September 9, 2008

China's grains, which are now much cheaper than international prices, are drawing more speculative investment into the sector as the gap continues to widen between its prices and that of the international market.

China's rice price has remained at RMB 3/kg while that on the international markets is four times as much. Wheat flour in China is also nearly two-and-a-half times cheaper than the same product on international markets.

In fact, China's absolute prices for wheat is now lower than what it was in 1996. However, even with the government propping up prices, wheat farmers are finding it hard to keep pace with rising material costs.

The differential could make China's grain market the next investment front for speculative capital after investors withdrew from stocks and real estate, which offer low prospects currently, according to Cao Jianhai, head of the Investment and Market Research Division of the Institute of Economics under the Chinese Academy of Social Science.

Part of the rising trend can be seen from Goldman Sach's US$300-million investment in pig farms in China's Hunan and Fujian recently. Since China's grain prices are low, an investment in pig farming would be particularly apt since feed prices would be low.  

This would not be the only channel for taking advantage of low prices however, other more direct channels such as grain purchasing, marketing and logistics, grain processing, contracting or purchasing cultivated land, and purchasing of grain futures could also be avenues for speculative capital to flow in, Cao said.

Although the signs are not apparent now, speculators are just waiting for the right moment to act, he said.