The current round of price increases is a cost-driven price increase under conditions of ample liquidity. From the various components of the CPI, the rise in prices of food and housing categories are the main factors driving the increase in the CPI.
■ Tang Xuli, Cao Jing
Since the second half of 2010, inflationary pressures have gradually become more evident, with the CPI steadily increasing and repeatedly setting new highs not seen in recent years. Currently, in the rising consumer prices, food prices play a dominant role. In the first three months of this year, food prices increased by 10.3%, 11%, and 11.7% year-on-year, respectively pushing up the CPI by 3.2, 3.5, and 3.7 percentage points. Preventing too rapid an increase in overall price levels has become the primary task of current macroeconomic regulation.
Causes of the Current Price Increase
This round of price increases is a cost-driven price increase under conditions of ample liquidity. From the various components of the CPI, the rise in prices of food and housing categories are the main factors driving the year-on-year increase in the CPI. There are mainly three reasons:
Firstly, imported inflation factors are significant. The United States, the European Union, and Japan have successively implemented quantitative easing monetary policies, exacerbating the global liquidity glut. The CRB index, which reflects international commodity prices, has risen by 30.4% since 2010. NYMEX crude oil prices have once again broken through $100 per barrel, reaching as high as $115 per barrel; gold prices have risen by 38% since 2010 and have increased by 7.2% since the beginning of this year; compared to the start of 2010, LME 3-month copper futures prices have seen a maximum increase of 35.8%, though prices have recently fallen somewhat; LME 3-month aluminum futures prices have risen by 17% since 2010. Most grain varieties on the international market have seen price surges, accompanied by violent fluctuations. Wheat prices on the Chicago Mercantile Exchange rose by 47% throughout 2010, and have recently declined somewhat. The current wheat closing price is $7.7 per bushel (May 10), representing a 43% increase from the beginning of 2010; corn prices are at $7.1 per bushel, a 72.7% increase from the beginning of 2010; rice prices initially fell before rising again, now entering a declining phase. The current price is $14 per hundredweight, roughly the same as at the beginning of 2010; soybean prices have generally been on an upward trend, with violent fluctuations recently. The highest price since the beginning of the year was $14.6 per bushel, with the closing price on May 10 being $13.4 per bushel, representing a 28.9% increase from the beginning of 2010. At the same time, China's iron ore for steel smelting relies over 50% on imports, with copper smelting raw materials having a foreign dependence rate as high as 70%, 50% of crude oil consumption relying on the international market, soybeans for edible oil raw materials having a foreign dependence rate as high as 70%, and cotton imports accounting for 30% of global trade volume. The sharp rise in prices of these raw material products brings imported inflationary pressure. Currently, China's prices for major grains such as wheat and rice are lower than international market prices. As domestic and international markets become increasingly closely linked, price increases in international commodities will inevitably push up China's prices.
Secondly, the increase in production factor costs in China, primarily manifested in the increase in labor and land costs. Regarding labor costs, since 2010, wage hikes and increases in minimum wage standards across the country have directly driven up labor costs. In 2010, 29 provinces (regions, municipalities) adjusted their minimum wage standards, with an average increase of 24%. Meanwhile, the gradual improvement of medical care, low-income assistance, and unemployment insurance also indirectly raised labor costs. In 2010, the national enterprise pension increased by an average of 10%, and the unemployment benefit standard increased by an average of 10%. Regarding land as a production factor, due to the increase in land requisition fees and usage fees, the supply of farmland has decreased, with rental costs for agricultural land doubling. Agricultural products belong to price-sensitive labor-intensive products, so increases in labor and land prices will inevitably lead to rises in agricultural product prices. Moreover, the continuous rise in refined oil prices has significantly increased operating costs such as transportation. In particular, diesel shortages and power cuts in the early stages have also pushed up production and operating costs for some goods.
Thirdly, ample liquidity has further fueled price increases. Domestically, in 2009, RMB loans increased by 9.6 trillion yuan, and in 2010, RMB loans increased by 7.95 trillion yuan. Additionally, in recent years, the rapid development of the interbank bond market, with the rapid increase in the issuance of short-term notes and medium-term notes, has further increased market liquidity.
