Drought has limited impact on China's grain prices

The middle and lower reaches of the Yangtze River, long known as China's "land of fish and rice," have been plagued by an exceptionally severe drought since the beginning of the year.

The prolonged drought has affected more than 35 million people in five provinces along the middle and lower reaches of the Yangtze River. As one of the largest grain producers in the world, China's struggle with the drought has caused international concern over its grain harvest this year.

Cheng Guoqiang, senior researcher at the Development Research Center of the State Council, stressed in an interview that the drought will mainly cut the harvest of early-season rice, but will hardly affect China's total grain output this year. Early-season rice makes up a tiny proportion of the country's summer grain output, not to mention that the autumn harvest produces the majority of China's annual grain output. China is self-sufficient in grain and can enjoy a grain surplus in bumper harvest years.

Drought-stricken provinces such as Hubei and Jiangxi along the middle and lower reaches of the Yangtze River are not China's major wheat producers. The drought will have a negligible impact on the summer grain output, although early-season rice cannot be planted in certain areas, and some paddy fields have no water after the crop has been planted due to the drought. Furthermore, water shortages have also affected the transplantation of mid-season rice seedlings.

Due to various adverse factors, the price of domestic grain futures increased to different degrees. According to the latest statistics from the Ministry of Commerce, the price of domestic rice futures continued an upward trend in May, growing 0.2 percent from May 16 to May 22. The closing price of the early indica rice on the Zhengzhou Commodity Exchange grew more than 4 percent from 2,448 yuan per ton on May 5 to 2,557 yuan per ton on May 25.

After taking into account various factors, most market watchers believe that the growth rate of China's Consumer Price Index (CPI) will remain above 5 percent in May. Many institutions predicted that the country's CPI will peak later than previously thought, and it has become more difficult for the country to achieve its target of keeping inflation at around 4 percent this year.

Tang Jianwei, a senior macro analyst at the Financial Research Institute under the Bank of Communications, predicted that China's CPI will rise nearly 6 percent in May from a year earlier, breaking the record set in March.

However, in terms of China's grain production structure, grain and rice output in the six southern provinces, including Jiangxi and Anhui, accounts for only 27 percent and 18 percent, respectively, of the country's total. Furthermore, the extent of damage caused by the drought in the six provinces varies and the early season rice-growing zones have yet to be significantly affected by the drought.

A research report released by the Agricultural Bank of China on May 30 also made it clear that it is unlikely the drought in southern China will seriously affect grain prices and CPI in the second half of 2011.

No cause for concern on international markey

However, the number of 35 million drought-affected people has still caused concern in the international community. The AFP even reported that if the continuing drought thwarts the government's efforts to curb inflation, the rising commodity prices and a shortage of food will probably lead to social unrest.

Agricultural experts said that despite the established fact that the continuing drought has negatively affected the summer grain production in the areas along the middle and lower reaches of the Yangtze River, the drought is currently not terrible enough to cause fluctuations in the grain prices on the domestic and even the global markets because the drought has not changed the domestic general oversupply situation thanks to China's seven consecutive years of grain output growth and harvests.

Experts said that China is self-sufficient in grain supply and can gain a small surplus in normal years. China's grain supply structure needs to be balanced through import and export, but the export and import volume is limited. For instance, the import volume of wheat, corn and rice are all below 1 percent of their domestic output.

"In fact, the drought has virtually not had an impact on domestic and international grain supply, but rather changed the psychological expectations of some investors in the grain market. The increased virtual demand has changed the supply and demand situation to some extent and will likely push up grain prices within a short period of time," said Cheng Guoqiang, vice director of the office of the Development Research Center under the State Council.

Minister of Agriculture Han Changbin also announced favorable news during the recent launching ceremony of machine-aided cross-region wheat collection. He said that 80 percent of summer grain in southwestern regions has been reaped and the wheat in the Huang-Huai-Hai Plain has entered into the period of maturity. Experts at the Ministry of Agriculture said that the summer grain production will have a good harvest in 2011 and the winter wheat output is expected to grow for eight consecutive years. The output of rapeseed to be reaped in the summer will also pick up.

By People's Daily Online

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