China Drought May Persist, Threatening Wheat Areas

Feb. 9 (Bloomberg) -- A drought in China’s Shandong province may persist, threatening winter-wheat crops, said the Qilu Evening News, citing the weather service. Wheat in Chicago jumped to the highest level in 29 months.

About 30 million mu (4.9 million acres) of winter wheat in the eastern province have been affected and no significant rain is expected in the next week, the report said. Shandong is facing its worst such event in 200 years if the region doesn’t receive rain by the end of the month, according to the Xinhua News Agency.

China, the largest wheat producer, is contending with severe dryness in the North China Plain after “substantially” below- normal rain since October, said the United Nations’ Food and Agriculture Organization. Wheat traded in Chicago, a global benchmark, climbed to its highest level since August 2008 today on concern over supplies. Protests partly linked to food costs erupted in North Africa and the Middle East in the past month.

“Drought may seriously hurt wheat output and quality,” Li Qi, an analyst at Everbright Futures Co., wrote in a report today.

The dry weather may worsen rapidly as temperatures get warmer and severely threaten grain output, the Ministry of Agriculture said on Feb. 4. Lack of rain affected 35.1 percent of wheat in eight provinces, including Shandong and Hebei, it said.

Wheat jumped as much as 6.5 percent to 3,048 yuan ($463) a metric ton on the Zhengzhou Commodity Exchange, a record for the most active contract, before trading at 3,019 yuan a ton. The price in Chicago advanced as much as 0.8 percent to $8.8150 a bushel before trading at $8.7875.

Food Costs

Rising food costs have stoked inflation in emerging economies. China’s consumer prices advanced 3.3 percent last year, breaching a government target of 3 percent. The January rate may have accelerated to 5.3 percent, according to the median estimate of 11 economists surveyed by Bloomberg, from 4.6 percent in December. Inflation in Indonesia, Southeast Asia’s biggest economy, was 7.02 percent last month, a 21-month high.

The People’s Bank of China yesterday raised the one-year lending rate by a quarter of a percentage point to 6.06 percent and the one-year deposit rate an equivalent amount to 3 percent.

The provinces most affected by the drought are Shandong, Jiangsu, Henan, Hebei and Shanxi, representing 67 percent of the country’s wheat production in 2009, the FAO said. China has 14 million hectares (34.6 million acres) planted with winter wheat in those areas, of which about 5.16 million hectares may have been hurt, it said, citing government estimates.

Biggest Consumer

China is the largest wheat consumer, representing about 17 percent of global usage in the year to June 30, the London-based International Grains Council predicts. The country’s wheat output may have dropped to 114.5 million tons at the last harvest from 115.1 million tons a year earlier, the U.S. Department of Agriculture estimates. Macquarie Group Ltd. expects production to decline a further 4 million tons this year.

Premier Wen Jiabao visited Shandong last week during the Lunar New Year holiday to inspect conditions on the ground, according to the Xinhua News Agency. The country has to “prepare for the worst and do our best to combat the drought to ensure a good harvest,” Wen was cited as saying.

While the UN says global food prices climbed to a record in December, grain stockpiles have been replenished since 2007-2009, when the U.S. State Department estimates there were more than 60 food riots worldwide. Combined inventories of corn, wheat, rice and soybeans will end this year at 457.6 million tons, 21 percent more than in 2007, USDA estimates show.

China has abundant wheat stockpiles which will lessen the impact of the drought on supply, said Everbright’s Li. Inventories are the highest in seven years, Li said.

(Source: http://www.businessweek.com/news/2011-02-09/china-drought-may-persist-threatening-wheat-areas.html)