August 30, 2010

 

State efforts tame Chinese agri commodities market

Most agricultural commodities futures have taken a respite after skyrocketing for a few months following the Chinese government's efforts to curb speculation on agricultural products.

 

China's agricultural commodities entered bull runs one after another this year, largely due to unfavourable weather conditions such as low temperatures, floods and droughts that have affected the growth of crops, fuelling expectations of lower output and providing reasons for speculation on the spot and the futures markets.

 

Due to anticipation of reduced production, a variety of traders including foreign-funded food processors, state-run grain producers and the appointed state grain reserve enterprises, rushed to the market for new grain, pushing up grain prices.

 

The anticipation of lower grain production was proved justified on July 12, when the National Bureau of Statistics (NBS) announced that China's summer grain output had fallen to 123.1 million tonnes this year, down 0.3%, or 390,000 tonnes, from a year ago. The drop was the first in seven years.

 

The drop in output was due mainly to the drought in China's southwestern regions earlier this year, with output in Guizhou and Yunnan provinces down 1.69 million tonnes, the NBS said.

 

The National Development and Reform Commission (NDRC), the top economic planner, was ordered in late June to check up the implementation of the policy of minimum grain purchasing prices.

 

In mid-July, the NDRC published measures the government would take to punish those involved in illegal activity causing abnormal price movement, imposing tough penalties for fabricating and spreading false information on prices.

 

China's Ministry of Agriculture (MoA) on August 13 urged local authorities to step up its efforts to ensure a good harvest as China's autumn grain production, which accounts for 70% of China's total annual grain harvest, has entered a critical period. The ministry also sent agricultural experts to different localities to provide advice on grain production.

 

The auction of state reserve grain also plays a major role in ironing out sharp fluctuations. During the past two months, the government has maintained the weekly reserve wheat auction and added two sessions specifically for flour mills, on July 23 and August 6.

 

At a time when the market feared insufficient corn supply in China, the government held two auctions of reserve corn last week. Responding to the news, corn futures on the Dalian Commodities Exchanges dropped instantly.

 

Wheat has entered into corrections since August 9 due to profit-taking and less worry over the impact of rising international prices on domestic market after officials highlighted the self-sufficiency of China's wheat market.

 

Corn started to shed earlier gains on August 19 ahead of an additional weekly auction on August 20. Soy followed the downward trend of corn.

 

Analysts believe China's agricultural commodities in general will stay in range trade in the near future. A sharp decline is unlikely at present, due to relatively tight supplies.