Adverse weather may disrupt China's control on prices

08:22, January 27, 2011      

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There is some part of China that could use additional water -- the drought-hit north, even while the central government is grappling to soak up excess liquidity to contain price hikes.

The dry spell has continued for months in the grain production regions in northern China, setting off concerns that it might threaten China's grain output and thus cause food price hikes, a major contributor of the country's inflation in recent months.

The bad weather came and may aggravate China's battle on price hikes, including higher interest rates and reserve ratios. The government also introduced price caps and promised increases in supplies to stabilize prices.

Meteorological and agricultural experts said it is still too soon to predict a decline in grain output. However, they worried that if the drought continues into the spring, grain output will fall and push up food prices.

DRY SPELL

Water shortages have been gripping nine provinces since October last year, including the six major wheat producing regions in China -- Shanxi, Shandong, Hebei, Henan, Anhui and Jiangsu -- which contribute more than 80 percent of the country's total wheat output.

Further, rainfall in the six provinces averaged only 40.2 millimeters since October last year, down 53 percent compared with previous years, according to the National Climate Center.

As of Monday, 60.39 million mu (4.02 million hectares) of crops throughout the nation were plagued by drought, according to the latest statistics from the Office of State Flood Control and Drought Relief Headquarters.

"There have been no rains for four months. It has been too long," said Song Qingguo, a farmer at the Xitiegang village of Qixian County in Henan, where winter wheat output accounts for almost one-fourth of the country's total.

"Wheat output will probably drop if such a situation continues," he worried.

At present, some 15.86 million mu of wheat is exposed to drought, according to Yang Biantong, an official with Henan's water authorities.

Another key wheat growing province of Shandong is facing its worst drought in 60 years, local authorities said. About 2 million hectares of land used for growing wheat, or 56 percent of the wheat-planting areas in the province, have been hit by drought, and the area is expanding, the Shandong provincial flood control and drought relief headquarters said.H Scientists say it is a result of the La Nina effect that is also responsible for the harsh winter gripping large parts of China's south, which also affected production and transportation of vegetables and other food.

The Ministry of Commerce said Tuesday that Chinese farm produce prices rose for a fourth consecutive week, through Jan. 23, with the wholesale prices of 18 staple vegetables growing 12.6 percent week on week. One reason for the price hike was the freezing weather in the south, it said.

"The current drought in China is the second worst during the same period of time since 1961 because of the adverse weather", said Zhang Peiqun, director with the weather forecast department of the National Climate Center.

The bad weather will persist in the following period of time, which means the drought in the north and the cold snap in the south will continue, Zhang said.

The China Meteorological Administration forecast on Wednesday that parts of Hubei, Hunan, Anhui and Zhejiang provinces will have heavy snow or snowstorms in the coming three days. Also, icy rain will slash parts of Guizhou and Yunnan provinces.

PRICE CONCERN

Having felt the pinch on their dining table from rising prices, the Chinese people have mounting fears that the current poor weather will put further pressure on food prices, which have been rising sharply for months.

China's consumer price index (CPI), a main gauge of inflation, rose to a 28-month high of 5.1 percent in November. The growth was mainly driven by an 11.7 percent surge in food prices, which accounts for one-third of the basket of goods used to calculate China's CPI. The December CPI rate dropped to 4.6 percent, with food prices rising 9.6 percent, government data showed.

The continuous damaging weather has alarmed the government and experts on prices, but they argued it is still early to foresee a drop in grain output.

Yang Biantong said Henan experienced widespread rainfall before wheat was planted, which ensured sufficiency of accumulated moisture in deeper soil layers. Further, crops need little water now as they are in a dormant stage of growth, he said.

The drought will be eased if the plants are again irrigated after temperatures go up in the spring season, he added.

Yao Jingyuan, chief economist at the National Bureau of Statistics, said it still needs more time to assess the current weather's impact on prices. China's grain output achieved the seventh consecutive year of growth last year which, along with adequate stockpiles, laid a crucial foundation for price stability, he said.

Guo Tiancai, a wheat expert at the Ministry of Agriculture, also agreed that earlier irrigation is providing enough moisture for now. But he warned of possibilities of big losses to the final yield if no measures are put into place during the period when the temperature warms up in spring and wheat grows faster.

He urged authorities and farmers to ensure crops are watered at the appropriate time, adding that the approaching four months would be crucial for wheat.

Over the weekend, Premier Wen Jiabao pledged, during his tour in the drought-hit Henan, that the government will build more water-saving projects. He also urged local governments to overhaul water resource facilities and reduce the impact of drought on agricultural production by putting in place various technologies.

SPECULATION RISK

Meanwhile, analysts pointed out that the current bad weather might prompt expectations of higher prices of agricultural products and thus trigger speculation, which will drive prices higher and add to the risks of inflation.

Wheat futures for September 2011 delivery at the Zhengzhou Commodity Exchange closed at 2,822 yuan (428.64 U.S. dollars) per tonne on Wednesday. The closing price on December 27 last year was 2,751 yuan per tonne.

Shen Hongyuan, an analyst with the China Zhengzhou Grain Wholesale Market, said the price increase is due to the dry weather. There is also a possibility that speculation plays a role in lifting prices, he added.

Li Guoning, general manager of a grain and oil purchasing company based in Hebei, said weather and government policies affect the market price of wheat. If drought lingers into March, it will be a factor used by speculators to push up prices, he said.

Hao Deyou, a researcher with the Hebei Provincial Academy of Agriculture and Forestry Science, said the government should closely monitor the weather changes and work to prevent price hikes due to speculation on drought.

Patrick Chovanec, associate professor at Tsinghua University, said the key reason for China's inflation is still excess liquidity, rather than lack of water.

"It is always easy to blame weather for price hikes," he said, arguing the government should move further on tightening to reduce money supplies in order to stabilize prices.

Source: Xinhua
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