China Importing U.S. Food Inflation With the mainstream media once again being distracted by the debt crisis in Europe, a much larger crisis has been breaking out in China. China has been hit hard in recent weeks with massive food inflation. Food prices in China have risen by 10% during the past month, including a 20% rise in fruits and vegetables. McDonald's recently announced that they will be rising prices for products in all of their stores in China, including a $0.15 increase for Chicken McNuggets. Kweichow Moutai Co., China’s largest liquor maker, is expected to raise prices on their products by 24% this month. In NIA's top 10 predictions for 2010, NIA predicted there would be major food shortages around the world. The China Banking Regulatory Commission is now admitting that there are severe shortages in China of corn, cotton, sugar, and other crops. China is now selling food from its state reserves in an attempt to keep food inflation under control. The Chinese government now fears that if they don't do more to combat food inflation, they will soon experience a massive outbreak of civil unrest across the country. In fact, last week a group of high school students in the Guizhou province started a riot in the school cafeteria over a $0.07 increase in the cost of a school meal; they shattered windows and destroyed tables, countertops, and chairs. A $0.07 increase in school lunch prices might not seem like a lot to Americans, because Americans only spend about 13% of their annual expenditures on food. If a family of four in the U.S. earns less than $28,665 per year, their children get a free school lunch. If more than 50% of the children in a town qualify for free lunches, everybody gets a free lunch. 31 million American children are now receiving free lunches. Chinese children don't receive any free lunches and most poor families in China spend approximately 50% of their income on food. So what is China's solution before food riots break out in every school and McDonald's nationwide? We are seeing signs that the Chinese government is going to implement price controls. We are hearing reports that in some Chinese cities, price controls have already been imposed on four main vegetables. NIA fears that China will soon impose price controls on dairy products like milk and eggs, as well as on meat, grain, and cooking oil. China might also impose price controls on energy commodities like oil, diesel, natural gas, and coal. The inflation that Chinese citizens are currently suffering from is inflation that China is needlessly importing from the U.S. The solution to China's inflationary crisis is simple, they should allow the yuan to appreciate in value. China's currency is currently artificially low because they are keeping it pegged to the U.S. dollar. As the Federal Reserve prints money, China's central bank also prints enough money to keep the yuan's exchange rate with the U.S. dollar stable. This is done entirely to help Chinese export companies, but it is causing Chinese citizens to suffer. If China allowed the free market to determine the exchange rate of the yuan, not only will their inflation problem be solved, but China will see massive short-term deflation where Chinese citizens see a massive increase in the purchasing power of their currency. When a government implements price controls, it is interfering in the free market and not allowing the free market to function efficiently. Price controls never work because the free market is always stronger than government. Price controls in China will likely lead to empty store shelves and hour long lines at gas stations. Price controls will also likely lead to the creation of a new underground economy in China where Chinese citizens buy and sell food and other goods in the black market, at prices that are determined by the free market. While NIA has strongly been encouraging Americans to stock up on and store agricultural products, China is making it illegal to hoard food. Garlic prices in China have nearly doubled from one year ago, so China's National Development and Reform Commission (NDRC) decided to fine the Shandong Price Bureau, a local garlic seller, 100,000 yuan or approximately $15,000 for illegally cornering the garlic market to force up the price. The NDRC also fined Jilin Corn Central Wholesale Market Ltd. 1 million yuan or approximately $150,000 for colluding with their competitors to jack up the price of beans. No individual corporation has the power to drive up agricultural commodity prices substantially on their own. Yet, China's government is blaming speculators for rising food and energy prices, without realizing it is the Chinese government's own manipulation of the yuan that is causing massive food price inflation. When Chinese citizens and businesses hoard commodities, they are not doing it to artificially manipulate commodity prices higher, they are doing it to protect themselves from the government's dangerous and destructive actions. The same food inflation crisis that China is currently experiencing will likely hit the U.S. in early 2011, only much worse. NIA believes it is only a matter of time before Congress places the blame for rapidly rising U.S. food prices on American "speculators" who are buying agricultural commodity ETFs and "hoarders" who have food storage at home. While China can easily solve their food inflation crisis by allowing the yuan to strengthen, the U.S. will have no way of solving its upcoming food inflation crisis. Despite the U.S. being a major producer of agricultural products and being mostly self-sufficient, oil is a very important commodity used in agriculture production and the U.S. needs to import most of its oil. Oil prices hit a new 52-week high last month of about $88 per barrel. It is also important to realize that agricultural commodities now trade on the international market. Americans are now competing against the rest of the world for the consumption of food. The U.S. just raised its forecast for fiscal year 2011 agricultural commodity exports to $126.5 billion, up $13.5 billion from its last estimate three months ago. They didn't raise this estimate by 12% because the U.S. is increasing production, they raised it as an admission that high agricultural commodity prices are here to stay.