May 22, 2007

 

Grain prices driving inflation in China

 

 

Food prices have been the main driver of inflation in the past several months, having risen an annual 7.1 percent in April, according to China National Grain and Oils Information Centre (CNGOIC).

 

With food prices out of the equation, inflation was just 1.0 percent.

 

A reduced wheat harvest in China due to drought could increase inflationary pressure the rest of the year, the China Securities Journal said on Monday.

 

The Ministry of Agriculture has also said that there still exist multiple difficulties and problems for the country to achieve its goal of stabilizing summer wheat output.

 

China's consumer price index has been rising since last autumn as prices for grains such as corn and wheat rose. This has created worries that increased grain demand from the growing food processing and ethanol industry would threaten food security.

 

A lower wheat harvest could drive prices even higher. China's wheat harvest this summer could fall 3 percent to 96.43 million tonnes from 99.31 million tonnes seen in 2006, with a 2.5-percent drop in overall output expected for the year, according to a forecast from China National Grain and Oils Information Centre.

 

Summer crops normally make up 20 percent of China's annual grain output which has grown for three straight years since 2003 to 497.46 million tons last year, up 2.8 percent or 13.44 million tons from 2005.

 

Analysts say the extent of any price increase would not be large, as the country's wheat market is generally balanced on ample inventory. In addition, government reserves could calm any market movements if prices rise too high.

 

A plunge in wheat-growing acreage is also unlikely as the government has adopted preferential policies to encourage farmers to grow more farm produces.

 

All these meant that runaway inflation in China would be unlikely.

 

Meanwhile, the corn crop could increase 0.6 percent, increasing 1 million tonnes, the CNGOIC said. Corn prices have climbed sharply in China since mid-2006, and state reserves are estimated to be very low.

 

Drought conditions in parts of China is also threatening summer crops. A daily average of more than 1.2 million farmers in Henan were mobilized in the first half of May, using 276,000 electrical pumps to irrigate land. The Hebei government has started to ration water to meet production and domestic demand.