What affects the upside-down of grain prices in China?

The phenomenon of grain prices upside down at home and abroad has become one of the hot topics in government departments and agricultural economy recently. In July this year, Chen Xiwen, deputy head of the Central Rural work leading Group and director of the office, mentioned that "China is facing unprecedented changes since reform and opening up." the "change" here refers to the background of the continuous upside-down of grain prices at home and abroad. the impact of grain import pressure on domestic grain prices.

Research data show that the upside-down of grain prices has gradually increased in recent years. The soybean price spread widened significantly in April 2014 and peaked in September rising from $178.1 / tonne to $414.4 / tonne before falling back to about $340 / tonne and has remained so far. The corn price gap also rose by 73.9% in April-September 2014, from $160.6 / ton to $278.3 / tonne, and fell sharply to $161.3 / tonne in July-November 2015. The wheat price spread also showed an increasing trend at the end of 2012, especially from US $81.20 / ton to US $193.3 / ton from May to September 2014, and remained around US $150 / ton by November 2015. The fluctuation of the price difference between indica rice and japonica rice at home and abroad is very similar: after a year of continuous growth since May 2014, the price difference between indica rice and japonica rice reached its peak, with indica rice at US $272.8 / ton and japonica rice at US $427.6 / ton. by the end of September this year, the two decreased by 88.2% and 75.2%, respectively, but expanded by 17.3% and 22.2% respectively in the following two months.

The widening price gap has stimulated grain imports and increased grain supply in the domestic market, thus affecting domestic grain prices. From the perspective of international economy, the factors that affect the future trend of price difference lie in the transmission effect of international grain prices and the trend of exchange rate.

First of all, the decline in international crude oil prices leads to a drop in international grain prices, while relatively low import prices have a transmission effect on domestic grain prices. With the development of bioenergy, the international grain price is related to the crude oil price. On the one hand, international grain prices continue to decline, while domestic grain prices remain relatively stable, which directly leads to the expansion of grain price differences at home and abroad. Data show that from June 2014 to October 2015, the international price of crude oil fell from US $105.7 per barrel to US $44.60 per barrel, a decrease of 57.8 per cent. At the same time, international soybean prices fell 35.5% from $528.4 / ton to $330.4 / ton, while international corn prices fell 16.2% from $174.4 / ton to $149.5 / tonne. International wheat prices fell 16.2% from $268.8 / ton to $225.3 / ton. International rice prices fell 18.7 per cent from US $536.1 per ton to US $435.6 per ton.

Before August 2015, domestic grain prices were basically stable, in which soybeans were long dependent on imports, and prices were transmitted by the decline in international soybean prices by 10.3%, while the prices of corn, wheat and indica rice decreased by 6.1%, 6.5% and 2.2%, respectively. Japonica rice prices not only did not decrease, but increased by 3.0%. At present, international grain prices have fallen back to the level before the 2007-2008 grain price crisis. however, in order to increase farmers' income by raising grain prices, domestic grain prices are basically in a slow growth trend. this makes domestic grain prices higher than international prices. Under the premise that there are no significant fluctuations in the international grain supply in the future, the main constraint to the rebound of grain prices is whether the price of crude oil can rebound. The low price of international crude oil reflects the political game between Russia, the United States and countries in the Middle East. These oil exporters have spent huge opportunity costs, but they are increasingly nervous about the affordability of low-priced crude oil, but it is not clear when the price of crude oil will hit bottom. As a non-renewable energy, the price of crude oil has been rising for a long time, and international grain prices will rebound at that time, thus reducing the gap between domestic and foreign grain prices.

Second, the recent devaluation of the RMB has narrowed the grain price gap at home and abroad. From 2007 to 2008, the reference rate of the RMB exchange rate fell from 7.7 to about 6.8, and after more than two years of stability, it fell to about 6.1 in late 2013. In August 2015, the RMB exchange rate suddenly rose 4.6%, from 6.11 yuan to 6.39 yuan to the dollar. It is estimated that the grain price difference reduction effects brought by this factor are 6.79% for soybean, 8.95% for corn, 6.16% for wheat, 8.60% for japonica rice, and 12.86% for indica rice. It is worth noting that the appreciation effect of RMB joining the Special drawing Rights (SDR) program and the devaluation effect of RMB brought about by the Fed's interest rate increase plan will also further affect the price differences between domestic and foreign grain in the future.