1. That's a historic fact now Jules. Grain markets are now more than ever moving on anticipation of future output. This will continue to be the case as the effects of this credit crisis are likely to lead to a massive drop in global output in 2009 due to constrained credit flows. Half of the world's DAP/MAP capacity has been offline since October last year ... a fair indication of what grain yields are achievable given grain output is an almost direct function of fertilizer consumption.
2. In 2005 Australia produced a record grain harvest. The following 3 years have been shockers with 2007 being around half that of 2005. The point - past yields do not mean future yields are guaranteed. Particularly when a large component of your grain output as in China's case is irrigation based and water availability is falling off a cliff. Just look at rice output in Australia for the last 5 years once water insecurity became an issue.
When China steps into markets to buy it traditionally hasn't been an importer for such as wheat, markets invariably move higher. Just as when India turned from a net exporter to a net importer in 2007 the market turned violently higher and we ultimately saw wheat move to a record high $14-15/bushel.
3. 10 million hectares is 10 million hectares. If the yield penalty is 1t/ha which is common in drought that's 10 mmt or half an Australian wheat crop. If the penalty is 2t/ha in extreme drought that's 20mmt or one Australian cropping year's output for wheat. That's grain they are removing out of the export market and that is largely where wheat prices are forged. China cares little for falling grain prices as it can import food security cheaply.
4. China can regulate the potential for food inflation within its domestic production base but if it needs to import it has no say in pricing.
