August 19, 2009


China grain prices face upside risk on poor weather


Grain prices in China may rise in the near term as weather conditions pose a supply risk, Standard Chartered said in a research note Wednesday (August 19).


The upside risk to grain prices poses a challenge for emerging markets, since higher food prices fuel inflation and reduce households' disposable income, it said.


In China, a severe drought in northern grain-producing regions is potentially bullish, though domestic analysts, including Wang Cheng of Nanhua Futures, say it's too early to conclude that supply would be squeezed.


But if the drought persists, some 11.3 million hectares of crop would be affected, including 3.9 million people and 4.4 million heads of livestock stuck with limited access to water, said Standard Chartered analysts, led by Abah Ofon.


The impacted areas are five northern regions: Inner Mongolia, Xinjiang, Jilin, Shanxi and Liaoning.


These five areas account for about 30 percent of China's autumn grain output, mainly in corn, but also wheat and soy. The autumn crop is around 70 percent of China's total grain production, Standard Chartered said.


"China is generally self-sufficient in grains and, with regards to corn, large carryover stocks suggest that it can weather a moderate drop in output," Ofon wrote. "However, poor weather and the need to maintain stocks at current levels may yet prompt China to source some corn from external markets."


Still, it's too early to tell if China would end up importing more corn, Wang said.


Poor weather conditions have been affecting not just China, but also other major producing countries including Brazil, Argentina and the US, Standard Chartered said.