Speculation May Be Fertilizing Farm Prices

Like other farmers in China's farm belt, Cao Yongfang held back from selling the winter wheat he harvested in early July, even though he usually sells crops as soon as they're picked.

This harvest season, Cao decided to wait for higher prices. And thanks to a wave of speculation and farm commodity-flipping in China's agricultural market, his waiting game was likely to pay off.

"The price of new wheat this year has risen to 1.04 yuan per half kilogram," said Cao, who plows the land in Hebei Province's Zhengding County. "It was only a little more than 0.8 yuan last year, and it will likely go higher in coming days."

Farm product prices across China started climbing quickly in April, beginning with vegetables and followed by spikes for mung beans, garlic and other goods.

Speculation was considered the main reason for the sudden increases, so the government responded by introducing new price controls along with penalties for hoarding. Officials also pursued a general crackdown on speculation.

These policies, however, failed to prevent prices for rice, corn, wheat and other staples from continuing to climb.

Wang Yuanhong, a senior economist at the State Information Center, said market demand is rigid for non-staples such as mung beans as well as staples such as wheat. That makes these goods vulnerable to short-term stockpiling and speculation.

Wang also thinks investment liquidity is driving up prices for bulk products such as wheat and cotton. Government controls aimed at discouraging investment in polluting, energy-intensive industries has encouraged investors to shift money to new arenas, such as farm product speculation.

Speculation tied to excess liquidity cannot be ruled out as a factor affecting agriculture prices, complementing basic factors such as labor, supply and demand, said Zhang Hongyu, director of the Ministry of Agriculture's Policy and Regulation Department.

The market climate is affecting more than food. For example, prices for cotton – a textile industry staple – have been surging.

Wang Aifang, information director for the China Cotton Association, said domestic cotton prices have climbed since autumn 2009 to their highest levels in a decade. "Cotton prices are up 30 percent compared to the average for 2008 and 2009," he said.

And textile companies are feeling the pinch as speculators place bets on the cotton market. Zhao Lanning, president of Huate Textile Co. Ltd. in Shijiazhuang, said prices for the yarn his company needs have risen by nearly one-third since February.

"Traders are making a fortune off flipping goods," Zhao sighed. "We wish we had bought more before the price surge."

Speculation Yarn

When cotton prices rise, the higher costs are passed down through a long industrial chain in China that includes cotton gins, yarn makers, weavers, dyers, finishers and exporters. About 95 percent of the domestic cotton crop is spun into yarn.

The cotton association recently reported high prices are cutting profits for garment companies. Many textile makers have temporarily shut down plants, while clothing companies are being more cautious when placing orders.

A salesperson at a Tianjin textile exporter said sales have fallen in response to rising costs and exchange rate fluctuations. So exporters have scaled back, handling "less than 50 percent" of levels seen in 2008, the salesperson said.

Overall, however, the textile industry has improved since the first quarter, when its industrial added-value rose 13.4 percent compared with the first quarter 2009. Exports have been growing, and the domestic market is strong. 

But the cotton portion of the industry has not fared as well as others. The sudden shriveling of demand for textiles and apparel during the financial crisis cut demand for cotton. And then prices started climbing.

"We haven't been producing cotton cloth since Chinese New Year" in February, Zhao told Caixin. "We've been operating exclusively in polyester cloth, where the price is relatively stable.

"Factories working exclusively with cotton are retaining only a small number of looms to produce cotton cloth and maintain their customer base," he said. "The rest have switched to production of other fabrics."

Farmers reduced the acreage dedicated to cotton in 2009 after prices fell to the lowest levels in years, averaging 12,159 yuan per ton in 2008. And as domestic output declined, cotton imports – equal to about one-third of domestic production – also slid.

This year, weather factors have also influenced market expectations of a delayed cotton harvest.

But figures compiled by the Cotton Trade Information Network suggest additional factors are affecting prices, which have stood at about 18,000 yuan per ton since March. The network says the cost should be around 15,400 yuan per ton, based on the 2009 market.

"One can clearly feel that the industry thinks this year's cotton price has risen too fast," said Wang, adding that the increases have been "outrageous" perhaps because speculative investors are targeting the industry as they have with real estate in China.

He Yongtao of the China International Futures Ltd. Mid-Term Research Institute said he cannot rule out the possibility that traders are hoarding cotton. Cotton traders don't share the fears of downstream textile and clothing makers who, he said, are now buying supplies on an as-needed basis so that they don't lose money if prices fall.

Regardless of price fluctuations, He said, traders are almost certain to sell their warehoused cotton eventually. Traders stockpile when overall demand for cotton is high, even though textile and garment-maker demand is stable.

A source at the Ministry of Agriculture's Plant Products Industry Department said recent price increases have mainly benefited traders, not farmers.

Agricultural analyst Ma Wenfeng of the BOABC consulting firm says there has been considerable price manipulation in the markets for cotton as well as wheat and other bulk farm products affected by tight supplies and reduced supply expectations. These markets, he said, have attracted investment capital.

And in farm areas such as Cao's Hebei, as well as Anhui and Jiangsu provinces, wheat prices are continuing to swing upward. This has led buyers to criss-cross provinces in search of sellers willing not to wait for even higher prices. But few can be found.

"Buying companies are unable to buy enough wheat," said He. "Farmers are generally holding out for better prices."

1 yuan = 14 U.S. cents