February 17, 2011

 

China's drought may impact global grain prices

 

 

The potential effects of drought in China on the country's grain production and imports can be a big swing factor for global prices, traders and analysts say.

Chinese authorities are trying to ease market jitters. The central bank said Wednesday (Feb 16) that would use monetary policy tools to promote grain production, and on Tuesday, the Ministry of Foreign Affairs downplayed the prospect of higher wheat imports, saying wheat reserves can ensure supply even if there is a shortfall in domestic production.

 

There have been bumper harvests in recent years and China's reserves are "ample and sufficient," Foreign Ministry Spokesman Ma Zhaoxu said.

 

A severe drought has hit major wheat-producing areas in China recently, affecting 6.71 million hectares of winter wheat in the provinces of Hebei, Shanxi, Jiangsu, Anhui, Shandong, Henan, Shaanxi and Gansu, China's Ministry of Agriculture said Wednesday.

 

"The 'China factor' is potentially bullish for prices. As it is, wheat supplies are already tight due to floods in Australia and the Russian export ban," said a Tokyo-based commodities brokerage analyst.

 

If there is demand from China, wheat prices could hit new highs, he said.

 

On Monday, dealers said that China's grain importers were already testing international market waters due to fears that the drought could slash the country's wheat harvest.

 

Arun Karur, head of Sapient Global Markets' commodities practice, said Monday that China could import up to four million tonnes of wheat this season if the drought is as bad as people fear.

 

"The next three-four weeks are going to be the critical period to see how they (Chinese importers) react to the crisis. Everyone's expecting a 3-5% price rise by the end of 2011 but it could be significantly higher if China comes into the market" Karur said.

 

On Tuesday, CBOT soft red winter wheat for March delivery, the most-active contract, settled down 31 3/4 cents at a two-week low of US$8.40 1/4 a bushel due to concerns that demand had slowed since prices recently reached 2 1/2-year highs.

In the corn market, China's imports this year may not exceed last year's level of 1.6 million tonnes, a senior Beijing-based grains economist said Wednesday.

 

China may begin importing corn only in the second half of the year if local prices rise above international prices, the economist, who declined to be named, said on the sidelines of a grains conference.

 

Corn traders are closely monitoring developments in China because the US Grains Council projected earlier this month that the country would buy as much as nine million tonnes this year, well above the one million tonnes forecast by the US Department of Agriculture.

 

In the soy market, Argentina has sold about 6.5 million tonnes of soy from its upcoming new crop to China for April-July shipment, the director of grain-trading company Cosur, Freddy Pranteda, said Wednesday.

 

Sales to China have been robust, he said, adding that Brazil has sold 1.5 million tonnes of soy to the country for June-August shipment just over the past four weeks.