Quake Pushes China on Food

China’s government is fighting to curb food prices in the aftermath of the Sichuan earthquake. Economists argue the country should keep markets open to prevent shortages rather than impose new price controls.

China-quake-food-305.jpg Chinese soldiers load food for earthquake survivors after a 7.8 magnitude earthquake hit the town of Hanwang in Sichuan Province, on May 13, 2008.
China is struggling to contain rising food prices amid twin natural disasters in the region this month.

The human toll is still being tallied from the earthquake that shook China’s Sichuan province on May 12 and the cyclone that struck Burma only nine days before. According to government estimates, at least 50,000 have died in China and over 43,000 in Burma. The economic costs could take months to emerge.

The two calamities have racked the region as it fights the effects of soaring food prices. Even before the emergencies, world rice prices had nearly tripled this year due to high demand and energy costs, according to United Nations and market reports. In Burma, rice prices have jumped 50 percent since the cyclone despite international efforts to supply aid, the Food and Agricultural Organization (FAO) said.

The earthquake’s effect on food prices in China is uncertain because the government was already grappling with inflation and policy problems before the shock hit. On the day of the quake, the government announced that inflation in April had climbed at an annualized 8.5 rate, driven by a 22 percent increase in food costs. Meat prices were up nearly 48 percent.

Price controls

Economists have been trying to persuade China’s government to drop the price controls it imposed in January, arguing that the curbs have only encouraged hoarding, discouraged production and made matters worse. So far, whether officials are getting the message that non-market measures may aggravate shortages is unclear. Instead, the government has been adding more controls. 

On May 8, the National Development and Reform Commission (NDRC) slapped new price ceilings on fertilizer and agricultural chemicals in an attempt to keep costs down for farmers, state media reported. In addition to limiting markups, the NDRC is trying to freeze fertilizer import prices, a move that may only drive manufacturers to sell their products elsewhere.

“You solve the problem for farmers but now you create a new problem for fertilizer manufacturers because they now face a fixed output price and rising input prices,” said Nicholas Minot, senior research fellow at the International Food Policy Research Institute in Washington, in an interview. “It doesn’t really solve the problem. It just pushes it back one level.” 

Ohio State University agricultural economist Luther Tweeten agreed that more price restrictions will only serve to reduce output.

 “If they put controls on the price of fertilizer, it means they’re going to get less supplies,” Tweeten told RFA. “All these things contribute to worsening the situation rather than making it easier.” 

Bid to end hoarding

On May 14, the NDRC ordered local officials to control food prices in Sichuan, Gansu, and Shaanxi provinces as well as Chongqing municipality in an effort to halt hoarding and speculation, Xinhua reported. Such moves usually increase hoarding during times of tight supply. 

Economists have joined the World Bank in arguing that countries should deal with the global price crisis by trusting open markets rather than blocking exports or imposing price curbs. Minot said that China’s non-market practices may lead to a spiral of problems.

“In the longer run, they’re creating a situation where people expect the government to take responsibility for prices, and consumers will be demanding that price-setting be extended to other commodities,” he said. “The government will essentially be responsible for changes in price and blamed for changes in price over time.” 

Luther Tweeten said the supply and demand forces of the world food market are self-correcting, if they are given free rein.

“We would like China to help keep markets open rather than try to control markets. The secret to being able to deal with world food problems is to share through markets,” he said.

Impact of disasters 

Tweeten said that the world variation in food output is only about 1 percent from year to year, but changes within any one country can be sudden and huge during disasters. By keeping markets open, countries allow international supplies to respond and adjust quickly.

“If we all share together through markets and the variation in world output, it’s not much of a burden on anybody,” said Tweeten. “But when countries start to put on price controls, rationing or whatever, that messes up the whole system and makes life more difficult.”

China’s government has sent some reassuring signals that the earthquake will not create added pressure on food prices. 

No “marked impact” on commodities markets is expected, the state-owned National Grain and Oils Information Center said in a report this week. But Sichuan accounts for 6.1 percent of China’s agricultural output, including 7.3 percent of its rice and 11.6 percent of hog production, according to state media.

Some food vendors in the quake zone have been fined after doubling their prices, Xinhua reported. The government responded with a similar crackdown when vendors raised prices during heavy snowstorms in January. 

Original reporting by Michael Lelyveld in Boston.


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