Jan 2008
Rise in costs signal change in China's role
01 January 2008 16:53
John Hey
Is cheap Chinese produce set to become a thing of the past? Is the country losing its competitive advantage as an exporter? Certainly, a sharp increase in the country’s fresh produce prices over the past year has led people to wonder.
The farm-gate price of Chinese Fuji apples, which have come to symbolise the country’s rapid rise as a produce exporter, is up by around 30 per this year. When combined with a jump in seafreight costs, this is leading to market prices in Europe that are 50 per cent higher than last year, and resulting in limited demand. While a drop in this season's apple production partly explains the price hike, there are other forces at work here, and apples are not an isolated case.
Soaring food prices drove Chinese inflation to its highest level in more than a decade in October, with fresh vegetable prices leaping 30 per cent from a year earlier. As the consumer price index keeps climbing, suppliers note that the cost of everything is going up in China, including that of key inputs like fertilisers and packaging. In particular, the cost of labour is rising at double-digit rates. The appreciation of the Chinese currency, the yuan, and sharp increases in shipping costs are further eroding the country’s competitive edge in export markets, while the government’s move to tighten quarantine export controls has caused complications for shippers. At the same time, domestic demand is taking off as Chinese incomes rise. And speculation among traders is only bumping up prices as they store fruit in anticipation of a hot local market for the upcoming Olympic games.
So what does this all mean for China's role as a fresh produce exporter? While a slowdown in growth rates appears inevitable, the country's supply role is also changing. China has made inroads into export markets on a low-cost strategy, often gaining "share of throat" without increasing "share of wallet". But recent figures show that total fruit export volumes plateaued in 2006, while values increased 22 per cent, reflecting rising costs and a greater focus on quality and value-adding.
From the perspective of fruit imports to China, the rising cost of domestic fruit should have a positive impact in maintaining overall market prices at high levels. However, this is likely to spur more Chinese producers to explore the domestic market and to raise their quality standards, ultimately intensifying competition. As a result, we can expect to see a hardening of the trend whereby imported fruit boasting outstanding quality commands a handsome premium, but any product that is slightly "off-top" takes a big step down on price, as many suppliers have found out to their cost over recent months.
Is cheap Chinese produce set to become a thing of the past? Is the country losing its competitive advantage as an exporter? Certainly, a sharp increase in the country’s fresh produce prices over the past year has led people to wonder.
The farm-gate price of Chinese Fuji apples, which have come to symbolise the country’s rapid rise as a produce exporter, is up by around 30 per this year. When combined with a jump in seafreight costs, this is leading to market prices in Europe that are 50 per cent higher than last year, and resulting in limited demand. While a drop in this season's apple production partly explains the price hike, there are other forces at work here, and apples are not an isolated case.
Soaring food prices drove Chinese inflation to its highest level in more than a decade in October, with fresh vegetable prices leaping 30 per cent from a year earlier. As the consumer price index keeps climbing, suppliers note that the cost of everything is going up in China, including that of key inputs like fertilisers and packaging. In particular, the cost of labour is rising at double-digit rates. The appreciation of the Chinese currency, the yuan, and sharp increases in shipping costs are further eroding the country’s competitive edge in export markets, while the government’s move to tighten quarantine export controls has caused complications for shippers. At the same time, domestic demand is taking off as Chinese incomes rise. And speculation among traders is only bumping up prices as they store fruit in anticipation of a hot local market for the upcoming Olympic games.
So what does this all mean for China's role as a fresh produce exporter? While a slowdown in growth rates appears inevitable, the country's supply role is also changing. China has made inroads into export markets on a low-cost strategy, often gaining "share of throat" without increasing "share of wallet". But recent figures show that total fruit export volumes plateaued in 2006, while values increased 22 per cent, reflecting rising costs and a greater focus on quality and value-adding.
From the perspective of fruit imports to China, the rising cost of domestic fruit should have a positive impact in maintaining overall market prices at high levels. However, this is likely to spur more Chinese producers to explore the domestic market and to raise their quality standards, ultimately intensifying competition. As a result, we can expect to see a hardening of the trend whereby imported fruit boasting outstanding quality commands a handsome premium, but any product that is slightly "off-top" takes a big step down on price, as many suppliers have found out to their cost over recent months.
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