* Speculators smell big returns after garlic run
* Hoarding draws scrutiny from Chinese government
* Indian traders see pick up in exports to China
By Hallie Gu and Josephine Mason
JINXIANG, China, Feb 9 (Reuters) - Chinese farmer Gao Ge was worried. The 27-year-old from Shandong province had chosen not to sell his freshly picked chilli pepper crop after prices soared by almost a third in just two weeks in November, hoping for even higher prices.
Speculators were scooping up tonnes of the spicy fruit, betting on tight supplies as hot temperatures and heavy rain damaged the nation’s crop, cutting it by 10 percent.
Last year, the same investors played a similar game in garlic, sending prices to stratospheric levels.
But now, prices have slipped as fears about low supplies have ebbed, Gao hasn’t sold a single pepper, and the two-tonne crop sitting at his small farm is losing its colour - and its value.
In late January, Gao was scrambling to sell his harvest in Jinxiang, one of the country’s main chilli trading hubs, to fund his family of five’s week-long Lunar New Year holiday.
“I‘m a bit panicked,” he said by phone just days before festivities started on Jan. 28.
“We have been toiling for the whole year and now we want to sell our stock and celebrate the new year.”
Keeping prices and food supplies stable is a priority for Beijing, as the government seeks to ensure staples for its growing urban population and maintain the health of farming, one of the biggest sectors in the world’s No. 2 economy.
So while chilli prices are still at historically high levels, the role of speculative investors in roiling the market and the difficulty some small farmers are having in selling their products have raised concerns. The government has already cracked down in other red-hot markets including equities and property.
The jump in prices has also captured attention in India, the world’s top producer, where traders say orders from China are up.
“If China’s production drops, it will help us in raising exports,” said Alapati Srinivasa Rao, a trader based at Guntur, India’s biggest market for chillies. “India is the only country that can supply large amount of chillies to China.”
This is the second time in less than a year that speculators have put Jinxiang in the spotlight. Last summer, a small group of retail investors piled into garlic, spurring a spike in prices of the pungent bulbs.
Just a few months later, buyers had cleared their garlic stocks and were looking for fresh investment opportunities.
“All my clients made money from investing in garlic. Then they saw they could also hoard chillies, so they bought in,” said Li Shun, a 45-year old agent in Jinxiang, overseeing piles of chillies being sacked up in his chilled warehouses.
The two crops go hand in hand. Farmers plant chillies after picking their garlic crop around May, harvesting around August and shipping them to market once they have dried.
Spurred by the hope of big returns and growing demand for use in dishes, particularly from Sichuan and Hunan, China’s chilli acreage this year is forecast to rise 3 percent to 1.6 million hectares, according to the Chinese Academy of Agricultural Sciences.
He Shan, purchasing manager of a trading company based in China’s southwestern Chongqing province, has stashed nearly 2,000 tonnes of Jinxiang-grown chillies this year.
“I am very positive about the chilli prices,” he said. “Demand will be strong no matter what, but there is great deficit in supplies this year.”
But not everyone is so bullish, with some traders steering clear due to concerns about volatile prices, uncertain demand and a fragmented industry.
And as with the garlic boom of last summer, most of the profits are going to traders and investors, not farmers.
After counting on the sale of his chillies bringing in around half his annual income, Gao was still sitting on his crop after the Lunar New Year holiday passed.
“We did not get any money from the harvest. Our spring festival was quite rough,” he said. (Additional reporting by Rajendra Jadhav in MUMBAI; Editing by Lincoln Feast)