This round of price increases is mainly reflected in the rise in agricultural product prices and has a certain degree of rationality. Firstly, with the advancement of urbanization, the number of rural laborers is showing a downward trend, which will inevitably raise labor costs. This conforms to market rules and aligns with China's policy orientation towards supporting agriculture. From this perspective, this round of price increases will be a relatively long-term process. Secondly, real estate prices are constrained by regulatory policies, resulting in slower growth rates. Thirdly, there is overcapacity in global industrial products, with industrial product pricing restrained by insufficient international demand. Fourthly, service consumption demand in China is not strong. However, during this process, there are also some irrational factors. On one hand, some foods are subject to speculative capital manipulation, leading to excessively rapid price increases beyond reasonable levels; on the other hand, overly loose domestic and international liquidity environments have played a fanning role.
Supply-demand contradictions are the main cause of China's agricultural product price increases.
Global Agricultural Product Supply and Demand Have Gaps
From the international market perspective, there are supply gaps in global wheat and corn. In 2010, the total global grain production was 2.18 billion tons, while total consumption was 2.24 billion tons, resulting in a supply gap of 61.26 million tons. By type, the total wheat production was 645 million tons, consumption was 665 million tons, leaving a gap of 20 million tons; corn production was 814 million tons, consumption was 840 million tons, leaving a gap of 26 million tons; rice production was 452 million tons, consumption was 452 million tons, with basic balance in supply and demand; soybean production was 256 million tons, consumption was 255 million tons, with basic balance in supply and demand. Overall, the current international grain market supply and demand are roughly balanced, but there are gaps in wheat and corn.
Frequent Natural Disasters in Major Global Grain Producing Areas
The main wheat producing areas are China, India, the United States, Russia, and Canada, with these five regions accounting for over 50% of global wheat production. The main corn producing area is the United States, where production in 2010 was 320 million tons, accounting for 38.8% of global production, with 132 million tons used for feed, 160 million tons for industrial purposes (mainly fuel ethanol), and around 50 million tons exported. The next largest producer is China, with 2010 production at 170 million tons, accounting for 20%. Furthermore, compared to the U.S.'s output of 9.66 tons per hectare, China's corn yield is relatively low, at 5.56 tons per hectare, only 58% of the U.S.'s. Rice is produced 80% in Asia, with China's production accounting for 30.7% globally. The main soybean producers are the United States (35.1%), Brazil (27.1%), and Argentina (19.2%), accounting for over 80% of global total production.
In recent years, major grain producing areas have been affected by natural disasters: Russia's persistent high temperatures and drought in 2010 triggered multiple forest fires, causing a surge in global wheat prices; heavy rains and mudslides in Brazil in recent years have driven up local commodity prices; Australia experienced a massive flood event that occurs once every 200 years, directly causing a reduction in wheat production (Australia's wheat production accounts for 3% of the global total, with about 80% used for export, accounting for 10% of world trade volume, making it one of the important global wheat exporters). Extreme weather and natural disasters have ravaged the globe, and the future global grain market outlook is not optimistic.
