Nov 27 2009
My colleague this morning happened to ask if I had heard about the garlic bubble in China. A quick news search led me to the story:
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.
Chefs and housewives in some cities are struggling to get hold of one of the nation's favourite ingredients, which has passed gold and oil to become the China's best-performing asset.
Several factors have led to the “garlic bubble” in China. Firstly, low prices of garlic last year:
Falling garlic prices last year have contributed to the shortage with many farmers discouraged from planting the crop again…
To compound the problem, supplies of garlic have been further reduced due to speculation. Yes, speculators are hoarding warehouses full of garlic to drive price up in the face of rising demand. Chinese believe that garlic has medicinal properties and is therefore a remedy for swine flu. This year's unusually high level of demand is attributable to the flu epidemic and Chinese desire to consume more garlic to fend off the illness.
The result of all these combined factors is illustrated below. The low prices in 2008 led to farmers to cut back on production, reducing supply to S2009normal. What the farmers did not predict, however, is the rise in demand due to swine flu. The reduced supply is exacerbated by speculators buying up output and warehousing it, shifting supply further left to S2009w/speculation.
As can be seen, prices have risen, but shortages persist. It should be expected, therefore, that prices will continue to rise until the shortages are eliminated. On the other hand, the speculators may begin to release their hoarded supplies, shifting supply outward and restoring equilibrium closer to the current price.
A third possibility is that the swine flu epidemic will subside and demand will return to a normal level. This, of course, would spell doom for speculators who put millions of RMB into garlic who would then find themselves with “assets” that had lost their value. This would mean the proverbial “bursting of the bubble”. This final possibility seems unlikely anytime soon, for among the Chinese, traditional beliefs run deep, and with the lack of widespread access to a swine flu vaccine, garlic will likely remain the remedy of choice for the country's masses.