Source Bloomberg

16 February 2011

Drought in wheat-growing regions in China, the world’s largest producer, may persist for a further month and rain may come “too late” to avert damage to crops, pushing prices higher, British Weather Services said.

“We’re not looking at anything other than cold and mostly dry” weather, said Jim Dale, senior risk meteorologist at British Weather Services. “It’s probably going to do further damage, at least to the price in the short-term, because of the anxiety and the risks,” said Dale, who correctly predicted the U.K.’s coldest December on record and Argentina’s drought.

Wheat in Chicago climbed to the highest level since 2008 this week and touched a record in China on concern the worst drought in 60 years in the wheat-growing areas will tighten supplies. Global food prices have surged to “dangerous levels,” pushing 44 million people into extreme poverty since June, the World Bank said yesterday.

“The scenario is that they have got less production, their reserve stocks have been drawn down, there are drought fears, so it’s more than likely that they are going to look at replacing some more stock,” Tom Puddy, head of grain marketing at CBH Group, Australia’s largest grain shipper last year, said today. “We may see them look to buy more from Australia.”

China purchased 1.4 million metric tons in the 2009-2010 marketing year, according to the U.S. Department of Agriculture.

Drought Areas

About 36 percent of winter wheat planted in eight major growing provinces in China is affected by drought, and 6 percent of the crops are under “severe drought” as of Feb. 14, the Ministry of Agriculture said yesterday. That compared with 42 percent and 9 percent as of Feb. 9, the ministry said.

“As we move into March, particularly the second part of March, we will see a break then,” Dale said in a phone interview from London, referring to a change in weather in China. “That may well be too late. The damage may have been done already, if not already now.”

British Weather Services is a London-based meteorological company that provides weather-related risk analysis to agriculture production, sports events and businesses.

Longer-term forecasts are not that reliable, said Yin Changwen, director of drought relief at Shandong’s department of water resources.

China Imports

May-delivery wheat gained as much as 0.8 percent to $8.7925 a bushel on the Chicago Board of Trade, and was at $8.73 at 2:15 p.m. Singapore time. The most-active contract gained to $9.1675 on Feb. 14, the highest price since August 2008. Futures have jumped 68 percent over the past year.

Substantial losses to China’s wheat crop may force the Asian nation to drain stockpiles and seek supplies from overseas in the next marketing year, helping push prices higher, Abdolreza Abbassian, senior economist at the United Nations’ Food & Agriculture Organization, said Feb. 9.

As of Feb. 10, the drought had affected 6.75 million hectares of crops, leaving 2.8 million people and more than 2.5 million livestock short of drinking water, the state-run Xinhua News Agency said Feb. 12. Rain on the North China Plain has been “substantially” below normal since October, the FAO said on Feb. 8.

China’s wheat harvest may be less than 100 million tons this year, said Commodore Research in a note e-mailed Feb. 3 by Landsberg. That compares with the last harvest of 114.5 million tons, according to the U.S. Department of Agriculture.

Global Stockpiles

The drought in China may hurt the wheat crop, jeopardizing the goal of rebuilding stockpiles, the FAO’s Abbassian said. Global wheat output must grow at least 3 percent to 4 percent in the 2011-2012 season to rebuild global reserves, Abbassian said.

Global harvests of wheat will total 645.4 million tons this season, while demand will be 665.2 million tons, according to the USDA estimate on Feb. 9. That will drain stockpiles to 178 million tons, the lowest level since 2008-2009.

Foreign Ministry Spokesman Ma Zhaoxu said yesterday China has “abundant” grain reserves to meet demand and the current drought won’t affect international food prices.

China’s grain supply is in balance with demand and stockpiles ample to meet consumption, said Nie Zhenbang, director of the State Administration of Grain. Large-scale imports to meet domestic needs are “unrealistic,” Nie was cited as saying in an interview with Chinese Communist Party magazine Ziguangge. The agency is responsible for managing the country’s grain reserves.