Question, what do a worsening drought in China, the latest Chinese interest rate rise and the inflation figures for January have in common?
Everything.
The drought in northern China is now the worst in 60 years and this week forced the central government into boosting grain prices (for wheat, rice etc) by almost 22% to try to keep a lid on price pressures.
And the central Government also said on Wednesday that it will spend $US1 billion to battle the drought.
World wheat prices are climbing on the worsening drought, which has added to the price push from the wet weather in Australia and the bad drought in Russia and other Eastern European producers.
Despite inflation falling to an annual rate of 4.6% in December, from 5.1% in the year to November, the drought looks set to boost the CPI to well above 5% in coming months.
The drought and its price impact is probably why China boosted interest rates in a surprise way this week to a new high of 6.06%.
The increase came at the end of the Spring festival and the Lunar New Year, but didn’t hit market confidence.
Perhaps the next couple of inflation readings will have that impact.
The drought is the worst in six decades in many areas, and has left a swathe of grain-producing regions reeling from a lack of any significant rainfall in more than three months.
On Wednesday China’s State Council said it would authorise the spending of at least 6.7 billion Yang ($US1.02 billion) to divert water to affected areas, construct emergency wells and irrigation facilities, and take other measures.
The move was top of a list of ten measures to spur grain production and tackle the persisting drought, which threatens wheat production.
The State Council also decided to pay crop-growers higher prices for their produce to offset lower yields in drought-hit areas.
(Wheat is generally grown in the north of China, while rice is primarily cultivated in the wetter south).
According to news reports China’s State Council warned the situation could worsen, saying rainfall across northern China for the foreseeable future would remain "persistently below normal levels and major rivers will continue to be generally dry".
And yesterday China’s economic planning agency announced a rise in minimum rice purchase prices this year to encourage farmers to grow more grain.
A statement on the National Development and Reform Commission (NDRC) website said the government would continue the policy of minimum purchase prices in major rice-growing regions in 2011.
The rises in the minimum rice purchase price had been approved by the State Council, China’s Cabinet, said the statement (on Wednesday).
The purchase prices for japonica rice will rise 21.9% percent to 128 Yang ($US19.4) per 50 kilograms, while prices for early and middle-late indica rice will increase 9.7% and 10.3%.
China’s State Council had said on Wednesday that the country had to boost grain production as drought continues to wreak havoc in north China’s wheat growing regions.
China’s main wheat-growing regions, including Shandong, Henan, Hebei, Anhui, Shanxi, Shaanxi, Gansu and Jiangsu provinces, have been plagued by drought since October last year.
The eight major grain-producing provinces impacted produce more than 80% of China’s winter wheat.
Xinhua newsagency reported that drought has affected about 7.73 million hectares, or 42.4%, of the total winter wheat crop area in the country’s eight key producing provinces.
While China’s grain output rose 2.9% last year to 546.41 million tonnes, (marking the seventh consecutive year of growth), there are doubts that will be topped this year because of the drought.
The UN’s Food and Agriculture Organization (FAO) also issued a warning on Tuesday over the impact on the winter wheat crop.
"The ongoing drought is potentially a very serious problem," the agency said.
The situation in the regions could become critical if temperatures dropped further this month and a spring drought followed the winter one, the FAO said.
Wheat prices in China have also been rising rapidly in the last few months.
Average flour prices in the country rose more than 8% in January from the previous two months, the FAO said.
Chicago wheat prices are now above $US8.80 a bushel.
According to latest UN report, severe drought in northern China has badly damaged the winter wheat crop and left the ground very dry for the spring planting.
The FAO warning adds China to the list of countries, including Canada, Kazakhstan and Russia, whose wheat crops have suffered severe weather setbacks in recent months, while America’s hard red winter wheat seedlings have also suffered from a lack of rain and snow.
By lowering snow cover, the conditions had also left the crop vulnerable to damage from low temperatures during the rest of the winter.
The drought is putting pressure on wheat prices in China, the world’s largest wheat grower.
Some of the driest areas are close to Beijing like Hebei Province, which is next to Beijing.
China’s wheat imports have risen from 893,700 tonnes in 2009 to 1.2 million tonnes last year.
Corn and soybean imports have also soared as well in the past year.
