Opinion: Grain price hikes no cause for alarm

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Last updated at: (Beijing Time) Saturday, December 06, 2003

Opinion: Grain price hikes no cause for alarm

The drastic decline in grain yields and surge in prices of most staple agricultural products have sparked great controversy over food security.

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The drastic decline in grain yields and surge in prices of most staple agricultural products have sparked great controversy over food security.

Some scholars are confident that China has enough grain, while others are unsure or even claim supplies will fail to meet demand by 2005. The latter predict the shortfall will reach a crisis point within three years, given the dwindling areas planted, slump in the rice yield, losses of arable land to urbanization and the grain-for-green project to protect the environment.

In my opinion, food security is not a problem in China for the time being and in 2005 the country will not face a crisis in grain supply.

Considering the present international and domestic situation, we need to take a new perspective on grain security.

First, the issue should be seen against the backdrop of globalization and China's opening up to the outside world.

Given China's relative scarcity of land and water resources now and in the near future, growing resource-intensive produce will do nothing but worsen the situation.

A more open approach should therefore be taken to maintain grain supply. China has every reason to import a certain amount of grain, based on the principle of comparative advantage, from the international market. There is no point in retaining an inordinate degree of grain self-sufficiency.

In fact, the real threat to food security is China's foreign exchange payment capacity. By the end of September this year, China's foreign exchange reserves had hit US$380 billion. By the end of December, the reserve is expected to exceed US$400 billion. These figures give eloquent proof of China's capacity to pay.

Second, this issue should be seen in the context of China's market-oriented economy.

Prior to China's reform and opening-up process in the late 1970s, grain production was regulated by administrative forces, which often distorted the grain supply and demand relationship.

In recent years, as China's market economy has matured, the market has played an increasing role in adjusting grain supply and demand. Given the current price rises, farmers may soon adjust farming strategies and increase grain production if the government does not interfere in the market.

Third, since China adopted its reform and opening-up policy, the supply-demand structure of food has undergone fundamental changes. The traditional structure featuring grain as the dominant product has swiftly given way to an all-embracing one including grain, cotton, oil, sugar, livestock, poultry, aquatic products, vegetables and fruit.

In the long run, slashing grain production leaves more room for other varieties of produce to emerge in the market, better catering to the varied needs of the people.

Besides, when it comes to grain security, both grain production and stockpiles should be taken into consideration. Despite decreasing grain production, grain stocks in China are still sufficient to meet demand.

Last but not least, the recent surge in prices of grain and other staple foods is attributable not only to decreasing supply but also to swelling monetary supplies.

The broad measurement of money supply, M2, which includes cash in circulation and all deposits, grew by 20.7 per cent year on year from January to September. The rapid increase in money supply and loans has inevitably pushed up the prices of grain and other staple food.

The rise in grain prices poses no threat to China's food supply or the lives of urban residents but provides a precious opportunity for farmers to increase their income.

The government should refrain from interfering in the market by selling the staple food in store in large quantities.

The price rise will not only benefit farmers but also accelerate reforms of state-owned grain-purchasing enterprises.

To stabilize the domestic market, the government should abolish favourable policies for grain exports.

The key to long-term grain security is protection of arable land. In the 1990s, the frenzy to urbanize and build economic development zones and expressways led to loss of farm land. If this trend is left unchecked, the continual loss of farm land will worsen the country's grain situation.

The recent State Council policy that forbids the illegal requisition of farm land should be strictly abided by.

In the meantime, the grain-for-green project, which is vital to protecting the environment, should be carried out at a proper pace.

To cushion the impact of the grain price rise, the social security system should be further improved to offer relief to the impoverished, who will bear the brunt of the fluctuations in grain prices.

The official threshold for minimum living standards could be lowered or special grain coupons granted to those living below the current minimum standards.

Given the excessive growth in money supply, the government should properly regulate the monetary market and maintain order in the grain market.

Notes: The author Ma Xiaohe, is a researcher with the Institute of Industrial Research under the State Development and Reform Commission.

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