China's drought has global implications

Share

The drought that has parched the land in much of northern China was already months old when the artillery was called into action last week. With the country's wheat crop - critical to bread prices the world over - under threat, hundreds of shells filled with silver iodide were fired at the sky.

The assault on the clouds had the desired short-term effect, provoking the first snowfalls of Beijing's winter after 108 days without precipitation. But while the light snow brought rare smiles to the faces of grain growers, the National Meteorological Centre has already acknowledged it wasn't nearly enough to relieve the country's parched breadbasket.

Wheat and flour prices linger near record highs amid persistent whispers of looming production shortages that could force Beijing - which has 1.3 billion mouths to feed - to import large amounts of wheat for the first time in seven years. A recent statement on the website of China's national drought control headquarters described the situation as "grim."

China is grappling with drought just as food prices here and in many parts of the world are soaring, creating concerns that unrest could spread as poor countries find many items unaffordable. Broader inflation is also a rising worry in China and other fast-growing emerging markets, and a problem in some slow-growth countries such as the United Kingdom. Rising prices for an array of goods could destabilize global economic recovery as companies cope with higher costs and central banks around the world feel mounting pressure to raise interest rates and slow growth.

Wheat prices on the benchmark Chicago Mercantile Exchange hit their highest level since the 2008 financial crisis earlier this week before sliding back after assurances from Beijing that the country still had "abundant" grain reserves.

Wheat also hit a record high this week of 3,110 yuan ($466) per ton on the Zhengzhou Commodity Exchange - China's main grain-trading floor - amid predictions from international experts that this year's harvest could fall as much as four million tons shy of last year's 114.5-million-ton crop.

In addition to concerns about China's crop, wheat prices have been driven up by floods in Australia and a year-old ban on exports from Russia - normally one of the world's biggest producers and sellers - caused by a prolonged drought there.

The International Grains Council has estimated world wheat production for 2011 at 647 million tons, down substantially from 2010 and 2009. If China does need to import large quantities, the market could tighten in a hurry.

China, which is largely self-sufficient in wheat, imported 1.4 million tons last year, in part due to a growing fondness for Western foods requiring higher quality foreign wheat. The last time China imported substantive amounts of generic wheat was in 2004 when it bought about seven million tons (much of it from Canada) in an effort to boost the country's reserve stores.

Last week, the United Nations Food and Agriculture Organization issued a rare "special alert," warning that the ongoing drought that has hit the provinces of Shandong, Henan, Hebei, Jiangsu and Shanxi - which together account for nearly two-thirds of China's wheat production - has already jeopardized crop yields and "could become critical" if the dry spell stretches into spring. The state-run Xinhua newswire has referred to the drought in Shandong as the worst in two centuries.

"In my hometown area, everything depends on nature. We don't have wells or other irrigation, so if there is no rain there is no water in the fields. Planting time comes in one month. If there is still no rain by then, the whole year is lost," said Wang Guichun, a Shandong native selling flour Wednesday in a wholesale food market on the western edge of Beijing.

As the artillery barrage demonstrated, the government has been unwilling to leave things to nature alone. Last week, Premier Wen Jiabao pledged a $2-billion campaign to counter the drought and boost grain production this year, including a massive effort to drill thousands of new wells in Shandong, Henan and Hebei. Mr. Wen and President Hu Jintao have separately toured the affected areas and called for "all-out efforts" to combat the effects of the drought, usually a signal for local officials to ignore budgetary constraints in achieving the directive from Beijing.

"We cannot do what Americans or Australians do, and just leave it to nature, and if a drought happens farmers get compensation from insurance companies. If a shortage happens, it will be a disaster for the world because China will buy all the grain (on international markets). We need to take responsibility for this," said Chen Shuwei, chief analyst at Beijing Orient Agribusiness, a consulting firm seen as having close links to the Agriculture Ministry.

But Mr. Chen said it was still too early to panic, as the drought's impact on wheat crops wouldn't be known for months. "We can't make judgments until the growing season starts." Almost 90 per cent of wheat production in China, the world's largest grower, is spring wheat planted in March for harvest in June.

Inflation, particularly in food prices, is already a top concern for Beijing, which has warily observed how food prices helped spark the revolution in Egypt. The price of flour - which earlier this week rose two yuan per 25-kilogram bag at Ms. Wang's store in the Beijing wholesale market - is seen as crucial because of its role in Chinese staples such as noodles and steamed buns.

Overall prices rose 4.9 per cent in January, higher than the government's 2011 inflation target of 4 per cent. Food prices jumped 10.3 per cent, compared to the previous month.

"The state council is doing everything it can to fight the drought and keep food prices stable," viewers of state-run CCTV television were told this week, referring to Mr. Wen's cabinet.