A Balancing Act for Food Prices and Security

A Balancing Act for Food Prices and Security

05-12

Grain storehouses are full and price fluctuations modest in China, creating ripe conditions for market forces that can ensure national food security.

A food-price storm has swept the world. Rapidly rising food prices have caused shortages in a number of countries; in some, food riots have spilled blood on the streets. Governments and international organizations such as the UN have tried to address the crisis with an array of policies.

In China, the overall food supply is sufficient, and price fluctuations are truly modest across the country. Prices of corn, soybeans, wheat and rice have risen only slightly during the past two years. In some regions, rice prices have even dropped.

"With grain in our hands, there is no need to panic," said Premier Wen Jiabao. And officials from National Development and Reform Commission have reassured the public that "the international food price hike has a limited impact on China."

Nevertheless, the Chinese government has deemed food security of paramount importance and has imposed several measures to control staple food prices. True, there is no need to panic. But in the long run, China should never underestimate its potential for food problems.

Adjusting the pricing mechanism and fine-tuning incentives offer immediate remedies for the current international grain shock and an ultimate solution to ensure China's food security.

Why is China being spared during the current international food crisis? There are at least three reasons. First, four consecutive years of bumper grain harvests -- likely to be repeated this year -- have provided sufficient supply. Second, at home there has been no sharp increase in demand for grain. Third, the claim that "the Chinese can feed themselves" carries weight, as most grain storehouses are full.

Last but not least, the Chinese government's focus on the agriculture sector is paying off. China called off agriculture taxes at the turn of the century and increased subsidies for farmers. Recently, the State Council passed 10 new measures designed to support farming.

Nevertheless, the key to food price stability is to kick-start a positively reinforcing cycle of supply and demand for grains. In our view, even if a food crisis were to spur production, it would take some time to tame price hikes and fully resolve such a crisis. China should continue to be self-sufficient on grain supply, and allow the market's "invisible hand" to perform.

Currently, the government is selling reserve grains to stabilize prices. It's the right step to tackle the food crisis, but the tool must be used with caution. In fact, officials can raise the price based on the equilibrium of supply and demand. Higher prices will meet farmers' expectations and encourage them to grow and sell more grain, which will eventually increase supply.

Inflation risks have complicated the problem. Some worry higher grain prices will fan the flames of inflation, which is already serious. The reality is that China's excess money supply, which is a result of massive foreign reserves, is the root cause of inflation. Since fluctuating prices for staple foods are a result -- not a cause � of inflation, there is no need to worry that increasing grain prices will exacerbate inflation.

Another concern is that possible food price increases will affect the lives of China's middle- to low-income population. That's partly true. Decision-makers, however, have to weigh their options and choose the least harmful. The relative low prices that have been achieved by administrative controls are not sustainable. Mismatched supply and demand curves, once collapsed, can wreak havoc if prices erratically bounce to new heights, which would hurt households on tight budgets even more.

It would be feasible to raise food prices and subsidize low-income groups simultaneously. But policymakers should keep in mind that subsidies, when overdone, have the potential to drive up the money supply and add fuel to inflation.

The government wants to balance many goals: stabilizing food prices, containing inflation, furthering economic development, and ensuring basic living standards. However, food price controls can only buy time. To really solve the problem, we need deeper reforms.

To tackle inflation, the currency exchange mechanism should be changed to mop up excess liquidity. To guarantee food security, food price levels should truly reflect supply and demand, and become an accurate signal for farmers to produce, process and sell the fruits of their labor.

As China urbanizes and industrializes, people are consuming more calories and increasing the demand for grains. But the nation's stocks of arable land and water resources are dwindling. So, in addition to favorable agricultural policies, China should make good use of international and domestic markets to adjust supplies.

Meanwhile, the nation's grain sales system should be overhauled to better allocate resources. Also, it's necessary to kick out corrupt agricultural bureaucrats and punish them for illegal behavior, such as exaggerating grain reserve reports.

Grain, after all, is a commodity. Low food prices are not necessarily something to celebrate, and we should not be smug when hearing that the lowest international food prices are in China.

Expanding supplies requires obeying market rules. And it's worth bearing in mind that any Great Wall of Food Security can only be built by the hands of the country's 100 million farmers.