Attachments
1. Background
China's(1) sharply increased food inflation in the last year shares a number of underlying causes with global food inflation, but is also distinct from it in some key respects. Sharply increasing global fuel prices have been a key factor in both Chinese and world food price increases, both because of their direct impact on prices through sharply higher production costs for farmers, and indirectly through the impact on grain markets of the development of grain-based fuel production technologies that are economical substitutes for petroleum products at current high world oil prices. A recent World Bank study has suggested that these two factors are responsible for approximately 75% of the surge in world food prices(2). Chinese food inflation has also been stimulated, in part, by these trends. But Chinese food inflation in the last 12 months has been primarily driven by meat prices, with the price of pork increasing 71 percent since mid-2007, and vegetable oil prices, up 40 percent. The increase in vegetable oil prices is a direct result of the world food price increases, as China is the world's leading importer of soybeans and soybean prices are at record levels. The increase in the price of pork is also somewhat related to oil price increases, as production costs, and feed costs, were stimulated by world trends. However pork price fluctuations in China are primarily a result of supply issues: the very low pork price in 2006 led to cut backs in production; the outbreak of blue ear disease in 2007 further reduced pork supply. The prices of staple grains have also risen, but at a considerably lower rate, with the Producer's Price Index values of wheat, rice and corn up by 8.65 percent, 3.48 percent and 8.91 percent, respectively, in the year up to the end of March. The average grain price in the CPI was up by 7.4 percent, year on year, as of the end of April 2008.
For the purposes of this note it is most important to recognize that:
a) China's grain markets have not yet experienced a rapid increase in prices comparable to the recent surge in global cereal prices. Cereal prices in China are currently quite insulated from global market trends, due to an emphasis in Chinese grain policy on self-sufficiency and price stability; and
b) Chinese food inflation is largely the result of specific issues in the meat and vegetable oil markets, quite distinct from global food inflation trends.