, especially from May to September 2014, rising from 81.2 USD/tonne to 193.3 USD/tonne, and by November 2015 its price gap still stood at around 150 USD/tonne. The domestic and international price gaps for indica rice and japonica rice fluctuated very similarly: from May 2014 they grew continuously for a year before peaking, with indica rice at 272.8 USD/tonne and japonica rice at 427.6 USD/tonne; by the end of September this year, the two had shrunk by 88.2% and 75.2% respectively, but in the following two months they widened again by 17.3% and 22.2% respectively.
The widening price gap stimulated grain imports, increasing the supply of grain on the domestic market, and thereby putting pressure on domestic grain prices. From the perspective of the international economy, the factors affecting the future trend of the price gap lie in the transmission effect of international grain prices and the movement of exchange rates.
First, the fall in international crude oil prices caused international grain prices to fall, and the relatively low import prices have a transmission effect on domestic grain prices. With the development of bioenergy, international grain prices are linked to crude oil prices. On the one hand, international grain prices kept falling while domestic grain prices remained relatively stable, which directly caused the widening of the domestic and international grain price gap. Data show that from June 2014 to October 2015, the international crude oil price fell from 105.7 USD/barrel to 44.6 USD/barrel, a decline of 57.8%. At the same time, the international soybean price fell from 528.4 USD/tonne to 330.4 USD/tonne, a decline of 35.5%; the international corn price fell from 174.4 USD/tonne to 149.5 USD/tonne, a decline of 16.2%; the international wheat price fell from 268.8 USD/tonne to 225.3 USD/tonne, a decline of 16.2%; and the international rice price fell from 536.1 USD/tonne to 435.6 USD/tonne, a decline of 18.7%.
Before August 2015, domestic grain prices were basically stable; among them, soybeans had long relied on imports, and their prices were affected by the transmission of falling international soybean prices, with a decline of 10.3%, while corn, wheat and indica rice prices fell by relatively small margins of 6.1%, 6.5% and 2.2% respectively, and japonica rice prices not only did not fall but rose by 3.0%. At present, international grain prices have all fallen back to levels before the 2007-2008 food price crisis; however, in order to increase farmers' incomes by raising grain prices, the Chinese government has kept domestic grain prices basically on a slowly rising trend, which has made domestic grain prices higher than international prices. On the premise that international grain supply does not fluctuate sharply in the future, the main constraint on a rebound in grain prices lies in whether crude oil prices can rebound. And the low international crude oil price reflects the political games among Russia, the United States and the Middle Eastern countries. These crude oil exporting countries have spent enormous opportunity costs, yet their tolerance for the current low crude oil price is also becoming increasingly strained, but when the crude oil price will bottom out has not yet been determined. As a non-renewable energy source, crude oil prices are bullish in the long run, and at that time international grain prices will also rebound accordingly, thereby reducing the gap between domestic and international grain prices.
Second, the recent depreciation of the renminbi has narrowed the domestic and international grain price gap. Since 2007-2008, the central parity of the renminbi exchange rate fell from 7.7 to around 6.8, and after more than two years of stability, it fell to around 6.1 in late 2013. In August 2015, the central parity of the renminbi exchange rate suddenly rose by 4.6%, from 6.11 yuan per US dollar to 6.39 yuan. According to estimates, the grain price gap reduction effect brought by this factor was: soybeans 6.79%, corn 8.95%, wheat 6.16%, japonica rice 8.60%, and indica rice 12.86%. It is worth noting that the appreciation effect brought by the renminbi's inclusion in the “Special Drawing Rights” (SDR) plan and the depreciation effect on the renminbi brought by the Federal Reserve's interest rate hike plan will also further affect the future price differences between domestic and international grain.