by Shae Smith (Money Morning)
Forget about the supposed gold bubble. Ignore the growing property bubble, and don’t worry yourself about the potential commodity bubble if Dr. B.S. Bernanke – yes, those are his initials – gets his way.
There’s a bigger bubble brewing. This one is in bulbs. But not light bulbs. And not tulip bulbs either…
Because this one’s not in the Netherlands, it’s in China. In fact, talk of this bubble began long ago.
"Garlic prices have increased fifteen fold in China in under a year because Chinese investors are said to be attempting to create an artificial shortage and drive up prices."
That was written over twelve months ago. But it’s truer now that it was back then.
How did the Chinese end up buying garlic as a speculative investment?
By the way, I’m serious. This isn’t some kind of elaborate analogy… China has created an asset bubble in garlic!
Well, first you have to go back a bit as the 2008 planting season was about to begin.
Farmers, sick of the increasingly low prices for garlic – about 1 Yuan (AUD$0.15) a kilo – decided to ditch the garlic crops for something that had a more attractive price, like corn or rice, which is also ‘price controlled’ by the government.
To the farmer, this made a commodity like corn, much more attractive, knowing that he would always get the same price for his crop, and not risk out on losing money on garlic plantations that attracted very little return. At one point, the price of garlic fell as low as 0.08 Yuan (AUD$0.012) per kilo.
Then along came Swine flu in 2009, and that changed everything.
You see, traditional Chinese medicine believes that garlic has medicinal use, and when Swine flu was invading our vocabulary this started to boost the demand for garlic. But because of the small crops that were planted in 2008, there wasn’t a lot of stuff to go around.
Which is partly to blame for the shortage today.
At first, officials had blamed the shortage on bad weather and farmers hoarding what little supply they had, but as the swine flu scare worsened, the price started to sky rocket.
By the end of 2009 the price for a kilo of garlic was 60% higher than the year before.
In fact, during this period, you’d find many articles like this one, stating how ‘Garlic beats gold as an investment’.
Because many food commodities are price controlled in China, garlic, which isn’t, started to attract speculators into the market.
But all this did was drive the price higher.
Right now, China is the world’s largest exporter of garlic. They export more than 1.5 million tonnes each year.
However, it greatly depends on who you listen to as to whether the price of garlic is sustainable at these new highs of about 14 Yuan (AUD$2.13) per kilo.
Firstly, you have mostly market speculators taking advantage of farmers without access to a wide range of information. Most farmers are still only receiving 1 – 1.5 Yuan per kilo for garlic, as speculators hoard the supply and release only small quantities to the market at a time, keeping the price elevated and demand high.
That being said, the farmers are still averaging three times more income from garlic this year than last year.
But the problem is, even though there’s a shortage of available garlic, many farmers are reluctant to plant bigger crops. The reason? They simply can’t afford the higher price of the seeds, and they don’t want to be left with goods they can’t sell.
Then you have Yi Xianrong, a researcher for the Chinese Academy of Social Sciences who has said that the garlic market ‘...is cyclical. Price are short term, and they will fall again before long.’ He estimates that this is just part of a three year cycle and prices will return to 1.5 – 2 Yuan per kilo soon.
However, one of the biggest problems facing the garlic market isn’t the speculators, but the Chinese government.
Many commodities, including agricultural ones are price controlled by the government.
Talk has already begun about the government stepping in and developing a ceiling limit that garlic can attract per kilo.
There’s two reasons here, being the world’s largest exporter of garlic, they don’t want the price to become too high and lose their best customers to Argentina or Spain as they also export large volumes of the stinky stuff.
But more importantly, China’s ever rising consumer price index (CPI) has caused the central bank to want to curb inflation. And any time an abnormal economic number comes out from China global markets get a bit rattled...
When the food component of China’s latest CPI was over 10% higher for the most recent quarter, you can bet that the Chinese government is going to step in and take control of the garlic market before any more of its economic numbers are skewed.
