The price of agricultural products in China may fall or affect global prices.

Japanese media reported on Sept. 21 that according to the Economist's Big Mac index, the value of China's yuan still seems to be undervalued. However, the price of the ingredients used to make the hamburger presents a very different picture, that is, the high delivery price of Chinese agricultural products.

Global markets are likely to see more downward pressure on agricultural prices as China's efforts to support agriculture are hampered, the Japanese Economic Review website reported on September 15.

The report said that in July, the price of a Chinese giant in dollars was 42% cheaper than that in the United States. The wholesale price of Chinese beef is twice that of the international market. Farm delivery prices for wheat, corn, rice and pigs in China are also 75 to 90 per cent higher than in other major producers.

China's agricultural market has been unstable after years of failed efforts to combat deflation that has hurt global agricultural prices. The recent 4% devaluation of the renminbi has narrowed this huge gap, but there is still strong downward pressure on China's agricultural products to force the gap to disappear. The prices of some agricultural products have fallen sharply, while officials are trying to raise the prices of others.

Artificially stimulated price

The seeds of the crisis were sown when China launched a huge bank lending stimulus in 2009 to cushion its domestic economy from the global financial crisis, the report said. Soaring wages attracted migrant workers from the countryside.

With the decline of interest in farming, "hollow villages" that have lost their prime labor force have become everywhere. The money remitted by migrant workers has injected an unprecedented amount of money into rural areas. The price of raw materials for agriculture, the cost of hiring people, and land rents have all risen.

The stimulus money went into the agricultural market. Corn, garlic, ginger and chili prices soared strangely in 2010 as investors used cash earned from property deals and equity acquisitions to bet on rising agricultural prices. The government cracked down on speculators, but also tolerated inflation by raising agricultural support prices every year. The surge in meat prices in 2011 and the rise in agricultural prices are recognized as a reality.

Let the market play a role

The government was initially worried that falling prices would prompt farmers to give up their land as the agricultural cost structure expanded, the report said. Now, the government is letting it go.

Officials explain that they are following the Communist Party's new belief that markets should be allowed to play a "decisive role" in the allocation of resources, but increasing pressure from soaring reserves and imports is likely to be the real driving force.

Guaranteed prices for cotton and soybeans were cancelled in 2014, and price support for rapeseed was cancelled this year. According to the Ministry of Agriculture, the price of cotton and rapeseed is down 30% from last year, and the price of soybeans is down 13%. The prices of other agricultural products are also falling due to weak demand and a sharp fall in global prices.

China is still trying to support wheat and rice prices because they are seen as key to food security, the report said. The focus is now on corn, the largest crop in China. Most observers expect the government to lower the guaranteed price for the upcoming harvest season to avoid adding to already huge inventories. However, price cuts would also reduce the income of millions of farmers and lead to a huge devaluation of the government's corn reserves.

The report said that at a time of careful consideration by the government, the expectation of a fall in market prices has been formed. The price of early corn harvested in August is lower than that of last year, and some grain depots sell last year's corn at a discount to make room for new corn. China's January corn futures contract traded about 15% lower than the spot price, heralding expectations of a fall in prices.

Danger of spillover

There is a danger that the chaos in China's agricultural market will have an impact, putting more downward pressure on international prices, the report said. So far, China has eased deflationary pressures by maintaining large agricultural reserves and allowing record imports of soybeans, grains and meat. But as it reaches a tipping point in its determination to avoid falling agricultural prices, imports are likely to contract and officials are likely to sell inventory reserves at all costs.

This has happened to cotton. China's cotton imports fell 30 per cent in the first half of 2015 compared with the same period a year earlier. Import quotas have been cut to very little in order to digest the ballooning reserves. Similarly, the expected fall in corn prices is expected to prevent imports of sorghum, barley and brewing grains used by feed processors as substitutes for Chinese corn.

Signs of danger can also be seen in other agricultural products. The price of imported milk powder has plummeted this year after Chinese companies built up too much inventory in 2014. However, imports of hay, breeder and bull semen have increased as small family farms have been replaced by large factory-style dairy farms.

Driven by low prices in the international market, China has been importing soybeans at a record pace, the report said. But the corresponding decline in the price of final products made from soybeans in the Chinese market may slow the increase in imports.

There are a few bright spots for global producers, especially meat. China's demand for meat seems encouraging. High beef prices, rampant smuggling and idle slaughterhouses have prompted the government to loosen controls on beef imports. Officials have reached agreements with several countries to import beef cattle and beef.

Although demand is tepid, pork imports are expected to increase due to rising prices. China's pig producers have lost tens of millions of live pigs in the past year, straining supplies this summer and causing prices to rise. A new industrial park that has been specializing in imported pork recently opened in Henan to serve Shuanghui Group. Shuanghui is now the owner of Smithfield Foods, an American meat producer.

Given that there are so many changing factors, many of which are hidden from the public eye, China's role in the agricultural market seems more uncertain than ever, the report said.