May 30, 2011

 

China's drought raises world grain supply concerns

 

 

China's prolonged drought could affect grain output in the country's key growing regions, putting pressure on global supplies and prices, but plentiful stocks of domestic wheat will act as a buffer to keep import volumes low.

 

Analysts are closely watching the weather in China, warning that any further supply shocks in the grain markets would fuel a further rally in US corn and wheat futures, already stoked by harsh crop weather in the US and Europe.

 

"Parts of China have been too dry and if we did see crop failures in that part of the world they are going to look to the global market for supplies," said Luke Mathews, a commodity strategist with Commonwealth Bank of Australia in Sydney.

 

"They are going to be looking to North America and Europe and there is significant amount of concern whether those particular countries will be able to satisfy those needs."

 

CBOT corn has climbed 80% since the start of May last year, while wheat has risen around 50%. Last week alone corn and wheat jumped more than 10% on expectations of a global squeeze in supplies.

 

Timely corn seeding is crucial for optimal yields needed to replenish US supplies that are projected at the lowest level in 15 years amid strong demand from livestock feeders, ethanol makers and exporters.

 

About 80% of the US corn crop has been planted, according to the USDA, but showers this week are expected to bring the final corn seedings to a standstill.

 

Rains in the northern US Plains have put spring wheat plantings behind schedule, with seeding only 34% complete in the top wheat state of North Dakota, down from the normal pace of 85%.

 

A Chinese government think tank has forecasted that 2011 corn output will rise to a record 181.50 million tonnes due to increasing acreage, but analysts said it would be a tough target to achieve.

 

"The 180 million tonnes level is a bottleneck, and the general market forecast, which is yet to come, should be lower than the forecast," said an analyst with consultancy China Corn.

 

China's corn prices hit an all-time high in March. That, coupled with low state corn reserves, made it difficult for Beijing to cool food price rises, driving up the country's overall inflation rate to a 32-month high in March.

 

Food prices fell 0.4% in April from March but were 11.5% higher than a year earlier.

 

"Global corn supplies are extremely tight and the world is banking on sharp increases in production," said Mathews. "Chinese authorities were suggesting a lift in local production and they will need every bit of that."

 

Barclays Capital warned that recent extreme weather incidents have created upside risks to food inflation for the second half of 2011, citing China as one of the areas of concerns.

 

"Drought-like conditions in the Yangtze River basin and eastern Shandong are likely to weigh on Chinese food production and increase import demand," the bank said in a report.

 

"Shandong has received just 12 millimetres of rain since September 2010, with some reports indicating that around 40% of the province's wheat crop has been lost."

 

China's total wheat output stood at 115 million tonnes last year, official figures showed. However, analysts said China is likely to see a slight wheat output increase this year.

 

Water levels on the Yangtze midstream are six metres lower than they were the same time last year, with rainfall only a fifth of the levels seen in 2010, according Chinese media, quoting local drought relief agencies.

 

China's meteorological administration said on Wednesday that average rainfall in Anhui, Jiangsu, Hunan, Hubei, Jiangxi, Zhejiang and Shanghai, which are China's major rice producing areas, is the lowest since 1954.

 

China turned corn importer last year, buying 1.57 million tonnes, the most in 15 years, and almost all came from the US. In March, China Grains Reserve Corp (Sinograin), which manages China's central government reserves, bought one million tonnes of US corn.

 

The country is also seeking other origins and developing new sources for supply. Argentina's deputy agriculture minister, Oscar Solis, said in April that the country hopes to work out a health protocol and export up to two million tonnes of corn to China this year.

 

Analysts say the weather in July-August, which is the crucial growing period, will be the deciding factor to final output.