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Peter Fuhrman
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Chairman, Founder and Chief Executive Officer at China First Capital (www.chinafirstcapital.com) , China-focused international investment bank and advisory firm for private capital markets and M&A transactions in China. China First Capital has a disciplined focus on -- and strives for a... More
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  • Good News About China’s Food Price Inflation: Chinese Peasants’ Time of Unprecedented Plenty 0 comments
    Dec 14, 2010 7:32 PM

     Food prices in China, as everyone inside and outside the country now knows, are rising fast, in some cases by over 30% during 2010. The Chinese government puts some of the blame on speculators who are said to be buying large quantities of fresh food, holding it off the market and then profiting from price increases. There seems to be some evidence of this.

    There’s no short-term fix for these price increases. The Chinese government has released for sale some of its food stocks. It is also urging peasants, and local cadres who govern rural China, to make sure more food is grown next year to increase supplies. The peasants probably won’t need any such encouragement.

    The increases this year in food prices have done more, in a shorter time, to lift income levels for many of China’s 600 million peasants than any other single measure taken over the last 30 years.

    There has never been a  better time, in China’s long agrarian history, to be a peasant. Fundamentally, food price inflation in China represents a colossal transfer of wealth from China’s more affluent urban areas to the rural hinterland where half of China’s population still lives.

    If this lasts, it will narrow the gap in living standards and income levels between China’s cities and countryside. This is one of the overarching goals of the Chinese government. And yet, no one is applauding.

    Instead, the Chinese central government has reacted with some alarm to the recent price increases. It knows that higher food prices are putting the squeeze on city-dwellers, including, of course, those in the capital Beijing and other major cities. In China, communist power originally took hold in the countryside, and a lot of party doctrine still speaks about its roots among the peasantry. But, political power today is firmly rooted in urban areas.  China’s political, economic and cultural elite all live in major cities, as do most of their friends and family. So, price rises effect this group directly.

    When apples, the staple autumn fruit in most of China,  almost double in price, as they have this year, political leaders will soon hear about it. The fact that China’s apple farmers now have a lot more money in their pockets is not necessarily part of the political calculus.

    Yet, it is undeniable that the fastest and most effective way to raise peasant living standards and real incomes is higher farm prices that don’t fuel overall inflation. There are signs that’s now the case, that the only area of significant double-digit inflation is in food prices. If so, this is unquestionably the best time in Chinese history to be tilling the land.

    How long will this last? Of course, commonly, a spike in food prices leads to overall price levels rising as well. This can erode, or even wipe out,  the rise in income for farmers from higher food prices. Also, today’s high prices will certainly lead to more land being cultivated next year, as farmers chase the fat profits from today’s prices.

    I was just in Jiangsu Province, in central China, and it seemed like most of the farmland is under plastic cover this winter, allowing peasants to keep growing and selling vegetables. Supply goes up, price comes down. Eventually.

    How high are food prices at present? Looking around my local covered market, prices in the stalls for many fruits and vegetables are now as higher or higher than prices commonly seen in the US. Looking just at autumn fruit, apples are about $1 a pound; navel oranges around 60 cents; clementines about $1 a pound; bananas are 50 cents a pound. Meat prices have risen sharply.

    Pork remains comparatively cheap at about $2 a pound, but chicken is quite a bit higher here. Garlic and ginger, the two fundamental staples of all Chinese cooking, are both at all-time highs of around $1 a pound.

    So far, in my experience, higher food prices haven’t yet fed through to higher prices at restaurants, noodle shops or even the outdoor steamer wagon where I buy corn-on-the-cob and potatoes as snacks. This means restaurant margins must be hurting. One notable exception, McDonalds in China. They recently announced price increases to counter effect of rising raw material costs.  With about 900 restaurants in China, all in larger cities, McDonalds feeds a lot of people.

    Wages are also rising very steeply in urban China, as is household wealth for anyone who owns property. This seems to be allowing most urban Chinese to absorb higher food costs without much of a fuss.

    In other words, just about everyone across this country of 1.4 billion is doing much better, year by year. For now, the 600 million peasants are doing best of all. Viewed across the breadth of China’s long history, no less than across the last 30 years of unparalleled economic progress, this is a singularly welcome development.

    .



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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