Economy

Bitter harvest

Fears of failed Chinese wheat crop are driving world grain prices up

Conserve it...

Chinese farmers produce almost all of their wheat between autumn and spring, with a harvest in June. The crop needs rain in the autumn, snow cover through the winter and then rain again in the spring. But the current crop has not received the typical watering, nor the normal snow needed to keep it insulated from the extreme cold of winter.

Hence a minor snowfall in parts of Shandong last Sunday was greeted with considerable relief, as the first precipitation in much of the province for 140 days. Three days earlier Beijing had also received its first wintry dusting, after 108 days of its own without rain.

But that still constitutes very little rainfall since October and accordingly the UN’s Food and Agriculture Organisation put out a special alert last week on the threat to 60% of China’s wheat production (concentrated mostly in Shandong, Jiangsu, Henan, Hebei and Shanxi). It was the first warning of its type for China in 15 years.

But why is the wheat harvest now making international headlines as well as domestic ones? Partly because of its inflammatory impact in the already volatile Middle East, says Ben Simpfendorfer at China Insider. As the world’s largest producer, China usually grows just about enough wheat to meet its domestic needs. But when it looks like falling short, it must turn to the global markets, pushing up prices internationally. That hits countries like Egypt, the largest wheat importer with nearly 10% of the world’s imports, by driving up bread prices. Analysts say other Middle Eastern governments have also been buying up wheat reserves, in anticipation of further discontent on the streets in the weeks ahead.

It doesn’t help that speculators are keenly aware that the Russian wheat crop was down by a third last year (drought and fire) or that the Australian harvest has been hit hard by the recent flooding. As a result wheat prices are at a three-year high, up 80% on 12 months ago.

The news is rippling through the global equity markets too. Wheat, together with rice, accounts for about 40% of the food component in the Chinese CPI basket, so the worry is that a continuing climb in prices will stoke wider inflation, leading to more pressure on interest rates and a greater likelihood of further monetary tightening.

Some forecasters think the concerns are overblown. Donna Kwok, an economist on HSBC’s Greater China economics team, believes existing stockpiles of 30% to 40% of annual production are sufficient to see off the worst of any shortfall this year. Others say higher temperatures than normal mean that the absence of snow cover has been less devastating, and that a spring season of more plentiful rain is always the key factor in determining winter wheat yields.

Some even question whether drought necessarily entails crop failure – in 2009 China’s wheat production regions also experienced a severe drought but final grain output increased, rather than subsided.

But the anxiety seemed real enough for the State Council to assemble in special session last week to discuss crop policies, and subsequently announce a plan to allocate Rmb12.9 billion ($1.96 billion) to boost grain production and fight drought, according to CCTV. There was also another bout of large-scale cloud seeding (see WiC32), leading to scattered snowfalls across several of the breadbasket provinces.

Of course, the current conditions should lead to a wider debate on whether the third year in three of dry conditions is a man-made problem or a climactic one (or even just a natural weather cycle).

That hasn’t been the case in most of the Chinese press, however. Probably under encouragement to put a dampener on inflationary talk, the media has concentrated instead on man-made solutions to the drought. An immediate priority (albeit less short term than the rainmakers’ silver bullet) is to improve water conservation. The problem, says China Business, is that investment in irrigation has tailed off hugely since the 1970s. The Shanghai Morning Post agrees, claiming that future spending must move beyond “rail, road and aviation” towards water infrastructure as well.

Fortunately, other newspaper editors expect positive things here too, noting that water conservation initiatives were given pride of place in this year’s “No.1 Central Document”.

No.1 – traditionally the first policy paper to be released by the State Council each year – is usually thought to signpost the government’s priorities for the period ahead. All of the recent editions have focused on rural development (and it’s not always easy to pick out substantial differences between documents from year to year). But the 2011 version does seem to have a clear water conservation theme, talking about things like improving water efficiency and adjusting prices for urban and industrial users.

Right on cue, Agricultural Development Bank, one of China’s three policy banks, then announced that a third of its loans this year would go into funding water conservation projects. Although the rain may not have been falling, the news flow was certainly moving in the right direction…

This year’s No.1 plan also expects local authorities to allocate at least 10% of the proceeds of land sales (which could be as much as $30 billion annually, or 10 times last year’s irrigation spending) to water-related agriculture projects. As is so often the case, provincial administrators are getting most of the blame for the current predicament, although their reluctance to spend on irrigation in the past is understandable given that grain production has not been regarded as much of a contributor to GDP growth.

Getting less discussion are the longer-term obstacles to ensuring that China has enough water. That debate is being left more to the specialist blogs, like Asia Water Project, which asked Lijin Zhong and Hua Wen from the World Resources Institute for the bigger picture on the challenges ahead.

One is ongoing urbanisation (city residents consume three times as much water as the rural population, according to the two experts).

Another – and more specific to the agricultural sector – is the regional imbalances brought about by China’s development model. The south, where water resources are generally far more abundant, has more of an industrial economy, with locals more reluctant to grow crops on land that might make more money used for other purposes. That means farmers to the north, where water resources are lacking, are being relied upon more heavily.

A third is how water consumption targets will fit with expanding energy demand, and continuing economic growth.

Zhong and Wen say the full details of the latest Five Year Plan will include new efficiency targets for the big water-dependent industries like petrochemicals, iron and steel, and in previous Plans the power sector was also required to improve water efficiency by 10%. But herein lies another conundrum, as many of the newer power generation technologies have very high levels of water consumption. Nuclear power needs a lot of water for cooling, for instance, and large scale solar farms even more (almost double that of pulverised coal per unit of energy generation, says Zhong). Conventional coal-fired power churns out greenhouse gas, of course, but has much more modest water usage.

With that kind of choice on offer, who’d be a Chinese environmental planner?


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