The Chinese Garlic Bubble

China sees huge rise in garlic prices

Garlic prices are hitting record highs in China, the world’s biggest producer of the pungent bulbs, amid reports of a speculative bubble in the market even as people rush to buy it as a putative cure for swine flu.

The China Daily reported last week that a high school in the eastern city of Hangzhou bought more than 400 pounds of garlic and made students eat it at lunch to stay healthy.

Wholesale garlic prices in Beijing are now 15 times as high as in March, and still rising.

Jerry Lou, a Morgan Stanley China strategist who has researched the opaque market here, said speculators — fueled by the abundant liquidity sloshing around China — have moved into the small market and strategically driven up prices.

“You need a warehouse, a lot of cash and a few trucks. That’s how it works,” Lou said, describing garlic speculators’ tools of the trade. “Basically, what you do is try to arrest as much supply as possible, then you bid up the price. Moving garlic from one warehouse to the other, you make millions of dollars.”

Lou said garlic wholesalers told him that gangs that had amassed cash and credit from dealing property and stocks in other parts of the country had chosen the garlic market as their latest ruse.

See also:
Garlic outperforming gold and stocks
Hold Your Nose: Garlic Is Best Investment in China
Garlic, China’s Best-Performing Asset
Chinese Garlic Market Reeks of Speculation
Garlic run smells like speculative bubble
Garlic prices in China shoot up on flu fears
China Sees Huge Rise in Garlic Prices
Garlic Dealers Cashing In On Flu Rumours
Savvy investors pile into Chinese garlic
Strong demand for garlic in China drives up local prices
Garlic Investors Smell Money

History repeats itself.

Tulipmania

Traditionally, the buying and selling of tulip bulbs occurred during the summer months, after the flower had bloomed in May or June (depending on the type) and the bulb was lifted from the soil, to be wrapped in paper and kept dry indoors. The flower would have been viewed by then and the bulbs, themselves, inspected and exchanged before being replanted in September. A seller promised to deliver the bulb when lifted and the purchaser to pay upon delivery. In trade such as this, honor obviously was important, especially since a blossom in the summer need not necessarilty look the same the following year. Indeed, the changeability of tulips was one of their charms. But such variations could lead to deception or at least the suspicion that bulbs might not be the same as contracted.

In the planting season of 1635, as prices began to rise, there was a fundamental change in how bulbs were traded in the Netherlands. Increasingly, they were sold by weight while still in the ground, with only a promissory note to indicate details of the bulb, including its weight at planting, and when it would be lifted. The bulbs, themselves, the delivery of which was months away, were not sold, only these paper promises. Weight was measured in aasen (azen or aces), an exceedingly small unit equal to one-twentieth of a gram, or less than .0018 of an ounce. Although paying by weight was a more fair way to assess price, an immature bulb costing less than a more mature one, it also increased the price of the heavier bulb. And, because a bulb planted in September or October likely would weight substantially more when lifted (after blooming) the following June or July, it encouraged speculation. Even if the price per aas did not change, the price of the bulb, itself, could increase three to five hundred percent over those nine months, depending upon weight. Heavier bulbs, too, tended to flower earlier and have more offsets, the smaller bulblets attached to the mother bulb.

Tulips grown from seed could take five to ten years to produce a flower, those from offsets from three to five years to become flowering bulbs themselves. Because a tulip bulb may produce only one or two offsets a year and then only for several years before the mother bulb, itself, dies, one found to have offsets when lifted obviously increased in value. But a grower could not afford to sell a particularly valuable bulb too soon. To do so would limit the ability to produce any more of that variety–which is why particularly desirable flowers always were in short supply.

Variegated tulips, those with contrasting markings, such as red (Rosen) or purple (Violetten) against a white ground (or bizarden, against a yellow ground), were most favored, especially those whose color was displayed as thin feathers or flames that symmetrically ran along the center of each pedal and around the edges. This vivid coloring, which so bewitched the Dutch, was caused by a virus that infected the tulip but also weakened it and reduced the number of offsets. A complete mystery at the time, the mosaic virus was conveyed by aphids, which flourished in the fruit trees that were a feature of seventeenth-century gardens. An infected flower was said to be “broken” and there was no way to determine if, or when, a flower would break. It was an unpredictable process that only added to the allure of the tulip for the Dutch.

The cultivation of new varieties in 1634 depressed prices, and tulips became accessible to a popular market. No longer the province of professional growers and connoisseurs, they now could be purchased by small buyers, such as the weaver or spinner and other crafts and tradespeople. For a modest investment, often paid for in kind, one could speculate in the more common tulips that were the stock of mass trade. Late that year, prices then swung in the opposite direction and began to rise. To meet demand, offsets were sold, which only could be separated when the bulb was lifted. Buying in the winter for delivery in the summer became acceptable and, by 1636, a futures market had developed for the bulbs, themselves. Buyers promised to pay a specified price for bulbs in the ground at a fixed time in the future, speculating that, at lifting time, they would be worth more than the promissory note, which then could be sold to a new buyer in hope of realizing a profit. As spring approached and expectation increased, this trade in tulip futures became more frenzied, and, by November and December of that year, speculation was at its height. Prices for so-called “piece” goods (the more desirable varieties) doubled or trebled, and even the most plain and common tulips, which previously had been disdained, were bought. Indeed, these “pound” goods, which were sold in bulk, rose as much as twenty-fold. Smaller lots were offered, as well, and bulbs could be purchased by the basket, the pound, or the ace. Goods in kind were delivered at once, and cows and cloth, looms and land, shops and houses paid to secure the purchase.

At the height of this tulip mania, most transactions did not even involve the exchange of goods but became purely speculative. “Everything was worth money and so current that one could get in exchange almost anything one desired,” says Gaergoedt. “And all this with promises and vouchers, when the bulbs were in the earth” (First Dialogue). Even though buyers did not have the cash amount or sellers actually possess the bulb, there still was the expectation that a succeeding sale could be at an ever higher price. But buyers must have begun to wonder if the escalating prices of the previous two months could be sustained (and been suspicion, too, that more tulips would be grown, increasing the supply). In the first week of February 1637, when investors were not willing to go higher, the market collapsed, the bulbs contracted the previous autumn still in the ground.

As Gaergoedt, who had mortgaged his house, laments: “it has been a madness.”

In the end, tulips are tulips and garlic is garlic. Just like the Tulipmania of the mid 1630s, the Chinese garlic bubble will also collapse and all the latecomers to the speculative garlic frenzy will be left holding the clove, financially ruined.

/Devil Take the Hindmost

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