Food Price Bubbles and Government Intervention : Is China Different ?

The last decade has witnessed different price trajectories in the international and Chinese agricultural commodity markets. This paper compares and contrasts these dynamic patterns between markets from the perspective of price bubbles. A newly developed right-tailed unit root testing procedure is applied to detect price bubbles in the CBOT and Chinese agricultural futures market during the period 2005-2014. Results show that Chinese markets experienced less prominent speculative bubbles than the international markets for its high self-sufficiency commodities (wheat and corn), but not for low self-sufficiency commodities (soybean). The difference in price behavior is attributed to differences in market intelligence, and to Chinese agricultural policies related to trade as well as domestic government policies. Besides, it discusses challenges to the sustainability of the stable price trajectory in Chinese markets. Keyword: food; price bubble; government intervention; China JEL: D84, G12, G13, G14, Q14, Q18  This research was supported by the Major Program of National Social Science Foundation of China (Project No. 12&ZD048) and the Earmarked Fund for Modern Agro-industry Technology Research System (Project No. NYCYTX-35) and the China Scholarship Council. Chongguang Li is the corresponding author, email: [email protected]. The authors also thank S.P. Shi, X.L. Etienne and L. Gutierrez for various support. 2 INTRODUCTION Large swings in food prices occurred in the world market in last decade, which brought complex effects on farmers, consumers and market participants (Chavas et al., 2014). The last decade also witnessed different price trajectories in the international and Chinese food commodity market. International food prices approached dizzying heights in 2008 and 2010, followed by rapid collapses. Using January, 2005 as base prices (set equal to 100), the futures price indices for wheat, corn and soybean on the Chicago Board of Trade (CBOT) reached respectively 309, 265 and 194 in 2008, but fell back to 221, 170 and 128 in January 2009 (see Figure 1). In China, food prices followed different patterns. For wheat and corn, Chinese prices increased smoothly during the world price boom and bust. But Chinese prices for soybean also experienced large volatility (see Figure 1). This indicates different dynamic price patterns both across commodities and across countries. What is the nature of these differences? And what is their cause? This paper investigates these issues and attempts to answer these questions. Figure 1. Daily CBOT and Chinese futures price indices: January, 2005 to December, 2014 (January, 2005 = 100)