China's Worst Floods Since 1998 to Cut Farm Output, Lift Prices
Aug. 3 (Bloomberg) -- Thomas Saulnier, a fund manager at Gaia Capital Advisors, talks about the outlook for soft commodity prices amid the hottest July in Russia in 130 years. He speaks from Geneva with Linzie Janis on Bloomberg Television's "Start Up." (Source: Bloomberg)
China’s worst flooding in more than a decade may cut production of rice, cotton and pork in the largest producer, boosting prices and hampering government efforts to keep inflation under 3 percent, analysts said.
“The disastrous weather will reduce rice output by 5 percent to 7 percent and cotton by 5 percent to 10 percent in our initial assessment,” said Li Qiang, managing director at Shanghai JC Intelligence Co. The drop may “lead to inflationary pressure should the government fail to take action,” he said in an interview yesterday.
The world’s most populous country grows almost a third of the globe’s rice and cotton and produces about half its pork. An output decline may support global prices. Rice has climbed 15 percent in Chicago since June 30, while cotton in New York has advanced 26 percent in the past year. The floods have boosted food prices in China, the largest consumer.
“If history is any guide, floods in 1998 led to a 16 percent spike in average grain prices in the second half compared with before the floods,” Zhou Jiaxin, analyst at Guoyuan Securities Ltd., said in an interview.
Chinese Premier Wen Jiabao called on local authorities to strengthen rescue and relief efforts after flooding killed 928 people and left 477 missing, the most in more than a decade. Floods and landslides knocked down almost 450,000 homes, destroyed more than 400,000 hectares of farmland and caused 52.7 billion yuan ($7.8 billion) of losses in July, the Ministry of Civil Affairs said July 27.
Three Gorges
The floods in 1998 killed about 4,000 people, forced the evacuation of 18.4 million more and caused at least 1.66 billion yuan of losses.
China’s Three Gorges Dam, the world’s largest, was hit by a second peak of water on the Yangtze River in eight days on July 28, the operator said. Flows were managed, with the dam releasing water at 42,400 cubic meters a second, China Three Gorges Corp. said.
The potential impact of natural disasters on grain supply may be a problem for the economy, the China Daily reported today, citing Zhao Xiaoyu, vice president of the Asian Development Bank. The output of grain harvested this summer fell for the first time in seven years, the report said.
Rice production may drop by about 10 percent this year because of floods, the industry web site cngrain.com said July 20. Consumer prices advanced in May at the fastest pace in 19 months, gaining 3.1 percent, the National Bureau of Statistics said June 11. Inflation cooled to 2.9 percent in June.
Price Gains
“Floods and heat together with a loose monetary policy have all contributed to the gains in food prices, which may lead to inflationary pressure,” Wu Zhengwu at AJ Securities Co. said. “Prices of food items such as wheat, rice, corn, pork and garlic have all risen in the month of July.”
Grains, meat and other food commodities increased an average of 6.9 percent to 7.1 percent from a year earlier, said Wu, reiterating comments in a report published with analyst Xu Chunhua July 28. Those gains may contribute an additional 2.38 percentage points to the Consumer Price Index, they said.
Pork prices jumped 7.1 percent on average in July compared with the previous month, the National Development and Reform Commission said. Prices will keep rising through the Mid-Autumn Festival at the end of September, the commission said July 29.
‘Peak Season’
The gains were partly the result of flooding in southern China in the first half, said Gary Lau, analyst at Bocom International, in a report last week. Prices may climb by a further 10 percent from September with “consumption stepping into peak season” between September and February, he added.
China is estimated to have produced 137 million tons of milled rice and 32.5 million bales of cotton, each weighing 480 pounds, in 2009-2010, as well as 48.9 million tons of pork in 2009, according to U.S. Department of Agriculture data.
The autumn grain harvest contributes more than three quarters of annual production. Rice is of particular importance as the staple represents half the entire autumn harvest, Guoyan’s Zhou said.
China is not going to be short of grains as the government keeps plenty of stockpiles to counter shortages and price spikes, Ma Wenfeng, analyst at Beijing Orient Agribusiness Consultant Ltd., said by phone on July 28.
Advance Capped
“The government can increase volumes of weekly auctions from its stockpiles or make them more frequent, or curb speculation by limiting the buyers to only processing companies,” Ma added. “Prices may gain a bit, but it won’t be out of control.”
The country consumes about 500 million tons of grain a year and the government keeps stockpiles equivalent to about 40 percent of demand to safeguard supply, according to Bao Kexin, president of China Grain Reserves Corp., which stockpiles agriculture products on behalf of the government. Premier Wen has said the government is seeking to increase production of grains, oilseeds, cotton and sugar and will continue to stockpile agricultural commodities.
“We aren’t particularly concerned about the inflation in the second half of this year because of the sufficient stockpiles the government can use to stabilize prices,” Judy Zhu, analyst at Standard Chartered Bank, said by phone from Shanghai yesterday.
--Feiwen Rong. Editors: Richard Dobson, Matthew Oakley.
To contact Bloomberg News staff for this story: Feiwen Rong in Beijing at +86-10-6649-7563 or frong2@bloomberg.net
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