Jikun Huang, Jun Yang, Huanguang Qiu Center for Chinese Agricultural Policy (CCAP), CAS

1. Fighting Global Food Price Rises in the Developing World:The Response of China and Its Effect on Domestic and World Markets Jikun Huang, Jun Yang, Huanguang Qiu Center for Chinese Agricultural Policy (CCAP), CAS Scott Rozelle Stanford University

2. Food price (2005=100) in the selected countries

3. What is behind these price rises? Reports in the media … and briefs by policy analysts .. are confusing Biofuel boom… Rise of China Weak US dollar Oil price and increasing freight rates Crop failures

4. Global pressure on food prices and food supplies is causing rising concern in the world about the welfare and food security of many in developing countries … and is even being blamed for social and political unrest Page 4

5. To ease the mounting pressures and to avoid the damage that food crisis could bring to China’s economy, officials called for the use of a broad spectrum of policy measures to counteract the price rise. Many actions were immediately taken.

6. Questions and Overall Goals of This Presentation • What are the causes of the current rises in food prices? • Are the pressures for higher food prices being transmitted into developing countries (e.g., China)? • How are government’s responding? • Are the policy efforts to keep prices down effective? • What about the effect of these policies longer run on prices inside and outside of developing countries? Overall goal: • To try to help answer the questions raised above.

7. Rest of Presentation • The Threat—Rising Prices in World Food Markets and Their Causes • China’s Leaders Respond • Impacts of China’s Countermoves • Discussion and Policy Implications

8. The Genetic Revolution and real global cereal price index in 1905-2005 (All prices = 100 in 1960)

9. International Prices for Some Selected Commodities (price of January 2005=100, measured by US$)

10. Sources of international food price changes Source: Yang, Qiu, Huang, Rozelle (2008)

11. High food shares and integrated markets:threat of inflation and rising concerns • On average, food still accounts for a large share of China’s total expenditures: • 36% in urban and 43% in rural in 2006 • China’s agricultural market is highly integrated into world markets.

12. Nominal protection rates (%) in China, 1980-2005 In absence a response by government, rising price internationally could be expected to lead to higher prices domestically Source: Huang, Yu, Rozelle and Martin (2008)

13. China’s Leaders Respond • Recognizing the threat, China took a series of steps between in 2007 and 2008 to try to counter the rising prices.

14. Major policies: • Sell grain stocks to free market traders; • Eliminate VAT rebate (13%) on the key agricultural commodities; • Restrict the outflow of China’s own cereal; • Sign long terms futures and forward contracts with grain (and meat) exporting countries; • Impose fertilizer export tax levies: 30%-35 in Feb 2008 and then 100% after mid-May; • Subsidies and insurance to farmers raising sows • Tightened monetary policy; • Adjust biofuels policy: Big initial plans; second thoughts.

15. Impacts of China’s Countermoves • Rice, wheat and maize Prices (Have means to operate in the short run) • Soybean prices (No much policy measures available in short run) • Pork prices (Little traded due to SPS and other NTBs)

19. No any means to force down prices in the short run: No stock + about 60% domestic consumption is imported

21. Explaining the sources of price rises and effectiveness of China’s policies in 2005-2008 • Methodology • Scenarios

22. Modified GTAP-E model • Creating ethanol and diesel industry in the model • More detail agricultural commodities • Separating maize from coarse grain • Separating soybean from oilseeds • Adding the module to reflect the substitution between biofuel and gasoline • New extension: Taking into the by products of Biofuel (DDGs) into account

23. Scenario for 2005-2008 • Reference scenario (RF): • No changes in world oil price in 2005-2008 • No expansion in world biofuel in 2005-2008 • Two alternative scenarios: • Actual world oil price in 2005-2008 • Actual world oil price + actual world biofuel production

24. Real crude oil prices(US$/barrel in real 2005 price)

25. Current and Projected Total Biofuels (bioethanol and biodiesel) Production in the Next 30 Years. Source: Msangi, et al., 2007

27. Simulated China’s food prices under difference scenarios in 2005-2008 (2005=100) Wheat Rice Maize Soybean

28. The combined impact of all of China’s policy responses (and other factors except for oil price and biofuels) are captured by the residual.

29. Discussion and Policy Implications (1) • China’s counter measures have helped keeping domestic grain prices from rising as they have on international markets and achieved its national grain security in the recent years. • However, this does not mean that such a set of policies is optimal for the world. When more than 30 countries, in addition to China, levied export assessments or prohibited traders from exporting from domestic markets into international markets, there seem no good global solution in the short run unless there would be a strong global/collection action.

30. Discussion and Policy Implications (2) • Two further questions: • Can grain prices be suppressed indefinitely? Answer: No. Indeed farmers are shifting production from grain to edible oil crops. In the longer run it is inevitable that China will confront great pressures of rising grain price in near future. • Has China’s growth caused the recent rising food prices on international markets?

31. China has been a net food exporter duringits rapid growing period in the past 3 decadesAgricultural export and import (billion US$), 1980-2006

32. China’s net export of rice, wheat and maize in 2005-2007 (1000 tons) This means that at exactly the time that world food prices were taking off, China was actually increasing shipments into international markets.

33. China’s net import soybean in 2005-2007 (1000 tons) Only in soybeans, its imports did rise. Surely, a 15 percent rise between 2005 and 2007 could not cause the world food crisis.

34. Real cereal price index (All prices = 100 in 1960) Biofuels will cause rise in food prices(unprecedented in last 100+ years), it could have huge effect on many parts of the population … Biofuel era ? Business as usual

35. Discussion and Policy Implications (3) • Needs to prepare to accept food price rises—as long as they are in an acceptable range. As agricultural prices rise, however, farmers will be stimulated to increase production. China’s current policies to limit the rise of food prices will not work in the long run. • The fundamental method to control rising food prices and maintain national food security will be realized by all efforts that will enhance investments in the agricultural sector.

36. Discussion and Policy Implications (4) • Rising and sustained high food price should be looked on as an opportunity to stimulate the rural economy. They will help foster a strong agricultural sector. • It should be recognized that it is inevitable that there will be some consumers that get hurt. It is essential to construct (enhance) a social security system to provide the necessary support for vulnerable citizens.