Rapid Growth in China's Agricultural Product Demand
Firstly, with the improvement in living standards, demand for agricultural products has greatly increased. China's grain production is stable, but due to improvements in living standards, demand has expanded rapidly, with residents' consumption of meat (5 pounds of grain converted into 1 pound of meat) and other side dishes, such as alcohol, continuously increasing. Secondly, there is strong demand for fruits and vegetables in northern regions during winter. In recent years, the demand for winter fruits and vegetables from Hainan has shown "stability in the south and prominence in the north," meaning stable sales in southern provinces and substantial growth in sales in northern regions like North China, Northwest China, and Northeast China. For example, Hainan fruit and vegetable sales at Beijing's Xinfadi Market were 130,000 tons in 2003, 300,000 tons in 2007, and increased to over 600,000 tons in 2010; Xi'an's Xinlv Market saw Hainan fruit and vegetable sales reach 400,000 tons in 2010, doubling year-on-year; Shenyang and Harbin had Hainan fruit and vegetable sales of 80,000 tons in 2007, increasing to 230,000 tons in 2010. Thirdly, the rapid development of grain deep processing has driven up the price of raw grains. On one hand, in recent years, driven by high industry profits, deep processing has developed rapidly. For example, 3.17 tons of corn can be processed into 1 ton of alcohol, with profits as high as around 1,600 yuan per ton, much higher than the profit from selling raw corn; on the other hand, the government provides subsidies for the grain deep processing industry, further increasing profit margins. For example, producing 1 ton of alcohol results in a government subsidy of 1,400-2,000 yuan; additionally, the grain deep processing industry faces overcapacity issues, with processing capacity either exceeding or equivalent to production. For instance, soybean deep processing capacity is 110 million tons, while actual production is only 38 million tons. Fourthly, traditional grain planting yields are low, reducing farmers' enthusiasm for planting. Compared to economic crops, traditional grain crops like rice have lower planting yields, leading to reduced farmer enthusiasm. Taking rubber as an example, the income from planting rubber is 2,739 yuan per mu, while planting rice yields only 410 yuan per mu. In recent years, the sharp rise in natural rubber prices and the sugar cane prices in 2010 have even prompted farmers to partially or completely switch water fields to economic crops. Moreover, due to some agricultural product acquisition prices being lower than market prices, farmers are reluctant to sell. Fifthly, some foods are subject to speculative capital manipulation, leading to excessively rapid price increases, strengthening people's expectations for agricultural product price increases.
Multiple Measures Taken
To Ensure Basic Stability in Agricultural Product Prices
Vigorously develop agriculture and ensure sufficient supply. Acknowledge the reality of China's continuously decreasing planting area for grain crops, limited room for single-yield improvement, population growth, and increasing demand for grain due to industrial processing, focusing on expanding supply capacity, improving grain utilization efficiency, and alleviating supply-demand contradictions. First, further implement various measures to support agricultural production, consolidate and strengthen the foundation of agriculture, maintain stable agricultural development, including increasing subsidies for agriculture, supplying agricultural machinery products, and protecting farmers' enthusiasm for grain planting; second, strengthen the construction of agricultural product planting bases and vegetable greenhouses, expand winter vegetable production, and improve land use efficiency; third, increase research and development investment, expand the production scale of fast-growing, high-yield crops, and increase total crop production without increasing land area.
Ensure the basic food supply for low-income residents. The faster growth of food prices has a greater impact on low-income groups. Consider using "food vouchers" and basic subsidies to increase protection for low-income groups. Additionally, while controlling faster price growth, genuinely protect farmers' interests and avoid reducing agricultural product prices at the expense of farmers' income.
Strengthen infrastructure construction in circulation links and reduce agricultural product circulation costs. On one hand, fiscal funds should be used to expand the construction scale of agricultural product storage (cold storage) and trading markets, ensuring convenient agricultural product transactions and sufficient storage capacity to achieve higher inventory levels; on the other hand, improve agricultural product transportation channel policies, exempting tolls for legally loaded fresh agricultural products vehicles traveling on highways. Avoid the waste of large quantities of fresh agricultural products in concentrated production areas due to inability to transport them out.
Encourage and support the production of high-quality grains. While increasing the total amount,细分 the management of the grain market, encourage and support the production of high-quality grains in a targeted manner, guide farmers to expand the production of relatively scarce crops such as corn and coarse grains, enrich and optimize the variety structure of domestically produced grains, and meet the growing demand for premium grains such as japonica rice and high-quality wheat among residents.
Strengthen the supply of agricultural inputs and market supervision. Strengthen production, reserves, and unified scheduling, ensure the supply of seeds, fertilizers, pesticides, diesel, and electricity needs for grain production. Accelerate the cleanup of illegally constructed corn ethanol processing projects and control the development scale of corn deep processing. ■