February 12, 2009

The grain price in China is to maintain stability or rise mildly this year, bulwarked by efficient drought-relief work, bumper harvest in the past few years and generous grain stockpiles.

China's drought-relief work has displayed obvious results, with over 60 percent of the drought-hit winter wheat cropland being irrigated by February 9.

According to a press conference given by the Chinese government on Tuesday (Feb 10), it is expected that irrigation will reach most of the wheat in drought-stricken areas within 10 days, thereby effectively reducing the impact of drought on grain output.

China emphasised great importance on rural irrigation infrastructure in recent years. In the fourth quarter last year, China allocated RMB20 billion of its government fiscal expenditure for rural infrastructure. It plans to further allocate RMB1 trillion in its stimulus package for rural development in 2009-2010.

The drought is expected to reduce winter wheat output by about 5 percent and annual grain output by around 0.8 percent, in light of the current situation.

China's gross grain output was estimated to reach a record 528.5 million tonnes last year, the fifth year for the country to reap bumper harvest. China has purchased about 40 percent of total wheat output for state reserve last year, accounting for 70 percent to 80 percent of the marketed wheat.

With its rich reserves, China's wheat supply can be guaranteed this year, dismissing any worry about a large increase in wheat imports.

Grain producing enterprises are not seriously affected by the drought thanks to support by the government. The drought may exert some pressure on grain processing enterprises since wheat prices outgrow flour prices. However, this situation would not last once the price stabilises.

Farm product prices on the futures market will return to reasonable levels once the drought is relieved by irrigation and rains.