Tag Archives: food

China Facing Large Jump In Cereal Imports

The latest look-ahead for China by the UN’s Food and Agriculture Organization (FAO) sees a big jump in cereal imports. The FAO’s recently published Global Information and Early Warning System, GIEWS, country brief says that total cereal (barley, maize, wheat and rice) imports for the 2011/12 grain marketing year, which runs from July to June, will reach at least 9.2 million tonnes, a new record, and a 92% increase on the 2010/2011 figure. This is despite ‘significant’ increases in cereal production over the past few years, including another record harvest this year which saw prolonged drought conditions in several regions in the country.

The increase reflects government efforts to provide irrigation to drought-affected farmers, and higher procurement prices intended to encourage the production needed to meet rising self-sufficiency targets. Supply still struggles to keep up with demand so government will need to sustain its policy measures to stabilize domestic cereal prices, whose sharp rises over the past year have been significant contributors to consumer price inflation.

Footnote: During last winter and spring, China spent 216 billion yuan ($34 billion) on infrastructure to improve water supplies to farmland, an official with the Ministry of Water resources told the annual central conference on rural work in Beijing this week. That was a 44% increase on the same period a year earlier. Spending is expected to rise a further 10% to 258 billion yuan during this winter and the coming spring as the push to sustain agricultural production is maintained.

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The Cassava Conundrum: China’s Food Price Spiral

High food prices are a symptom not source of China’s inflation. Excess liquidity still slopping about the system is the main underlying cause. But food prices are politically sensitive. Hence plans to control prices put in place last month. Beijing has to be seen to be in control, even though price controls rarely have a happy history.

High world food prices complicate the picture. China is a leading food grower, but as its population and their incomes grow, it is becoming an ever larger food importer. Its demand has helped drive up world food prices. The U.N.’s Food and Agriculture Organization’s Food Price Index is close to its 2008 peak, having risen unrelentingly since June (pulling fertilizer prices in its wake). China’s imports are not the sole cause; poor harvests and the falling U.S. dollar play their part. But there are echoes of the surge in prices of 2008, which caused food riots in several countries.

The world is better placed now than then. Rice, wheat and maize, three of the most important staples, are in more adequate supply than they were in 2008. Yet still prices are high. Governments, including China’s, will be running down stock piles so the next harvest is important, particularly of cereals, soybeans and sugar. The FAO worries that the increase in supply globally may not be sufficient to match the growing demand. In which case, high global food prices will continue into next year, making Beijing’s instruction to local governments to secure supplies at steady prices more difficult to carry out.

Next year’s cereal crop, particularly wheat and the coarse grains used in feedstock, may be the most critical. This year’s crop has been hit by drought and flood around the world. Although it is the third largest on record, it has come in less than expected. The wheat crop worldwide is 5% less than in 2009. Some growing countries have imposed export restrictions. Stocks have covered this year, but these will need to be replenished on top of the continuing growth in demand. The FAO says that, absent more bad weather, winter wheat plantings should raise wheat production next year to meet the increase in demand, but no more. It is a similar story with coarse grains.

China is the second largest grower of both wheat and maize so its weather and yields will be critical. That makes reports of a two-month drought in Henan, Anhui, Shandong and Hebei on the North China Plain and which produce over half the country’s summer grain, concerning. The drought-affected area accounts for a fifth of the country’s winter wheat planting area. Prices will remain high and volatile.

The global balance between supply and demand for rice is much better. However, the continuing weakness of the dollar and buyers switching from expensive cereals could force up rice prices over the coming months. Domestic prices will be insulated from this to some extent as rice prices, like those of wheat, are controlled.

Corn and soybean prices do track international prices fairly closely, and higher prices for these feed through to meat and egg prices. Oilseeds, sugar, dairy, meat and fish prices are also at or around 2-year highs on world markets.

