September 1, 2009

The long drought in China's largest corn and soy production areas in the northeast will reduce this year's harvest, which could trigger a price increment for corn, but analysts said on Monday (Aug 31) it was unlikely to cause any supply disruptions.

 

During an inspection tour in drought-hit Inner Mongolia last week, Premier Wen Jiabao urged local governments to implement measures to ensure good harvests. He also asked local governments to care for farmers whose crops have been damaged by the severe drought and may face food shortages.

 

As of last week, 9.67 million hectares of farmland, mostly in the northeast regions of Jilin, Liaoning, Heilongjiang and Inner Mongolia, were suffering from drought. These regions produce 40 percent of China's corn and more than half of the country's soy output.

 

According to figures released by the State Flood Control and Drought Relief Headquarters, the drought has damaged crops on two million hectares of farmland and caused drinking water shortages for more than six million people and 5.6 million livestock.

 

Meanwhile, industry officials expected the scale of damage to corn in Jilin and Liaoning to be more serious than that for soy in Heilongjiang, the country's largest soy growing area, which had previously suffered from bad weather.

 

Feng Jilong, vice president with Jilin Grain Group, said corn harvest in Jilin, the country's largest corn producing province, would surely decline.

 

Some analysts have expected corn output to drop by as much as 30 percent in the four northeastern provinces, which together produced about 60 million tonnes of corn.

 

However, Feng said it was too early to give any estimate as drought damage varies in different areas. He said under the worst scenario, corn prices could rise but there would not be any supply shortage as there are more than 30 million tonnes of carry-over stocks from last year.

 

The drought had pushed up sales of state corn reserves at the weekly auctions, with the amount sold last week doubling the previous weeks but it was still lower than the weekly offer of 2.5 million tonnes.

 

Analysts also estimated an on-year decrease of at least 20 percent for soy output this year, partly due to the smaller acreage being planted.

 

A lower soy output meant China, the world's largest soy importer, would need to purchase more overseas soy next year, particularly from the US. China expects its soy imports this year to hit a record 40 million tonnes. As of August 20, Chinese importers have bought nearly 8.4 million tonnes of new-crop US soy, which were twice the sales booked during the same period last year.

 

The cheap, new US soy crop has been attractive for Chinese crushers due to the better crushing margins and the US soy price was also much lower than domestic soy prices offered at weekly government reserve sales.

 

Currently, the government is still holding about six million tonnes of soy in reserves but it has been unable to sell at weekly auctions due to high prices.