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China’s Grain Price Hikes

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China Power

China’s Grain Price Hikes

A severe drought has prompted concerns about a grain shortage in China—and pressure on international prices.

Chinese returning from the Lunar New Year festivities in their hometowns quickly discovered that the prices of many goods had increased again, with the rise in the price of grain being the most significant.

The government has been telling the public through the media that the jump in grain prices was due to a major drought, and it has said it’s determined to control these price rises.

Certainly, it seems like the current round of inflation could genuinely be down to changing weather patterns. Looking at Beijing, for example, the first snowfall of the winter season arrived late and failed to alleviate the ongoing water shortages. The drought in China's biggest grain producing province of Shandong is particularly serious, and non-official media has said there’s bound to be a drop in grain production this year.

Last year, China was hit by a series of natural calamities, but still saw grain production rise 3 percent on the previous year. This was possible because the unusual weather mainly hit non-grain producing provinces and so had little effect on production. This year's drought, in contrast, was felt mostly in grain producing provinces.

China's rising food prices have made the international community extremely anxious. I was browsing some foreign websites recently and saw AFP, for example, reporting on China's drought for two consecutive days. It also noted concerns that China's rising grain prices will cause a hike in global grain prices.

International organizations have also voiced concern. The UN Food and Agriculture Organization has issued a warning that the drought in the world's largest grain producer could affect global grain prices. Western media has also speculated that China may end up importing large volumes of grain due to a fall in domestic wheat production, which would further tighten international supplies.

Some Chinese media accuse the Western press of indulging in another round of sensationalism, or perhaps even some implied China-bashing. Personally, I think that although some of the coverage in the Western media is speculative, it isn’t malicious. Still, it’s worth looking at why some of the hype about the drought having an international impact is misplaced.

China’s summer grain production has grown for seven consecutive years, and food self-sufficiency has reached 95 percent. China’s stock/consumption ratio, meanwhile, stands at about 40 percent, which exceeds the global average of 18 percent. Various provinces and cities in China have a huge grain reserves system, which is under the direct control of the State Council. Once the government gives the go-ahead, the grain reserves can immediately be transferred from 34 locations and placed on the market.

The government believes these reserves are an important factor in ensuring stable grain prices. The question now is how and when the government will respond. Whatever the response, there’s no doubt about the seriousness with which this is being treated—Premier Wen Jiabao reportedly called two meetings during the Lunar New Year holidays to discuss the issue.