Research Report No 075, 2004

In October 2003, a price hike occurred abruptly on the country’s grain market, which had been basically stable in the past years. The situation gradually turned stable towards the end of the year. But, compared with the same period of the year before, the prices of the three main grain products (wheat, corn and rice) rose respectively by 10% to 20%. The grain prices rose again after the Spring Festival of 2004. The prices of the three main grain products increased by around 30% over the same period last year. As a result of excessive media reports, people were led to believe that the country has entered a period of nationwide food shortage and price hike.

Grain is a special commodity. The price fluctuation can easily catch people’s attention. More than 20 years after the initiation of reform and opening-up, the state has gradually solved the grain problem through a series of measures and policies after some twists and turns. We do not need to panic over the grain issue. Nor should we place it over all the other issues regarding the rural areas.

We believe that we should seriously deal with the grain issue from the following aspects.

I. Getting a Clear Picture of the Grain Problem

We should first make it clear whether the price hike this time is a partial problem or an overall problem. Is it a result of annual shortage or a long-term shortage?

The country’s per capita grain possession is a key figure to judge the supply and demand relationship. Once per capita grain consumption is set, the country’s total demand for grain will be clear, and the macro-control will have a basis. Although almost everyone believed in the past years that the country’s per capita grain possession should be 400 kilograms, and it should increase with the improvement of the living standard. But our research, which has been proved by the facts in the past 20 years since 1984, shows that the per capita grain possession should be around 370 kilograms. And if the proportion of main grain product (rice, wheat and corn) output is proper, the country’s grain supply can be satisfied. In the years of the past two decades -- except in 1993-1995 – when the per capita grain possession exceeded 370 kilograms and approached 400 kilograms, farmers would find it hard to sell their products at a good price, and the grain prices would be basically stable with occasional drop. In 1984, China’s per capita grain possession reached 396 kilograms for the first time. A nationwide grain oversupply occurred. The state finance could not bear the heavy burden. The government then started the reform of the monopoly system over the grain purchase and marketing. After the per capita grain possession reached 393 kilograms in 1990, the next two years saw the figure stand at around 380 kilograms in 1991-1992. The reform to unify the grain purchase and sale prices could be implemented smoothly. The grain coupons and quota certificates, which had been used for 40 years, were cancelled eventually. The state started to push for the reform to "commercialize the grain and marketize grain operation."

The situation in the past eight or nine years was more so. In 1995, the per capita grain possession is 387 kilograms while the net grain import was 18.67 million tons. The grain supply could be satisfied and the grain prices tended to drop. Affected by the opinion of American scholar Lester Brown, the state raised the grain purchase price by 40% in 1996. As a result of the protective purchase price offered by the government in 1998, the country saw a bumper harvest in the years that followed. From 1996 to 1999, the per capita grain possession was above 400 kilograms. From 2000 to 2002, the per capita grain possession was respectively 366, 356 and 357 kilograms. At the same time, the net export of cereal and cereal flour in these three years was respectively 10.63 million, 5.32 million and 11.97 million tons. But the grain prices basically remained stable, indicating that there was no major problem with the grain supply and demand. If the grain stock was very much consumed in these three years, the stockpile was caused by the 400 kilograms per capita possession in the previous four consecutive years.

The reason why the per capita grain consumption has not obviously increased in the past 20 years is that the growth of China’s urban and rural residents’ grain consumption has been more and more diversified as their income rises, and that the growth has not seen in the direct grain consumption and relevant products. At the same time, the reform of housing, health care, employment and social security has curbed the growth of grain consumption. The grain consumption of high-income people has not obviously increased. And the grain consumption of farmers who work in the cities has not obviously increased. Therefore, the per capita grain possession of about 370 kilograms, or 480 million tons of total grain demand in the country, should be a point of balance for the grain supply and demand. In the future, along with the population growth, the annual grain demand should increase by about 3 million tons.

The only exception occurred during 1993-1995. In these three years, the per capita grain possession was no less than 370 kilograms, but the most drastic price hike since the reform began was reported with the grain price being more than doubled. In addition to the grain circulation system and macro-control mechanism, the causes were the devaluation of RMB, which made the grain export gained more than import. In 1993, the net export was 7.83 million tons. In 1994 when the grain had already risen, the country still exported 4.26 million tons. The rice output in the year was decreased, leading to a major shortage. But several hundred thousand tons of rice was exported to Japan and other countries in 1993-1994 because of a good profit. This intensified the short supply in the country.

If we maintained a balance in grain import and export, exercised macro-control properly and used State grain reserve immediately, the grain price would not have risen in such a drastic way.

Let us come back to the price hike this time. According to the National Bureau of Statistics, the total grain output in 2003 was 430.67 million tons, representing a decrease by 5.8% over the last year. The per capita grain possession was reduced to 334 kilograms. The country was in short of nearly 50 million tons of grain if compared with the per capita grain possession of 370 kilograms. It was a big sum. But in consideration of the current State grain reserve, the grain price should not have seen such a drastic rise. So the price hike beginning from October 2003 was not merely caused by the output decrease, but related to the slow advance of grain circulation reform and an ineffective grain macro-control mechanism.

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