Forget about the supposed gold bubble. Ignore the growing property bubble, and don’t worry yourself about the potential commodity bubble if Dr. B.S. Bernanke – yes, those are his initials – gets his way.
There’s a bigger bubble brewing. This one is in bulbs. But not light bulbs. And not tulip bulbs either…
Because this one’s not in the Netherlands, it’s in China. In fact, talk of this bubble began long ago.
"Garlic prices have increased fifteen fold in China in under a year because Chinese investors are said to be attempting to create an artificial shortage and drive up prices."
That was written over twelve months ago. But it’s truer now that it was back then.
How did the Chinese end up buying garlic as a speculative investment?
By the way, I’m serious. This isn’t some kind of elaborate analogy… China has created an asset bubble in garlic!
Well, first you have to go back a bit as the 2008 planting season was about to begin.
Farmers, sick of the increasingly low prices for garlic – about 1 Yuan (AUD$0.15) a kilo – decided to ditch the garlic crops for something that had a more attractive price, like corn or rice, which is also ‘price controlled’ by the government.
To the farmer, this made a commodity like corn, much more attractive, knowing that he would always get the same price for his crop, and not risk out on losing money on garlic plantations that attracted very little return. At one point, the price of garlic fell as low as 0.08 Yuan (AUD$0.012) per kilo.
Then along came Swine flu in 2009, and that changed everything.
You see, traditional Chinese medicine believes that garlic has medicinal use, and when Swine flu was invading our vocabulary this started to boost the demand for garlic. But because of the small crops that were planted in 2008, there wasn’t a lot of stuff to go around.
Which is partly to blame for the shortage today.
At first, officials had blamed the shortage on bad weather and farmers hoarding what little supply they had, but as the swine flu scare worsened, the price started to sky rocket.
By the end of 2009 the price for a kilo of garlic was 60% higher than the year before.
In fact, during this period, you’d find many articles like this one, stating how ‘Garlic beats gold as an investment’.
Because many food commodities are price controlled in China, garlic, which isn’t, started to attract speculators into the market.
But all this did was drive the price higher.
Right now, China is the world’s largest exporter of garlic. They export more than 1.5 million tonnes each year.
However, it greatly depends on who you listen to as to whether the price of garlic is sustainable at these new highs of about 14 Yuan (AUD$2.13) per kilo.
Firstly, you have mostly market speculators taking advantage of farmers without access to a wide range of information. Most farmers are still only receiving 1 – 1.5 Yuan per kilo for garlic, as speculators hoard the supply and release only small quantities to the market at a time, keeping the price elevated and demand high.
That being said, the farmers are still averaging three times more income from garlic this year than last year.
But the problem is, even though there’s a shortage of available garlic, many farmers are reluctant to plant bigger crops. The reason? They simply can’t afford the higher price of the seeds, and they don’t want to be left with goods they can’t sell.
Then you have Yi Xianrong, a researcher for the Chinese Academy of Social Sciences who has said that the garlic market ‘...is cyclical. Price are short term, and they will fall again before long.’ He estimates that this is just part of a three year cycle and prices will return to 1.5 – 2 Yuan per kilo soon.
However, one of the biggest problems facing the garlic market isn’t the speculators, but the Chinese government.
Many commodities, including agricultural ones are price controlled by the government.
Talk has already begun about the government stepping in and developing a ceiling limit that garlic can attract per kilo.
There’s two reasons here, being the world’s largest exporter of garlic, they don’t want the price to become too high and lose their best customers to Argentina or Spain as they also export large volumes of the stinky stuff.
But more importantly, China’s ever rising consumer price index (CPI) has caused the central bank to want to curb inflation. And any time an abnormal economic number comes out from China global markets get a bit rattled...
When the food component of China’s latest CPI was over 10% higher for the most recent quarter, you can bet that the Chinese government is going to step in and take control of the garlic market before any more of its economic numbers are skewed.
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