February 9, 2009

Fears that a severe drought will slash Chinese wheat production have grabbed the attention of US wheat markets, although analysts said crop losses would have no impact on world wheat trade.

 

China's ending stocks - what's left over after supply and demand are accounted for - are large enough to sustain domestic demand even if farmers end up with a short crop, analysts said. Irrigation and wheat's natural heartiness also may prevent a major crop failure, they said.

 

"China is not going to import wheat," said Roy Huckabay, analyst for the Linn Group, a commodities and futures business. "They have plenty of inventory left over from last year."

 

The US Department of Agriculture estimates China's 2008-09 wheat ending stocks at 44.99 million tonnes, up from 40.96 million tonnes last year. Production is estimated at 113 million tonnes, up from 109.3 million last year. The 2008-09 marketing year runs through the end of May.

 

By comparison, US ending stocks for 2008-09 are estimated at 17.84 million tonnes, and production is seen at 68.03 million tonnes. Ending stocks in the EU-27 are pegged at 16.45 million tonnes, and production is seen at 150.51 million, according to the USDA.

 

The impact of China's drought on the world wheat trade will be "none because of the size of their stocks," said Bill Tierney, head North American research analyst for LMC International, a global agricultural analysis firm.

 

Still, Tierney said he was "keeping a very close eye" on China following weather-related crop losses in other major wheat-growing countries in recent years. Back-to-back droughts slashed Australia's production in 2006-07 and 2007-08, while Ukraine saw serious crop losses in 2003-04 from winterkill.

 

"Both of those events have made me be much more cautious about dismissing [bad weather] out of hand," Tierney said.

 

Other analysts agreed the situation should be monitored. China's crop is expected to account for about 16.5 percent of total world production, although it barely imports or exports any wheat.

 

"The Chinese wheat crop is the single largest wheat crop in the world," said Dale Durchholz, analyst for AgriVisor, a farm marketing strategies firm. "That in itself says it's hugely important. I think it's really a big deal to keep an eye on that at this juncture."

 

China on Thursday upgraded emergency alerts regarding the drought to "level one" from "level two" in the eight major wheat-producing regions, including the provinces of Henan, Jiangsu and Shanxi. About 26 million acres of wheat, or 10.5 million hectares, in the regions have been hit by the drought, of which about 40% was seriously affected, the Ministry of Agriculture ministry said in a statement.

 

However, about 50 percent of the wheat grown in drought-stressed areas is irrigated, according to the ministry. Irrigation should go a long way toward preventing catastrophic losses, analysts said.

 

"If you take a look at China's yields, they're remarkably stable for wheat," Tierney said. "The reason is supplemental irrigation is always available. Overwhelmingly, the response from the most knowledgeable people that are closest to it is that supplemental irrigation trumps weather."

 

Wheat also is a hearty plant and is often referred to as having "nine lives" because of its ability to withstand harsh conditions. Farmers have a saying that "wheat is a weed" because of its toughness.

 

Recent media reports from China claimed that some wheat areas have been dry since the end of October, statements that appear to be true, said Drew Lerner, president of World Weather Inc., a private weather firm. The size of the region that has been left dry is "quite large and it would be significant if crops had not been mostly well established during the autumn," he said in a written assessment of the situation.

 

The two-month precipitation bias was favourable for wheat planting and establishment, except for a few areas in northern Henan, central and southern Shandong and a small part of Shanxi, Lerner said. Winters are normally mostly dry in China, meteorologists said.

 

"Odds favour some continuing dryness for a while longer," Lerner said. "We anticipate some timely relief in portions of the dry region in the next few weeks, but no general soaking will take place to restore lost soil moisture. As long as timely rainfall occurs in the spring the wheat crop will likely perform favourably."