China drought may 'devastate' wheat yields

by Agrimoney.com

The world's biggest wheat crop – China's – faces a "critical situation" if a drought across most of its range does not break, the United Nations has said, warning that cold temperatures could also "devastate yields".

The report was attributed with helping foster a revival in wheat prices to a fresh two-year high in Chicago.

The UN's food agency warned that "substantially-below normal" rainfall over the last four months, , had put some 5.2m hectares of winter wheat, an area significantly bigger than Denmark, at risk of drought damage.

By lowering snow cover, the conditions had also left the crop vulnerable to damage from low temperatures during the rest of the winter.

"Thus the ongoing drought is potentially a serious problem," the UN Food and Agriculture Organisation said in a so-called "early warning" alert.

"Adverse weather, particularly extreme cold temperatures, could still devastate yields.

"The situation could become critical is a spring drought follows the winter one, and/or the temperatures in February fall below normal."

'Serious risk'

The warning adds China to the list of countries, including Canada, Kazakhstan and Russia, whose wheat crops have suffered severe weather setbacks in recent months, while America's hard red winter wheat seedlings have also suffered from a lack of rain and snow.

Macquarie on Tuesday cautioned of a "serious risk of damage" to the US hard red winter crop from temperatures which are expected once again to fall below the -10 degrees Fahrenheit deemed a danger level by Kansas State University.

Last week, Barclays Capital warned that a "significant" drop in Chinese wheat production "could propel international prices strongly higher".

'Unnerves the trade'

The FAO alert was viewed a rebound foster a rise in wheat prices, which had earlier falling nearly 2% on another Chinese factor – a rise in interest rates.

Affected provinces, 2009 wheat crop, and as % of national output Hebei: 12.22m tonnes, 10.9% Henan: 30.51m tonnes, 27% Jiangsu: 9.98m tonnes, 8.9% Shandong: 20.34m tonnes, 18.1% Shanxi: 2.53m tonnes, 2.2% Total: 75.58m tonnes, 67% Source: UN FAO

Tighter monetary policy is seen as potentially quelling China's huge demand for raw materials, such as cotton and soybeans, of which it is the top importer.

The crop warning "unnerves the trade", Don Roose, president of broker US Commodities, told Agrimoney.com.

"It means more concerns, more problems. It has most definitely been a support factor," he said, adding that the string of tenders from North Africa and Middle Eastern buyers, such as Algeria, Iraq and Jordan, had also supported sentiment.

History lesson

However, Jerry Gidel, at North America Risk Management Services, was sceptical over the potential for a poor Chinese crop to prove a lasting concern, especially given estimates that the country has huge reserves of the grain.

"I have got burnt a number of times over the years getting excited about Chinese weather," he said.

Chicago wheat for March stood 1.7% higher at $8.73 a bushel with an hour of trading to go, having touched a two-year top of $8.80 ¾ a bushel earlier.

 
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