Cassava may be the interesting story, especially in China where a moratorium on new grain ethanol plants and domestic price supports for maize has boosted the demand for cassava chips as feedstock for fuel production. Roughly half of China’s fuel ethanol and alcohol output are now derived from root crops, namely cassava and sweet potato, and domestic cassava production has doubled over the past five years while Chinese farmers have also invested in overseas production in countries from Cambodia to Liberia. Cassava is now trading at record levels on international commodity markets, and encapsulates the chicken and egg situation, so to speak, that China finds itself in with respect to food of being a big driver of world prices that it is also trying to control.

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Food Price Controls Back On Table

Administrative remedies are such an instinctive reaction for policymakers that the only surprise in reports that Beijing is considering imposing new price controls to dampen the surge in inflation is that they haven’t surfaced earlier.

The always politically sensitive consumer price inflation hit 4.4% year-on-year in October, its fastest rise in two years and way above the 3% target rate for the year. There has been progress on holding the runaway rise in property prices using what monetary policy tools the central bank has to choke off the flow of money into real estate speculation, but the same can’t be done for food, whose prices jumped 10.1% in October. More alarming for policymakers, the average price of 18 staple vegetables was 62% higher in the first 10 days of this month, than in the same period a year earlier, Xinhua reported earlier this week.

We still expect interest rates to rise again before year’s end (though the yuan’s de facto dollar peg weakens the effectiveness of rate rises to soak up excess liquidity), but direct controls would have a more immediate effect on food prices, even at the risk of suppressing the underlying inflationary pressures. But with corn and rice at record highs the now is more pressing than the then.

Fuzhou and Kunming have announced price controls on some vegetables, which may be a test of an idea to hold mayors responsible for ensuring adequate local supplies of staple foods at steady prices. Other cities are said to be monitoring food prices, we assume in preparation should Beijing decide to try the idea more widely. Other measures reportedly being considered include food subsidies to consumers, a crackdown on hoarding and soft commodities speculation and more releases from strategic food stockpiles. (Update: official guidelines for imposing most of these have been announced.)

Further complicating the issue is a rise in global food prices. The UN’s Food and Agriculture Organisation’s food index in October rose to levels last seen during the peak of the food crisis in 2008, which bought a round of export restrictions in producer countries and retail price controls in China. Letting the yuan appreciate would ease some of the sting of the rising cost of animal feed and soy imports for China’s farmers and food producers, but that is a separate hornet’s nest. Price controls are politically safer and more familiar ground.

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China’s Floods Hit Grain Harvest, Put Pressure On Inflation

Li Qiang, managing director at Shanghai JC Intelligence, puts some numbers on our observation that the recent flooding would hit the forthcoming harvests hard. With official figures saying that 400,000 hectares of farmland across the country have been destroyed, Li tells Bloomberg that he expects rice output to be down 5% and cotton by 5%-10%. The summer grain harvest fell this year for the first time in the past seven years. But the autumn grain harvest is more important as it accounts for more than three-quarters of annual production in normal years. The price of rice has already risen 15% on the Chicago futures markets since June 30. Cotton has been climbing for the past year, and is now up 26% in the New York market over this time last year. As Bloomberg notes, that will make Beijing’s 3% inflation target harder to meet. And it will require judicious releases from the government’s grain stockpiles to stabilize prices.

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Food Games

A convergence of three touchy issues, the Beijing Olympics, product safety and relations with the U.S.: The U.S. Olympic team is to bring all its food with it from America and will take its meals in its training camp, not the Olympic Athletes Village. It is concerned about ensuring that local food is safe and doesn’t contain any rogue drugs or other taints that could cause American athletes to fail the Games’s random drug tests. Chinese authorities, who have made elaborate preparations for months to ensure that food supplies for the Games don’t get tainted with the odd bit of anti-freeze or other toxic chemicals or growth stimulants, are “disappointed” for which read outraged. Everyone playing to type.

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Filed under Beijing Olympics, China-U.S., Product Safety