The government should try to set up a sound and standardized agricultural product trading market as soon as possible to check speculation, ensure stability of prices and protect the interests of consumers and farmers.

Recently, garlic - a common staple in Chinese food - has become the target of speculative capital. Partly due to the belief that the pungent bulb can help ward off A(H1N1) influenza, garlic prices have rocketed more than 10-fold in recent months. The rush to buy has been exacerbated by profiteering businessmen in Wenzhou, a booming city in Zhejiang province. Wenzhou businessmen have long been well known for their role in pushing up real estate prices across the country. It is reported some have become millionaires because of speculation in this round of panic garlic buying.

On the surface, the latest drastic rise in garlic prices has been largely driven by some accidental factors, such as the widespread outbreak of H1NI influenza, but it fully exposes the long-standing absence in China of a scientific pricing mechanism for agricultural products. Owing to an asymmetrical information disclosure mechanism, China's agricultural products, including garlic, have long had difficulty in freeing themselves from the passive "bumper harvest-declining prices/dwindling planting acreage-flying prices" cycle, during which farmers are not in rhythm with the market.

More important, as a large exporter of agricultural products, the chaotic domestic pricing system makes China unable to provide domestic farmers with much-needed direction in international trading. Statistics from the United Nations Food and Agriculture Organization show that China's garlic exports accounted for as high as 90 percent of the world garlic trade volume in recent years. However, due to information asymmetry and their failure to unite as a cohesive group, China's garlic traders have failed to dictate garlic pricing in international markets and have thus been at a disadvantageous position in negotiations with foreign dealers. For example, the export price of high-quality Chinese garlic is only $0.6-0.9 per kilogram, compared with $1.5 per kilogram sold at US supermarkets. In contrast, California-grown garlic is sold as high as $10 per kilogram in the same market.

Such a large price divide between Chinese and US garlic indicates that China's garlic exports are heavily undervalued and there are seriously uneven pricing mechanisms in the two countries.

Contrary to China's chaotic and speculation-ridden agricultural product pricing, the US boasts the world's largest agricultural product futures market and enjoys a strong advantage in international pricing.

In fact, in the early part of the 19th century, prices of grains and other agricultural products in the US also underwent drastic fluctuations because of disorderly transactions. To change this, US grain dealers decided to set up the Chicago Board of Trade in 1848 to carry out futures trading of agricultural products. The transaction model has since been carried forward in the country, effectively helping stabilize agricultural product prices.

The US experience serves as clinching evidence for China to have substantial innovation in its commodities trading model and push for the simultaneous development of futures and spot markets to reverse the long-standing disorder in the domestic market.

Jinxiang, a county in Shandong province that has long been in the heartland of domestic garlic planting, has set up an electronic center for garlic trade, which means the country's first garlic futures transaction structure has taken initial shape. However, this year's skyrocketing garlic prices also indicate that the center has turned into a platform for speculative transactions instead of checking speculation. The underlying reason is that the center has not extricated itself from market temptations. That is also an indication that although similar agricultural product trading platforms should be popularized in other places, the country should try to expand items of regular futures transactions and bring domestic trading under standardized and binding institutions.

In addition, relevant State departments should set up an alliance of agricultural product trading organizations in a bid to stop farmers' interests from being compromised by asymmetric information and to help domestic traders gain a pricing edge in the international market.

The author is an anchor with Shanghai-based China Business Network.

(China Daily 11/27/2009 page8)