July 31, 2012

 

Global grain prices rise to record high on US drought

                               

 

An enduring drought in the US has pushed global grain prices to record high levels and triggered fears of another food crisis.

 

However, analysts say the price surge is unlikely to fuel inflation or consequently constrain the current monetary easing in China.

 

Over the last two months, the drought hitting the world's largest grain producer and exporter has sharply driven up prices of corn, wheat and soy (CWS), data from the Chicago Mercantile Exchange (CME) show.

 

Ryland Maltsbarger, director and principal economist with IHS Agriculture Services, says it's too early to tell if the prices of agricultural products have peaked. "The market is still figuring out. Prices will further go up if we have worse information of the drought in August."

 

The market will have a clearer picture in September and October, but prices of soft commodities will likely remain relatively high for the rest of this year, Maltsbarger told Xinhua in a telephone interview.

 

According to the CME, prices of corn, wheat and soy have surged 33.5%, 42%, and 15%, respectively on growing supply concerns since June 11.

 

"By the end of 2012, the CWS prices can further hike by 10% from current high ground if the drought continues to worsen while the US dollar remains stable," Maltsbarger said.

 

As food accounts for 30% of China's commodity price index (CPI) basket, people fear the grain price rises might stoke inflation. But analysts generally believe this year's upward trend, triggered by a supply setback, will not be severe enough to make regulators reverse monetary easing.

 

China's central bank, alarmed by deteriorating economic prospects, have cut interest rates twice since June, lowering the yearly benchmark rate of lending by 0.56%.

 

"While China is going to be increasingly exposed to bouts of food inflation, there are little signs of a meaningful food event on the near-term horizon, even if assuming a further 20-40% pick-up in global grain prices," a report from Barclays said.

 

The report, co-written by economists Huang Yiping and Chang Jian, states the immediate pass-through of overseas wheat and corn price surge will be small, since China is self-sufficient in wheat and its corn imports only constitute about 5% of total consumption.

 

China's good harvest is predicted to cushion imported inflation. Wheat production grew 3% in the first half from a year earlier, and agricultural businesses in corn-belt provinces like Jilin and Heilongjiang said their corn production will continue to increase if no major disaster occurs.

 

The price of pork, which was a major contributor to food inflation in China last year, actually has been declining since the fourth quarter 2011. Rising prices of stock feed are unlikely to alter the downward trend in CPI immediately, according to an emailed note from Societe Generale.

 

The biggest impact on China's food inflation will be rising soy prices, as China imports over 80% of soy for domestic use. Reports say COFCO and Yihai Kerry, two major edible oil suppliers in China, already have increased prices of their oil products.