The 3,000-odd villagers of Cifeng in the Inner Mongolia Autonomous Region are finding it tough to raise grain production because their earnings have been on the decline. In fact, "about 1,200 of our villagers have shifted to non-farming jobs," says Cifeng village head Li Hongjiang. "All farming-related costs are rising and people don't like to farm."

Li's village also mirrors the situation in some other farming communities, facing the challenge of rising costs despite the repeated increase in government subsidies and supportive measures. The Cifeng village head says costs of fertilizers, seeds and chemicals have risen sharply in recent years. The cost of a particular type of fertilizer, for example, has risen about 70 percent in just one year. All this has eaten into farmers' meager earnings and increased inflation.

The National Bureau of Statistics says prices of farming materials in Hebei province rose 13.6 percent year-on-year in January on the back of a 6.9 percent growth in 2007. "Costs are rising at a faster pace (now)," says Li Guoxiang, a researcher with the Rural Development Institute in the Chinese Academy of Social Sciences (CASS).

On the other side of the world, grain prices, especially the recent increase in rice prices, have caused a flutter in the international community. International Monetary Fund Managing-Director Dominique Strauss-Kahn has warned that the crisis created by rising grain prices would have a "horrific" impact on the poor. "Tens of thousands of people will starve."

And on Monday, UN Secretary-General Ban Ki-moon cautioned that increasing prices of food products across the world had reached emergency proportions, threatening to wipe out seven years of progress in the fight against global poverty.

Though grain supply is still not a problem for China, rising prices of agricultural products have pushed up inflation and made life difficult for the urban poor at a time when the government has made curbing the price rise its top priority. As Premier Wen Jiabao has assured the world, the country has ample grain stocks, both at the State and private levels.

China has about 150 million tons of grain, about 30 percent of its annual production and 12 percent more than the safe margin set by the international community.

And on Monday came State Administration of Grain deputy head Zeng Liying's assurance that the country's grain production would be about 500 million tons this year (the same as last year's).

But it is the driving effect of rising prices of agricultural products' on the country's inflation that is raising leaders' and planners' concern. Prices of agricultural products were a key element in pushing up inflation to a 12-year high of 8.7 percent in February this year. Experts estimate they contributed three-fourths of the exceptional 4.8 percent rise in the consumer price index (CPI), the key gauge of inflation, last year, even though last month's CPI rise might have dropped to 8.3 percent, according to the People's Bank of China's Vice-Governor Liu Shiyu.

The official figure is to be released today, but a Reuters report citing an insider, too, points to an 8.3 percent CPI growth in March. This means a growth of 8 percent in the first quarter against the benchmark bank deposit interest rate of 4.14 percent.

More than a mere economic issue, rising prices become a major concern in people's daily life. There is hope, though, because the food price rise seems to be easing of late. In the longer term, however, restraints on the country's agricultural production, such as diminishing farmland area, increasing farming costs and potential increase in demand still pose a big challenge, analysts say.

Statistics from the Ministry of Commerce, Ministry of Agriculture and the National Development and Reform Commission (NDRC) show that prices of grain, vegetables, meat and eggs have not only remained stable, but also dropped slightly, since last month.

"Although grain prices are rising across the world, domestic stock is ample," says China Merchants Securities analyst Wang Qiong. Hence, "grain prices would not contribute much to CPI growth in the short term".

Businessmen in northeast China, for example, are transporting rice to the southern regions to help stabilize grain prices there, says Sun Zhongjun, a rice dealer in Panjin, Liaoning Province.

The supply of meat, which was way below the demand last year, has improved and the rapid increase in vegetable prices in January and February because of distribution bottlenecks caused by inclement weather have been checked, thanks to normalization of transport, according to the NDRC.

The rise in edible oil prices around the globe, however, is still a major contributor to the increase in agricultural products' prices because China imports about two-thirds of its soybean, analysts say. "The impact of rising soybean prices across the world, however, will not become overt in China in the short term, and would therefore be limited," says State Information Center senior economist Zhu Baoliang. Plus "the overall demand and supply of agricultural products remain largely balanced."

The rise in grain prices around the world may not have an immediate effect on the domestic supply-demand balance, but it would ultimately harm the market, the analysts say. The US and some other developed countries are using more grains to produce bio-fuel, and this has especially pushed up corn prices. And because of the trade-off effect, farmers may tend to grow more corn instead of soybean, says Zhu. "Therefore, the rise in crude oil prices may lead to an increase both in corn and soybean prices." Also, domestic farmers could opt to grow more soybean if edible oil prices keep rising, and this could harm grain production.

Apart from rising production costs, the increase in people's income too will contribute to rising grain prices, says Li, of CASS. A rise in income levels will enable "people to consume more meat and milk, which means more grain input to produce them."

The rapid pace of urbanization is also a risk factor because it reduces the country's precious farmland area further, though the government has vowed to protect the lifeline of farming, the analysts say.

Last but not least, natural disasters such as drought and floods are a regular feature in China, making it hard to maintain a steady increase in grain production. Up to April 10 this year, 259 million mu of China's farmland (14 percent of the total) had been hit by drought, according to the State Flood Control and Drought Relief Headquarters.

And that may stop food prices to fall drastically, Li says. Instead, they could still increase by more than 12 percent this year against 12.3 percent last year.

(China Daily April 16, 2008)