OCTOBER 27, 2010, 10:02 A.M. ET.
Hot Potato in China's Rising Food Costs .
By CHUIN-WEI YAP
China's hunger is cascading across global markets, pushing prices of food commodities sharply higher lately. Back home, this boom is becoming a source of worry.
Reuters
A worker uses his mobile phone in front of sacks of raw rice at a processing factory in Qingtongxia, Ningxia Hui Autonomous Region October 16, 2010.
Over the next decade, China's annual grain demand is likely to reach 573 million tons, which is above its current production levels. With marginal increases in crop yield shrinking and arable land harder to find, the bet is on that Beijing may swiftly become more reliant than ever on global markets for an essential class of commodities it is desperate to keep mostly home-grown.
Soybeans traded in Chicago are at their highest price in 14 months, largely because of the strength of Chinese demand. Palm oil on the Malaysia Derivatives Exchange breached a 27-month peak this week. Thai rice prices are nearing a six-month high.
Inside China, this has already gone from just market play to a matter of public interest. In October, the price of staples such as cooking oil and sugar sold in China's supermarkets jumped 10% to 13%. News of food shortages—in corn, wheat, garlic, mung beans and sugar—have dominated local headlines this year.
Food is a political hot potato, and sharp price increases in a short time can stoke public anger, encourage smuggling, and threaten to up-end China's cherished standard of 95% self-sufficiency in food. Food accounts for a third of the basket of goods used to calculate inflation.
So far, the government has chosen to respond within markets. It has auctioned millions of tons in reserves of grain, cooking oil, sugar and cotton, and publicly threatened to punish "speculators." Last week, the central bank raised interest rates, in part to slow price gains.
Nonetheless, the gains have been accelerating. True, the last reported inflation rate—3.6% in September—was still well below the 12-year high of 8.7%, touched in early 2008, but food-price gains are back at those high rates.
Back then, after a season of heavy snowstorms disrupted production, Beijing imposed price caps on grains, edible oils, meat, milk and eggs to bring inflation back to an even keel. It took a year and a global financial crisis before the caps were lifted. Certainly, that is bitter medicine, which restrains prices as much as it limits efficiency and risks degrading quality in products.
But with the world betting on a richer, hungrier giant, the government knows the danger of inflation—and the difficult job of controlling it—is back.
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