Chinese Garlic Rebounds in the Export Market While Carrying Risks

The situation back in 2019

In 2019, garlic prices have risen moderately. As garlic stocks in Northern regions of China became saturated, domestic garlic prices underwent substantial adjustments.

The main reason the price of garlic was significantly higher than in 2018 was due to a new stage of garlic production. The sales price of garlic farmers was lower than the cost, and garlic farmers in the main producing areas were selling at a loss, which led to autumn planting. Most garlic farmers have reduced the garlic planting area, resulting in a relatively small supply of garlic in the market, adding to lesser supply compared to 2018.

In 2020 - Price too low for farmers

Accounting for approximately 70-80% of worldwide garlic exports, it would be an understatement to say that the situation in China affects the overall state of the global garlic market. The price of garlic has soared and plummeted, and it has continued to follow this trend in recent years. After the price of garlic fell substantially in 2018, strong growth in 2019 has brought considerable benefits to growers.

However, circumstances surrounding COVID-19 have caused the price of garlic to plunge again this year. After witnessing rises in demand in early 2020, the Chinese garlic market has currently been stable for the last month. Production for this season has seen a record number estimated to be over 4 million tons.

Jinxiang is one of the main garlic producing areas in China, establishing the saying, "The world's garlic looks at China, and Chinese garlic looks at Jinxiang”. This year's garlic market is estimated to face difficulties because the purchase price is too low.

Table 1. Cost of Chinese Garlic Production in Jinxiang

Many garlic producers in China have also discovered that they cannot afford to hire people from the harvest this year. From a purely cost-benefit point of view, revenue and expenditure excluding labor costs were basically flat, and a year of "work in vain".

In late July, the prices of average-sized garlic in the Jinxiang area was approximately USD 0.48-0.5, USD 0.52-0.54 for medium-sized garlic, and USD 0.54-0.56 per kg for large-sized garlic. This is almost a third lower than last year’s prices during the same time period, which has incentivized traders to store garlic and have prices increase. However, with the adequate storage period expected to be until mid to late August, there is the risk of not being able to sell the products in time.

The export unit price of garlic in May was USD 877 per ton, which is a decrease of about 28% year-on-year compared with USD 1,043 per ton in the same period last year; compared with USD 1,342 per ton in April this year.

Demand not sufficient to cover oversupply

Seeing that the price of garlic rose in 2019, there is increased enthusiasm for planting the crops again, contributing to the increase in planting areas. However, while growers have generally increased production and the total supply has gone up, the market demand is relatively fixed, and the price will inevitably fall. In addition, the pandemic has also suppressed market demand and contributed to the decline in garlic prices.

While Chinese producers suffer from the low price, there is stockpiling present in the market.

The export volume of garlic from January to May reached 91.3 tons, and the export value was USD 1.1 billion, an increase of 45.8%, and 59.2% respectively over the same period last year. Among them, the maximum export volume in May reached 30.5 tons, a record high number in the past decade.

Foreign buyers usually buy in large quantities when prices are low. In terms of export destinations, the export of fresh or chilled garlic in May reached 162.2K tons to Indonesia, followed by Vietnam at 25.8K tons, and Bangladesh ranking third at 11.1K tons. In the early stage of the outbreak, the domestic transportation of garlic was relatively difficult in March and April, export processing was difficult, and market demand fell sharply, resulting in a relatively large overall garlic inventory and oversupply. Thus, when a new batch of garlic was introduced, prices decreased.

Countries affected by the situation in China

Spanish exports at risk

The largest garlic producer and exporter in Europe, Spanish garlic is thought to be of generally higher quality than its Chinese counterparts, which has contributed to the increasing demand on the East Coast (US), although still dominated by Chinese products. Spanish production for this season started off with decreased production and white spots as excessive rains affected the harvest before going back on a steady track.

As the US is a significant export market for Spain, cheaper supplies of Chinese garlic could turn buyers more in favor of the latter product. Coupled with China’s low prices this season, this is expected to adversely affect exports, especially as many importing markets are not seeing considerable demand from leftover stock from previous purchases.

India focuses on local consumption rather than exports

India is another large producer of fresh garlic in the world, but the domestic prices have been higher than the price for the export market. and traders currently have little motivation to serve overseas demand.

Indonesia stockpiles with the abolishment of quotas

The relaxation of import policies has also directly boosted garlic exports to Indonesia. Starting from March this year, Indonesian officials have adopted temporary measures to abolish imported garlic quotas to prevent garlic supply from being interrupted. Indonesia fully depends on its garlic consumption from import, mostly from China.

Vietnam benefits from low prices

Another major importer of Chinese garlic-Vietnam’s garlic market is dominated almost entirely by China, with the country enjoying benefits of having no tariffs applied for its exports. The number of imports in Vietnam for onions, garlic, and leek (HS code 0703) far exceeds any other vegetables, with minimal exports. When the pandemic was at its peak, imports of garlic from China plummeted, and prices for the imported as well as locally sourced garlic hiked. With cheap and large quantities of Chinese garlic available for exports, prices of garlic in the major importing markets will drop as well.

What to expect in 2021

The Chinese market has no choice but to push toward selling its inventory to the global market, regardless of the fact that the price is high enough to yield a profit or not. Otherwise, the remaining stock will affect next season’s prices in the market.

The current demand for garlic is mainly divided into three categories- the first is the domestic demand; the second is the export market demand, and the third is the raw materials demand. The domestic garlic market has always maintained a stable and rising trend. Garlic processing products are diversified and the consumption of raw garlic materials has increased. The swing is mostly coming from export market demand.

Information asymmetry is the root cause

There is a need for garlic farmers to prevent planting risks ahead of time. Since 2006, garlic has seen a typical vicious circle of "more planting-falling prices-reducing plantings-rising prices".

The root cause of this problem is due to the fact that garlic farmers are at the lowest end of the garlic industry chain, and the circulation of information is lagging, which affects their planting decisions. The information asymmetry in the garlic industry chain makes it easy for traders to take advantage of the information and stock up a lot when the supply is tight.

Currently, information about the garlic industry is scattered and delayed, making producers unable to effectively prevent and respond to volatility. The development of the garlic industry is inseparable from industrial information flow, and there is a need for increased transparency and openness within the industry, which will act as an early warning and help reduce speculation within the industry and lessen fluctuations in prices.