Center

Keep a close watch on rising grain price

By Shi Weigan (China Daily)
Updated: 2006-12-16 10:16

The rising prices of wheat and rice futures on both the domestic and overseas markets seem to have directly caused this, but a more fundamental reason is that the overseasprivate equityfunds have switched their investment targets into agricultural produce.
On the international market, precious metals, energy products and agricultural produce are all traded in huge volumes, both in spot commodities and futures. A "China factor" exists on both markets, and especially on the futures market: The commodities China imports would usually see a price increase while the price of China exports would often drop.

Traditionally, China has small demand for imported corn and wheat, so it has little impact on the demand and supply of agricultural produce on the world market. But the prices of soybean and cotton, which China usually buys a lot from other countries, often fluctuate according to demand from China.

The prices of corn and wheat began going up on the international futures market in September when petrol prices slumped dramatically. Investment funds holding petroleum futures had to find other investment targets.

Metals and energy products have been weak in recent years, while the US dollar is not ideal for investment at the moment. So the futures of agricultural produce have inevitably become sought after by international investment funds. It is therefore little wonder their prices keep going up.

This opinion could find support from the statistics of futures exchanges in New York as well as other places. The futures of gold and petroleum have seen a drop in prices since September, while more of the agricultural produce futures were being held.

For quite some time, investors on the international and domestic markets have had extra liquidity. Put simply, they have too much money, while the projects worth putting money into are too few.

As a result, a huge sum of money is put into limited numbers of investment products, pushing up their prices one after another.

It is a common prediction by analysts that agricultural produce would become hot when metal and energy products weakened. Some even forecast agricultural produce to become bullish in the next two to three years.

If this is the case, what we are seeing now is only the beginning.

The wheat auctions have lowered the price for the moment, but if the wheat futures continue to be priced high on the world market, the government's auction efforts may no longer work.

China has had considerable negative influences on its economy during the continual price rise of energy products and metals. With prices of agricultural produce set to continue going up, this is a situation that requires the utmost attention.