China will gradually let global markets determine prices for grains and other major crops according to a feature in the China Economic Times that got worldwide attention last week when Reuters and other wire services picked up on it. Since 2004, Beijing has set floor prices for rice and wheat and stockpiled corn, soybeans, sugar and cotton at fixed-prices to insure profitable and all-out production by farmers. (These floor prices worked somewhat like loan rates in the U.S., with price support the intended goal.)
But Beijing has determined its current policy of setting guaranteed domestic prices often above world levels, buying up domestic production for “government reserves” and placing strict quotas on cheaper imports is unsustainable. The most dramatic example is in cotton, where China’s offer to farmers is nearly double current futures prices for cotton and that country’s projected ending stocks account for 19 months’ worth of annual consumption and 60% of the world’s total projected ending stocks in USDA’s November WASDE report!
Beijing learns it cannot repeal laws of supply and demand. Note this telling statement from Ms Fang Yen, head of China’s National Development and Reform Commission (NDRC), as quoted in the China Economic Times feature: “Grain prices have come to the stage to be decided by the market.” Then she added, “The existing policy has supported domestic grain prices to rise only, but not to fall, which is against the basic rule of value.”
Beijing also learns “laws of unintended consequences.” By forcing grain and cotton processors to pay much-above global prices for domestically produced commodities, China’s millers, feed and cotton mills could no longer compete with cheaper imports in their own domestic market, raising the need for strict import limits. But this, in turn, raised cries of “protectionism” and threats to slap levies, quotas and tariffs on China’s exports. It led to systematic fraud and corruption. For example, Chinese importers began to lure farmers into selling imported commodities to the government as their own production and then sharing the profit with them.
To reassure its own farmers and consumers, Beijing leaders say they will take a “go slow” approach for staple grains like rice and wheat, however and will “gradually” allow global markets to determine China’s domestic ag prices. They say cotton will be used as a “test” of the new policy next season but that they may “temporarily extend” price controls on politically-sensitive crops like rice and wheat.