November 27, 2013

China will gradually let the market drive prices of grain and other major crops, instead of the government arbitrarily setting price levels, according to the China Economic Times.

The Chinese government has set floor prices for rice and wheat since 2004, and stockpiles corn, soy, sugar and cotton at fixed-prices to protect farmers' profit margins and encourage output.

However, the state-reserve policy has driven up imports of agricultural commodities, including cotton, sugar, rice and corn. To source cheaper grains, Chinese traders are increasingly looking overseas and have imported in large volumes over the past two years. In 2012, China's cotton and sugar imports hit record highs. This trend is likely to continue this year.

Head of rural department of the National Development and Reform Commission (NDRC), Fang Yan, said, "Grain prices have come to the stage to be decided by the market."

"[The state-reserve policy] has supported domestic grain prices to rise only but not fall, which is against the basic rule of value," Fang added.

However, the Chinese government may take a slow approach for staple grains, such as rice and wheat, and "will gradually allow the market to decide prices of major agricultural prices," Fang said.

During the shift, the government will still be looking into target prices of major crops, and offer subsidies and insurance incentives to boost farmers' income, according to Fang.

Industrial officials had earlier expected Beijing to scrap the scheme to stockpile cotton as early as 2014. However, concern over food security has been dragging on the grain pricing reform.