Garlic prices rise and fall in a ten-year cycle: a review of garlic price fluctuations
"This year's sharp surge makes me very uneasy; it feels like I'm seeing a shadow from years ago." Old Chen, a garlic trader in Jinxiang, Shandong, had just entered the garlic speculation market in 2008 when he suffered a heavy blow, and that failure still makes him shudder to this day.
In this year's sharp surge, Old Chen finally made up for the losses of the previous few years, and he has again set his sights on small varieties without futures contracts, such as ginger. "Subtle changes in the supply-demand relationship of agricultural products provide opportunities for speculation," Old Chen said.
"Suan Ni Hen" (garlic so expensive it is brutal) rises and falls
"Actually, everyone is gambling." This is the sentence Old Chen says most often, but enormous blindness and the greed innate to merchants have made many garlic traders gamble wrong.
After experiencing the "golden age" of garlic prices in 2006, garlic prices fell rapidly in 2007. By mid-June of that year, the price of new garlic had dropped to a low of 0.75 yuan/jin. This made Old Chen and his partners see hope of making a fortune, so they scraped together more than 1 million yuan through various channels and resolutely "charged into" the garlic market to buy the bottom.
"Unexpectedly, garlic prices completely collapsed in 2008, once touching a historic low of 0.05 yuan/jin." Talking about that unbearable experience, Old Chen remembers it vividly. "Although they rose back somewhat later, we soon could not even cover the cold storage fees, and in the end we really lost everything."
In Old Chen's memory, garlic prices bottomed out and rebounded in 2009, "ran away from the pack" in 2010, and in 2011 "Suan Ni Hen" vanished without a trace while "Suan Ni Jian" (garlic so cheap it is wretched) arrived as expected. After reaching a peak in 2012, garlic prices fell to the bottom again in 2013 and 2014, and only improved somewhat in 2015.
In the futures market, agricultural products with a relatively high degree of marketization, such as soybeans, wheat, corn and white sugar, are difficult for a small number of speculators to manipulate because their volume is too large. However, garlic has concentrated production areas and is easy to store in cold storage, making it one of the most suitable agricultural products for "speculation."
"Making up losses" as Old Chen lays out his plans
At 4 a.m. on the 6th, the Beijing Xinfadi market was bustling. When a China Securities Journal reporter visited garlic distributors on site to check deliveries, he found that the wholesale price of bagged dried garlic that day was as high as 480 yuan/bag, with each bag weighing only 58.5 jin. "Previously, bagged garlic was 60 jin per bag. Recently, garlic prices have risen. Not only has our purchase price gone up, but the garlic traders' weight per bag of garlic has also shrunk accordingly. We can only raise our selling price, but we still cannot make money." Pointing to the cold storage not far away, one merchant said, "They have made all the money."
Xinfadi's daily market price quotations show that the average wholesale price of garlic rose from 4.95 yuan per jin at the beginning of the year to 7.3 yuan, an increase of 47.47%. The retail price of high-quality garlic exceeded 8.5 yuan, strongly reminiscent of 2006.
Regarding this round of "crazy increases" in garlic prices, Old Chen believes the main reasons are a reduction in planting area and reduced output caused by disastrous weather. As for the future trend of garlic prices, Old Chen holds a relatively cautious attitude. "Before the Spring Festival, garlic prices may still not come down. When new garlic from Yunnan comes onto the market in March and April next year, it will have some impact on prices."
"With garlic prices rising sharply this year, garlic farmers will accordingly expand their planting area. If extreme weather is not encountered next year, garlic output will increase considerably, and by then garlic prices will probably ride a 'roller coaster' again." After discussing with his partners, Old Chen chose to sell out this season's stored garlic at 7.5 yuan/jin, and on careful calculation, it was just enough to make up for the losses of the previous few years.
Similar to Old Chen's idea of making up losses this year, when the reporter conducted research at the Beijing Xinfadi Agricultural Products Wholesale Market, a merchant said, "There are many distributors with relatively abundant capital who put garlic purchased in summer into cold storage and wait to sell when market supply and demand become unbalanced, in the hope of obtaining high profits. Some bosses even made more than 12 million yuan in profit this year alone."
In Old Chen's view, this round of rapid garlic price increases is essentially no different from the wave of increases 8 years ago; both were caused by supply-demand imbalance.
"Garlic prices are rising too fast. On the one hand, supply is relatively tight; on the other hand, there is speculation." Zhao Qingming, chief economist of the research institute of the China Financial Futures Exchange, believes that from the perspective of economic returns, farmers are more willing to go out to work, leading to a substantial reduction in the cultivated area of agricultural products, especially cash crops such as scallions, ginger and garlic. At the same time, demand for these products is relatively stable, so some people hoard and corner the market in the circulation process and take the opportunity to speculate.
"Don't complain it's expensive": restless capital
As garlic prices rose, ginger also showed a trend of rising accordingly. According to a merchant at the Xinfadi Agricultural Products Wholesale Market, the retail price had already exceeded 4 yuan/jin. He even told the reporter, "Don't complain it's expensive. In a few days, you won't be able to buy it even at this price."
Looking at the agricultural products speculated on in previous years, they all share one common characteristic: they are easy to store. The ongoing speculation in garlic, ginger and other products can also easily create a demonstration effect and push up the prices of other agricultural products. Old Chen's partner was planning to add all of this year's earnings into it to make another profit.
It is worth noting that agricultural products such as garlic and ginger are mostly not traded in the futures market, and their degree of marketization is not high. This is mainly because although they are daily necessities, their demand is not large compared with varieties on the futures market, their output is also not large, and at the same time they do not have strategic storage significance, so they are extremely easy for speculators to manipulate.
"But speculating in agricultural products cannot be regarded as investment; it can only be a variety for short-term capital speculation. The story of speculating in garlic is all a short-term phenomenon." Xia Tianran, a macro analyst at Monita, said that, after all, we are now in a state of "asset shortage," and after real estate tightens, capital will flow elsewhere. Products with relatively concentrated production areas and limited output are more easily manipulated.
Xia Tianran said that it is very difficult to completely prevent agricultural products from being speculated on unless the government intervenes in prices, which is the simplest way. Of course, restricting hoarding or government reserves are also options.
Speculation in agricultural products such as garlic appears once every few years. Is it a new battlefield for investment funds under an "asset shortage"? Zhao Qingming said, "The agricultural product market is very small, and its capacity to absorb capital is relatively limited. At present, economic growth is slowing, the inflation rate is falling, and corporate profit margins are also declining. Under these circumstances, high-yield, low-risk financial products will certainly decrease, so the market should still be allowed to balance automatically, and the so-called 'asset shortage' should not be exaggerated."
The market is in an irrational state. In the sharp rises and falls of garlic prices, the losses of some garlic farmers reached as high as more than 1,000 yuan per mu. At the same time, unstable expectations also make some agricultural products more susceptible to speculation, with prices fluctuating too greatly. Old Chen admitted frankly, "It would be best to ensure the stability of garlic output from the source and guide garlic farmers to reasonably arrange production and sowing plans." In this regard, industry insiders said that the "insurance + futures" model is conducive to protecting farmers' planting interests.
Qu Dongyu, Vice Minister of Agriculture, said recently that agricultural risks in China are trending upward, and there is an urgent need to further improve and perfect the market risk management mechanism. First, we should enrich market risk management tools and strengthen knowledge popularization. While doing a good job in agricultural production and ensuring food security, we should proactively use modern management tools such as price insurance and agricultural product futures. Second, we should steadily expand the pilot scope of "insurance + futures." Third, we should vigorously explore the "production determined by sales + price insurance" model.