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Govt should allow grain prices to rise by up to 20%, expert says

(China Daily)
Updated: 2008-07-26 10:12

Farms thresh paddy in Huangshan, Anhui province. [Asianewsphoto]

Editor's note: Surging international grain prices and rising global inflation have placed the global spotlight on Chinese grain production, an industry that caters for 1.3 billion people. Cheng Guoqiang, a senior agricultural economist with the State Council Development Research Center, talked to China Daily reporter Xin Zhiming about China's production, its impact on inflation and how China is wrongly seen as a source of global grain price spikes.

Q: What do you expect of China's grain output for the whole year after it achieved a summer harvest?

A: China witnessed increasing summer grain output for the fifth year in a row, which is of vital importance for the whole-year grain production.

However, there are uncertainties for the whole-year grain production. Now is the crucial time for growing late rice, but it is subject to potential natural disasters, including drought and flooding. They may affect the overall production.

On the other hand, farmers' expectations for grain prices will have a bearing on grain output. If they expect prices to go up further, they will put more resources into farming, which will help raise output.

Q: Reportedly some farmers do not like to sell grain to the State because the market price is higher than the official purchase price. How should we handle this challenge?

A: Farmers are reluctant to sell because they expect prices to rise further given the high international grain prices. Take paddy price. In April, it was about 5,800 yuan per ton on the international market compared with the domestic price of about 2,800 yuan now. The reluctance has a great impact on the market.

I think the government should better manage their price expectations by disclosing the price and output information to the public. Meanwhile, we should allow the prices to rise by 15-20 percent, in my view. It will provide good incentives for farming.

Q: Such hikes will be good for farming and benefit farmers, but will the hike put more pressure on China's fight against increasing inflation? Inflation has hovered above 7 percent. How should we balance grain price and inflation?

A: Grain and food prices, taking one-third of the inflation basket, are no longer the main driving force for inflation. Food prices are stabilizing, this is shown by government statistics.

A 15-20 percent hike of grain prices would not have much impact on inflation. On the contrary, if we still control grain prices at a low level - our price level will be roughly on par with what it was a decade ago - it will cause serious problems. Farmers would be discouraged to grow grain and supply would be affected. We may not raise the prices to the international level, but the gap should not be that large.

We still face heavy inflationary pressure in the second half of this year, but we should not try to curb it through control of grain prices.

Q: The global grain prices have soared in recent months and incurred even social turbulence in some countries. What have caused the dramatic price gains?

A: The global grain prices have risen to the highest in 28 years. Prices of corn, for example, rose by 134 percent in March from 2005 while wheat rose by 191.2 percent.

We noticed that grain prices may move in tune with the rise in oil prices, which push up farming costs and increases demand for biofuels, whose development claims a lot of land for growing grain.

Since 2002 when oil prices started to rise rapidly, the demand for biofuel has grown, which in turn increases demand for land to grow agricultural products that can be used for producing biofuel. Such demand will expand rapidly in the coming decade.

Other factors contributing to grain price rises include dollar depreciation and speculative activities.

In the supply side, the global output has encountered some setbacks.

Q: Some people in developed countries have accused China and some other developing nations of pushing up grain prices globally. What role has China played in global grain price rises?

A: China is actually a stabilizer of global grain prices. Take corn prices. Corn prices rose the most in this round of global grain price spikes. From 2000 to 2007, annual growth of global consumption of corn was 27.3 percent. China's annual consumption grew by only 23.1 percent, but that of the US was 36 percent.

China has been a net exporter of grain in recent years. Last year, its net grain exports amounted to 8 million tons compared with 7 million tons in 2006.

Those who accuse China of pushing up global grain prices may try to shift the international attention away from their grain-consuming development of biofuels to avoid criticism.