Cooking Oil's Surge Shows How Inflation Hits Chinese

SHANGHAI--These days, Liu Chuansheng nervously scouts five locations before he buys cooking oil, illustrating how a sudden spike in the price of the Chinese kitchen's most vital ingredient has become close to a national crisis.

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Workers place bottles of cooking oil at a supermarket in east China's Anhui province. Rising food prices--particularly in the oil vital to Chinese kitchens--helped push the inflation rate to a two-year high in November.

On a recent Friday, the balding 33-year-old, who runs a breakfast stand with his wife, wheeled a shopping cart into the aisle of a C.P. Lotus Corp. superstore in northern Shanghai, eying only prices. In seconds, his wife emptied the shelves of its 11 remaining bottles of Cofco Ltd. "Five Lakes" soybean oil, the discount choice at 47.90 yuan, or about $7.20, for five liters (1.32 gallons).

At the checkout, Mr. Liu separated their $79 purchase into three batches to sidestep the store's four-bottle maximum and government bans on hoarding. To transport the provisions to their food stand, Mr. Liu placed two bottles into the basket of his blue electric scooter and balanced nine more on the running board. His wife plopped on back.

Mr. Liu's livelihood is now just as precariously balanced. He reckons his cooking-oil costs shot up 27% in 2010.

Rising food prices helped push China's consumer price index to a two-year high of 5.1% in November, and nowhere are the pressures felt more deeply than with cooking oil, more vital in Chinese cooking than even rice. Rising oil prices mean daily hardship for Chinese on meager incomes. And though food represents only about one-third of the CPI, it accounts for about 75% of the index's recent rise.

Such price challenges are a primary reason China's central bank abruptly raised interest rates twice in 10 weeks, most recently on Christmas Day. The next day, Premier Wen Jiabao went on national radio to take questions from anxious listeners worried about inflation.

According to a report on Saturday, China's official Purchasing Managers Index declined to 53.9 in December from 55.2 in November. Bank of America-Merrill Lynch economist Lu Ting warned the input price reading is "still quite high," and that Chinese authorities "will have to tolerate a relatively high inflation in the coming years."

Chinese housing has long been pricey, and an increasingly broad array of prices appears to be following. The National Development and Reform Commission in late December, for instance, announced a 3.77% rise in retail gasoline prices, to the equivalent of $3.50 a gallon, for an 11% increase in about a year.

But the main oil shock the Chinese face is at the stove rather than the pump. In a nation where few kitchens include an oven, cooking oil is so valued that a jug of it is an appropriate gift.

Chinese recipes from stir-fried beef to steamed fish call for oil, explains celebrity chef Martin Yan. "In Chinese cooking, the majority of dishes use oil," he says in an interview.

Wholesale soybean oil rose 23% last year through early December to about $1,451 a metric ton, with most of the gain since July, according to research firm Shanghai Pansun Information & Technology Co.

It is a potentially explosive trend. Three years ago, as oil prices were similarly surging, a stampede killed three people and injured more than 30 during a promotion offering $1.50, or about 20%, off five-liter bottles of oil in the western city of Chongqing. Prices ultimately hit $2,009 a ton in early 2008, according to Pansun.

At the Lotus store in Shanghai, shoppers appeared highly discriminating. Several perused bottles carrying the fish logo of China's most famous brand, "Arawana," produced by Singapore-based Wilmar International Ltd., but balked at the 52.90 yuan, or $7.90 price.

They included a young woman in a red jacket who took her cue from her husband's right foot, which he extended toward the 70-cent cheaper Cofco brand. She grabbed two of those then put one back, explaining that her income as a cleaner is limited and that she is raising a 10-year-old daughter.

Pressures are building at China's ubiquitous neighborhood mom-and-pop oil vendors. At the Wang family oil station in Shanghai's Putuo district, some customers buy only as much as they need for one meal. Not unlike at old-time petrol stations or community wells, Customers put their glass jars and plastic jerry cans underneath the grimy oil spigot. They arrive by motorcycle and on foot, haggling for a cheaper price, but are told the charge is 10 yuan a kilogram, about 68 cents a pound, with no discounts.

Chalk scribbles on an oil-storage tank that itemize unpaid purchases reflect the cost pressures: "A Shandong guy owes 30 yuan" and "Mr. Huang bought 490 yuan worth on Dec. 6."

In recent weeks, Beijing has moved to snuff out rumors that cooking oil is in short supply by auctioning millions of metric tons from strategic national reserves in Xinjiang and Shandong. The national planning agency has declared that supply "is completely guaranteed." In November, China's government ordered the largest producers to cap their retail prices through March. And it quintupled the fine for conspiring to raise prices to 5 million yuan, or $750,000.

For now, the measures appear to have put a lid on edible-oil prices. Yet one midsize producer in Shanghai says they are also discouraging production. The company's general manager, who asked not to be identified, said he would normally be maximizing output ahead of the Lunar New Year in early February but has now deactivated half his plant.

His warehouse is chockablock with 20,000 boxes of unsold oil he values at around $600,000. The production date on some of it is Nov. 23, around the time price controls were imposed and a large grocery distributor halved its order. The manager says talk in the industry is that prices will resume their climb around March.

Any disruption to China's cooking-oil industry would reverberate widely. In 2009, according to Nielsen Co., Chinese grocery customers spent 28 billion yuan, or $4.2 billion, on edible oil, their third-biggest packaged food outlay after yogurt and milk. About half the oil market is soybean based, and much of it is imported.

Soybeans represent the U.S.'s single-biggest export to China: $9.19 billion in 2009, topping the combined value of semiconductors and plastic materials, according to U.S. data. Driven by China, U.S. soybean shipments will likely break records in the year ending Sept. 30, reaching 1.59 billion bushels, the U.S. Department of Agriculture says in a December report. But the appetite of China's "crushers" can fluctuate wildly, and they also import rapeseed, sunflower, corn and peanut oil feedstock from countries as varied as Argentina and Ukraine.

Cooking oil is a rising concern of food vendor Mr. Liu and his wife, whose $105 daily sales from their tiny Shanghai stall go to support their two children who live back in their home province of Shandong. Despite the higher price for soybean oil, Mr. Liu shudders at the risk he faces in lifting his 10.5-cent charge for a flaky sweet bun. "Customers would disappear," he says.