June 29, 2011

 

 

Farm produce futures traded on China's Dalian and Zhengzhou commodity exchanges are expected to rise steadily in the second half due to mounting planting costs, surplus liquidity and lower expectations of tough tightening policies.

 

However, prices are unlikely to surge in consideration of regulative policies and adequate supply on the market.

 

The majority of agricultural products on domestic futures markets started to rebound at the beginning of this year and came to a peak in February, boosted by the consumption peak during the traditional Chinese Spring Festival. However, what followed was a fallback and persistent range-bound trading.

 

Analysts say that the domestic agricultural commodity market has almost touched bottom in the first half and is ready to improve on the weak correction in the second half in consideration of the following three factors.

 

First, rising costs of planting and labour will continue to prop up farm produce prices.

 

Despite the inflationary pressure, the country is stepping up efforts to push forward pricing reform for energy resources this year. It has already raised feed-in power tariffs in some provinces and is mulling over a tariff increase in electricity for residential use.

 

Meanwhile, the country also plans to accelerate pricing reform for oil products and water. All these moves may add to the costs of planting as well as raw materials. Labour costs are also on a rise as inflation has raised living costs.

 

Secondly, the central bank is unlikely to adopt such a tight monetary policy as that in the first half.

 

The People's Bank of China (PBOC), or central bank, has raised the required reserve ratio (RRR) once a month over the past six months. It has also twice hiked the benchmark lending and deposit rates.

 

The tightening measures have begun to produce effect, as new bank lending, an important indicator of monetary policy, tumbled to RMB551.6 billion (US$85 billion) in May from April's RMB739.6 billion (US$114 billion).

 

The broad money supply (M2), which covers cash in circulation and all deposits, hit RMB76.34 trillion (US$11.8 trillion) at the end of May, up 15.1% on-year, the slowest growth since November of 2008.

 

The tightening measures, however, have dealt a heavy blow to the country's small businesses, which find it more and more difficult to get bank loans, and they are the major factor to weigh on the commodity market in the first half.

 

Some insiders say that it is too early to talk about relaxing the monetary policy before inflation is fundamentally curbed. The country's Consumer Price Index, a major gauge of inflation, rose 5.5% on-year in May, a 34-month high.

 

Thirdly, the US may extend its loose monetary policy after its Quantitative Easing (QE2) expires at the end of June and this is expected to add to imported inflation pressure.

 

However, farm produce prices are unlikely to rise drastically given the government's regulative measures as well as the improving relationship between supply and demand. China is likely to achieve adequate summer grain harvests this year despite the drought and the ensuing flood in the middle and lower reaches of the Yangtze river.

 

Meanwhile, soy stocks at ports are at a high level due to weak demand and a large volume of imports in the earlier period. Cotton and sugar supply is expected to be less tight in the second half in consideration of an increase in the planting area this year.