May 5, 2011

The possibility of diminished grain production in China, triggered by the driest spring on record that has crippled agriculture in central and southern areas, sparked concerns over higher food prices and climbing inflation.

The drought has affected more than 1.33 million hectares of farmland in seven provinces, including Guangdong, Hunan, Hubei and Jiangxi, which are cornerstones of China's grain production.

Hubei province will definitely see a drop in wheat output this year while the lingering drought will also affect the growth of paddy seedlings, according to Governor Wang Guosheng.

China's consumer price index accelerated to 5.4% in March, the fastest pace in more than two years, while food prices soared 11.7% higher than last year's prices.

Analysts said the drought will not have a large impact on wheat prices, but it is likely to increase expectations that wheat prices will rise in the future.

"The drought will add to the country's inflationary pressures and test the government's ability to tackle inflation," said Huang Dejun, chief analyst with Beijing Orient Agribusiness Consulting Ltd.

"The country's grain stocks are enough to cover weather-related losses, as China has recorded seven years of bumper harvests. The country's grain supply is essentially self-sufficient," he added.

The drought has exposed weaknesses in China's water conservation infrastructure, experts said.

China has pledged to invest RMB4 trillion (US$608 billion) in water conservancy projects over the next decade, according to a document issued by the government at the beginning of this year.

"With the government's massive investment in water conservation, China will have effective drought relief and flood control systems by the end of 2020. Its farmland irrigation infrastructure will also be improved," analysts added.