May 26, 2006

 

China's climate woes may mean grain imports

 

 

A drought afflicting China's poor western region underscores the country's growing wealth gap and is raising concerns that China could need to import more grain at a time when global stockpiles are dwindling.

 

The United Nations Food and Agriculture Organization has reported that parts of some provinces -- among China's poorest-- have lost half of their winter wheat crops. Some areas are experiencing food shortages that could become acute, affecting millions of people.

 

Higher living standards in China's booming coastal regions, where foreign investment is concentrated, have helped make the country a leading importer of agricultural products. China will be the fourth-biggest destination for US farm products this year, overtaking the European Union, with purchases of US$6.8 billion, according to the US Agriculture Department.

 

But China's misfortune comes at a sensitive time for the global market. International wheat prices have hit multi-year highs in recent weeks as droughts have affected winter crops in other major wheat producers: the US, Eastern Europe and the states of the former Soviet Union. That has left global grain stocks close to record lows.

 

Goldman Sachs Group Inc recently raised its price forecasts for wheat and corn futures, basing its view partly on growing demand from China.

 

Already, industrialisation and urbanisation have cut grain production as farmland is swallowed up by cities and factories, the bank said in a research report.

 

As inventories for corn and wheat are now at 30-year lows, Goldman believes China would rely on increased imports to replenish its depleted stockpiles. The drought "underscores the potential for a sharp increase in imports," the investment bank said. Traders are closely watching weather patterns in case the effects of the drought start to broaden.

 

However, most domestic-market participants are not yet worried. Hai Yang, an analyst at Zhengzhou Esunny Information & Technology Co, says wheat stocks are lower because farmers are selling less to the government, while officials are releasing older wheat from storage. Total supply is still rising, so more imports are unlikely to be needed in the future, she says.

 

After a healthy wheat harvest last year, grain officials say domestic supply is still more than adequate. According to Chinese customs statistics, wheat imports in the first quarter of 2006 were down 92 percent by volume from a year earlier.

 

But there remain big problems for farmers whose land has not had rain for two years. Some of the worst-hit areas are in rugged and remote terrain, where relief efforts may not reach and residents have few financial reserves.

 

"In many areas, their major water source has dried up by more than 70 percent. That's a major problem for drinking water, animal water and agriculture too," says Fang Cheng, Asia officer for the UN Food and Agriculture Organisation's global information and early warning service.

 

Officials in some areas are encouraging farmers to abandon their land and seek jobs in the cities.

 

The arid northwestern provinces of Gansu, Ningxia and Inner Mongolia are among the worst affected. The drought has also extended to Yunnan province in the southwest and to Hebei province, which surrounds Beijing.

 

President Hu Jintao has made tackling the rural-urban divide a major priority, and Premier Wen Jiabao and other top officials recently have visited the drought-stricken regions to reassure residents that the central government is aware of their plight.