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Blame it on speculators and hot money

By Zheng Fengtian (China Daily)
Updated: 2010-11-15 13:34

Prices of several agricultural products have skyrocketed. The rise in prices, which began last year, has affected many people's livelihoods. There are several reasons for the drastic rise in prices of agricultural products, such as climate change, high inflation and the increasing cost of labor.

But there is no justified reason for the jump in the prices of non-staple farm products (from garlic, mung beans and ginger, to apples).

I think the sharp rise in prices of some non-staple farm products has been caused by the flow of hot money into the economy, which has increased speculation.

Speculators target non-staple farm products for four reasons. First, since non-staple farm products are grown on a small scale in the country, speculators can use a couple of billion yuan to hoard a large percentage of a certain product to influence the market and manipulate its price.

This process is rarely seen in major staple farm products, such as corn and soybean, which are grown in huge amounts, because speculators would have to invest hundreds of billions of yuan to hoard enough of the products to influence the market.

Second, the areas where non-staple agricultural products are grown are always concentrated in certain regions, which can be easily controlled by speculators for bulk buying.

Commercialized agriculture has been developing fast in China. The production pattern of "one village, one product" and "one town, one industry" has spread to many areas. The wholesale markets of some farm products are the farms where they are grown. For example, the major growing areas, wholesale markets and cold storage for garlic are in Shandong province.

Third, compared with perishable vegetables, some non-staple farm products such as apples can be stored for a long time in cold storage. This gives speculators the time to raise prices artificially.

Fourth, although the prices of some farm products have fluctuated widely in recent years, their prices are actually low, giving the market (and speculators) plenty of space to increase them. For example, the prices of garlic and mung beans in the domestic market were lower than in the international market last year. That gave speculators the chance to drive them up considerably in the domestic market.

More importantly, the government has no foolproof method to adjust and control the prices of non-staple farm products. Wild fluctuations in the prices of staples like rice, corn and wheat are not seen because the government has several macro-control measures to regulate them, one of which is public purchase.

Considering that the overall price of farm products is low, the government should allow their prices to rise to a reasonable extent. But there is a danger here. If the authorities let the prices of some speculator-controlled non-staple farm products rise sharply, it will have a reverse domino effect, leading to a sharp rise in the prices of many other farm products.

The national economy is facing severe inflationary pressure, and the proportion of farm products in the consumer price index is on the high side. If the government allows the prices of farm products to rise sharply, it will harm the overall economy. Since most farm products are essential goods, a rise in their prices can easily lead to an increase in the prices of other products. And the spiraling effect can lead to a sharp increase in inflation.

However, perhaps the worst part of a rise in prices of non-staple farm products is that farmers benefit little from it. Actually, the role of speculators can cause them great harm. Speculators usually make huge profits by hoarding and artificially raising prices.

But as soon as investors realize the market is saturated with speculators, they start withdrawing rapidly, causing the prices to fall steeply. This brings great misery to farmers. Suppose a farmer grows a certain product when its price is high but the price dips before he can harvest because of withdrawal of the hot money from the market. What can he do to minimize his losses? The answer is "nothing" A farm is not a factory where production of certain kind of goods can be immediately stopped to minimize losses.

Since rapidly rising or falling prices of farm agricultural products have a direct bearing on farmers' lives, the government should take measures to avoid volatile fluctuations. This is important especially to save small farmers from losing whatever little money they have.

Stabilizing the prices of farm products is very important for China and its people. Even non-staple farm products are important for people's livelihoods. Hence, the government should take steps to keep speculators away from farm products to protect the interests of farmers and consumers both.

The author is a professor at the Rural and Agricultural Development Institute of the Renmin University of China.