Price Controls, Transportation Cost, and Agricultural Markets in China

For many things, prices are controlled in China. This includes gasoline and other petroleum products. I believe that without a free float Yuan the Chinese government, namely the National Development and Reform Commission, will have an increasingly difficult time in determining the right price to set. In 2008 when petroleum prices reached $147/barrel, there were reports of gasoline shortages within the country, a sure sign that price controls were in place.

There are many difficulties regarding price controls. One big issue is that prices tend to increase in jumps unlike free market conditions where prices rise gradually.

Chinese officials recognize this effect as evidence by the following WSJ report:

"To prevent a 'chain reaction' of price effects, the NDRC said it will continue to subsidize farmers, the fishery and the forestry, and that public-transportation prices won't be raised. The NDRC said Thursday that it will launch a price-inspection campaign in rural areas in a bid to keep agricultural product prices at reasonable levels and boost farm output."

Hong, Shen, 2011. China raises gasoline, diesel prices. The Wall Street Journal, Feb. 21.

The article goes on to state:

"The Ministry of Commerce measure would aim to combat 'abnormal' market developments such as serious shortages of key goods including meat, vegetables, sugar, salt and dairy products, and to counter large-scale panic buying and price surges due to natural disasters or accidents, according to a draft published Thursday on a website of the State Council, China's cabinet."

Transportation is an important cost for fruits, vegetables, and other agricultural products. As petroleum prices go up along with inflation triggered by short crops, I think the view that panic could spread out is a reasonable expectation.

For these reasons, I continue to believe that marketing efficiency for agricultural products is extremely important. Efforts like Eden's Bowl, Inc. are a good thing to make specialty crop agricultural markets more efficient.

I will be writing more about Eden's Bowl, Inc. during the next few weeks.