China grains up, but it will not help global supplies

- Last updated on GMT

Related tags: Grain, Cereal, China

As grain stocks are depleted across the world, China's food
producers have found sourcing the commodity an increasingly
expensive and time consuming issue, writes Simon Pitman.
However, a report from independent intelligence provider Access
Asia indicates that an increase in domestic grain crops this year
is leading to both domestic freight problems and a loss of orders
for grain exporters to the country. But if a recent FAO report is
anything to go by, global supplies will not be impacted by the
increased fortunes of China's grain producers.

At first, Beijing predicted that there would be a shortfall in production in 2004 after several years of declining harvests, amid increasing concern that China's grain production was falling to dangerously low levels and that imports would continue to rise to meet demand.

But it now appears that 2004 will be a bumper grain harvest, with provinces announcing record crop levels. Anhui Province alone is expected to harvest eight billion kilogrammes of grain this summer, the highest for five years.

This has meant that grain is taking up a larger amount of domestic freight capacity than had been initially forecast. It also means that hopeful importers, primarily the Australians, will now not be getting the orders from the PRC that they were expecting.

One result of the longer term decline in production is that grain has led the pack in China's rising food prices, which in turn has been driving growth in the consumer price index (CPI). In May, the CPI was up by 4.4 per cent year-on-year, the highest growth rate in at least seven years, and in the first five months of 2004 alone it gained 3.3 per cent.

According to the Beijing-based National Bureau of Statistics (NBS), increases in food prices accounted for 87 per cent of the growth in the CPI in the first five months of the year. Access Asia​ says that with this year's harvest predicted to be good, and an increase in grain supply due to hit the market, this should help counter inflationary pressures. Along with steel, ferrous metals and oil, grain prices fell in May.

If official statistics are to be believed then government incentives to encourage farmers not to switch from grain as a staple crop appear to have worked. According to farmers in Hubei province, the grain price is US 70 to 80 cents per jin (1 jin = half a kilogram) and it has gone up by US 40 to 50 cents as compared with last year. For the average farmer this represents, according to the government, an increase of more than RMB1,000 (€100) per mu (15 mu = 1 hectare). NBS also says that this year over 600 jin of wheat is being harvested from each mu.

Further to this, local provincial authorities report that the promised subsidy to grain farmers has also been delivered, allowing them to continue to make a living from growing grain. The subsidy is said to effectively reduce the amount of rent the farmer pays for the grain growing land - typically (again taking Hubei as an example) this is more than RMB60 for each mu which has been reduced by around RMB40 per mu this year to encourage continued grain growing.

On an international level, the news that China's domestic grain supply is increasing will have little impact on world supplies. Only this week, the UN Food and Agricultural Organisation said that global cereal stocks are forecast to fall in the new 2004/2005 marketing season. This represents a fifth consecutive annual decline, despite an expected increase in cereal production for 2004 to 1,956 million metric tons, a substantial increase from the previous year.

The reason that China's increase in domestic consumption will have little impact on global grain supplies is simply due to the fact that the country is fighting a constant battle to keep up with demand from its 1.3 billion inhabitants. The fact that it will not be importing so much grain this year will only go part of the way to counterbalancing world grain supplies, which have also been hit by bad crops and increasing demand.

Consumption in China has been steadily rising in recent years and, in direct correlation to that rise, commodity stocks have been depleted. According to the Earth Policy Institute, consumption of grains stood at 344 million tons in 1993, while stocks stood at 239 million tons. As consumption steadily increased, the Chinese government did much to build up stocks, triggered by growing fears over population growth. This meant that by 1999, consumption was up to 373 million and stocks stood at 306 million. However, following a string of poor crops caused by bad weather conditions and farmer's apathy towards farming grains, in 2003 consumption stood at 378 million, whilst grain stocks had plummeted to 109 million tons.

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