June 23, 2008

    

China's grain prices seen to rise on fuel price hikes

China's fuel price hikes announced last week will add upward pressure on grain prices due to the increase in production and harvest costs, even with the government's promised subsidies to farmers to compensate them for higher costs.

 

China increased domestic gasoline and diesel prices by 17 percent - 18 percent  last week in response to near-record crude oil prices. The government was also responding to global criticism that China's booming economy and fuel subsidies are leading to a sharp rise in fuel consumption which is causing the rise in world prices. 

 

The government also said it will provide another RMB7.8 billion (US$1.14 billion) worth of subsidies to grain farmers as compensation.

 

However, the subsidises are unlikely to make up for the rise in production costs as other inputs such as fertilisers have been rising as well, said Xu Xiaoqing, deputy director of the Department for Rural Economic Development Research Center under the State Council.

 

 

The rise in costs could be felt as early as the autumn grain harvest.

 

By allowing fuel price hikes, the government is signaling its intent to allow a hike in grain prices, analysts said.

 

Analysts said if the government had not hiked fuel prices along with the surging global crude oil prices, the accumulated risks would be bigger than the higher inflation caused by easing the control on prices.

 

There was already increased smuggling of grain exports since China curbed its grain exports late last year as China's grains were cheaper than those abroad. 

 

While the government did impose grain export controls, products derived from grains, such as noodles, continued to be exported freely, leading to the inflation that China wanted to avoid.

 

Although China's wheat output is on track to see growth for the fifth year in a row, prices are unlikely to fall on expectations for higher prices due to the rise in grain prices.

 

With corn prices higher than wheat prices, more wheat is used to substitute corn as feedmeal, raising wheat demand, said Guo Ke, the manager of Dalian Commodity Exchange's Beijing office.

 

The prices of corn futures traded on the DCE and the wheat futures traded on Zhengzhou Commodity Exchange rose Friday after the fuel hike, although soy and soy products fell sharply on profit-taking.

 

China's soy prices have tracked recent gains of their counterparts on the CBOT, fully reflecting the impact of surging crude oil prices, said Liu Xinghua, an analyst at Great Wall Futures Co.

 

Soymeal prices in Dongguan city in Guangdong province were between RMB4,500/tonne and RMB4,550/tonne, up from RMB4,100-RMB4,250/tonne a week ago.

 

Livestock companies were making losses due to the high soymeal prices, which may curb the demand for soymeal in the coming weeks, said China National Grain And Oils Information Centre.