March 2, 2011

 

China suspends state grain purchases to tame inflation

 

The National Development and Reform Commission (NDRC) have reportedly ordered four state-owned dealers to suspend grain purchases, in an attempt to contain soaring inflation and high food prices.

 

The China National Cereals, Oils and Foodstuffs Corporation (COFCO), the China Grain Reserves Corporation, the China National Textiles Import and Export Corporation, and the China Grain and Logistic Corporation had been notified verbally before the Chinese New Year, to temporarily suspend grain procurements in the market this year, sources said Monday (Feb 28).

 

Many companies had been purchasing grain since January, but after being told by local and central governments to stop, the prices remained stable in many regions over the Chinese New Year holiday.

 

There was a possibility that tariffs on grains would be reduced, and that overseas purchases would be increased, sources said.

 

China's inflation in January came in at a lower-than-expected 4.9% on-year while food prices rose by 10.3%.

 

Prices of main staples such as rice and wheat have been rising across the country in recent months, and as of January, the average price of grain was up 8% from November and up 16% in the past year, according to the UN's agriculture-monitoring figures.

 

Analysts said the restriction of grain purchasing and hoarding by major state-owned grain enterprises will, to some extent, alleviate domestic price hikes in the short run, but in a longer term China has to strike a balance between supply and demand.

 

"As a country holding vast foreign reserves, importing grain could be a way for China to reduce the domestic shortage that has been further deteriorated by drought this year," experts said, adding that cutting tariffs could promote grain imports.

 

Price hikes seem to be the result of speculation, analysts said. "Authorities should sell the stockpiled grain during the first half of this year to contain the price hike, and other administrative measures should be taken, such as setting a ceiling for grain prices to prevent dealers from forcing up prices."

 

"China's grain price hike is a domestic issue," an FAO official said, adding that factors such as inflation and increasing demand have driven prices up.

 

China may influence the global market if it slashes duties greatly and decides to import a large amount of grain, though that would be very unlikely, as China holds one of the world's largest grain reserves, he added.