Editor's note: The Market Economy Institute of the State Council Development Research Center recently released a series of reports on China's market situation. The following two stories are sections of the reports focusing on the country's grain production and energy situation this year.
China's grain prices will remain basically stable this year, although the overall price level is expected to be higher than that of last year.
There is little possibility that the grain price will experience major fluctuations, and grain demand will remain stable this year.
If demand grows at an annual rate of 0.8 percent, China will require 494 billion kilograms of grain this year.
The government will continue to carry out a series of measures to support grain production.
Last year's price rise on the domestic market will also encourage farmers to plant more grain.
Grain output in 2005 will be higher than it was last year.
But the limited supply of land will make it difficult for the country to achieve grain production of 480 billion kilograms.
There will be a gap of 14 billion kilograms, even if the grain demand stands at 494 billion kilograms and production reaches 480 billion kilograms.
As a result, the grain price will not experience any significant falls.
On the other hand, the narrowing gap between grain demand and supply due to increased grain production will help prevent prices from rising too much.
According to a prediction by the United Nations Food and Agriculture Organization, global grain production for 2004 and 2005 will grow 8.4 percent compared with 2003 and 2004.
Grain stocks will increase for the first time in five years.
Impacted by the increase in global grain production, grain prices on the international market will be basically stable or drop slightly.
Grain prices on the international market are currently close to those on the domestic market.
As a result, the price of imported grain is mainly determined by transportation costs.
Rapid global economic development caused international ocean freight costs to experience significant growth last year.
The global economy will continue to grow at a relatively rapid rate this year.
The United Nations has predicted that the global economy will grow 3.2 percent this year.
Manufacturing and the mining will continue to maintain their strong momentum, while world trade will grow 7.2 percent.
Demand for ocean freight will also increase this year.
Ocean freight fees will be stable or rise slightly.
This will increase the cost of imported grain and provide a strong support for domestic grain prices.
Insufficient rail freight capacity and the increasing costs of road freight will also be factors in this year's higher domestic grain prices.
The domestic grain stock mainly concentrates on a few major production areas.
Grain stock in Northeast China alone accounts for a majority of the nation's total.
But there are insufficient stocks in non-grain producing areas.
Big gaps exist between supply and demand in southern China.
The imbalance between demand and supply in different areas requires that a large amount of grain to be transported around the country.
Earlier figures suggest that between 55 million and 82 million tons of grain are transported by train every year.
But this figure reached 100 million tons in 2003 and 2004.
More than 60 percent of grain is transported by road every year.
Grain transportation from the major production areas to non-production areas will increase this year.
Impacted by periodic factors, grain prices in 2005 will fluctuate in tandem.
Summer grain usually comes on the market in June and July.
However, grain consumption is at a low ebb at that time.
Meanwhile, food processing companies are normally unwilling to purchase a large amount of grain for stocks in June and July, due to the higher cost in the summer.
Grain prices will be at a low ebb over these two months, with prices picking up in August and September, because processing companies will be preparing for the Mid-Autumn Festival and National Day holidays.
Grain prices will drop again in October and November, due to low consumption demand and the selling of autumn grain. But they begin to pick up again in the following two months.
While the country's grain production is not enough to satisfy demand, there are also some structural problems.
Although there is a sufficient supply of corn, there is not enough rice.
Rice production will continue to fall short of supply this year and stocks will drop.
The country also cannot depend on imports to increase its rice supply, because there are only about 20 billion kilograms on sale on the international market.
Rice price will therefore remain strong this year.
However, wheat and corn prices will become weak, due to increasing supplies both domestically and internationally.
From the short-term point of view, the government should attach the greatest importance to increasing farmers' enthusiasm to plant crops, safeguarding the areas for planting grain and increasing the grain output.
The government should take measures to stabilize grain prices to ensure that farmer's income are raised.
From the medium-term perspective, the government should improve the protective system for grain prices.
A direct subsidy mechanism should be established for farmers planting grain.
A coordination mechanism should also be established to increase support for non-grain production areas.
From the long-term point of view, agriculture remains a weak link in the country's economic development.
A mechanism to encourage increased grain production and higher farmers' income has not been established.
The government should improve its macro-control system on grain production to let the market play its role.
(China Daily February 4, 2005)