un warns china drought to ignite wheat prices

U.N. warns China drought could pressure wheat prices

By Howard Schneider
Washington Post Staff Writer
Tuesday, February 8, 2011; 5:39 PM

A record drought in China's major wheat producing areas threatens to push world food prices beyond their current high level, the United Nations warned in a report Tuesday, adding to growing concern about how the rising cost of food is affecting the poor around the globe.

China, the world's largest wheat producer, consumes almost all of what it grows and keeps roughly 55 million tons in reserve. But the prospect of a failed winter wheat crop might prompt the country to import grain on a scale that could put further stress on world prices, the U.N. Food and Agriculture Organization warned.

The FAO's world food price index, a composite indicator of the cost of a basket of goods, is at its highest level since it was introduced in 1990. Wheat prices have roughly doubled since mid-2010, according to International Monetary Fund data.

Rainfall has been more than 30 percent below normal since October across five northern provinces that account for about two-thirds of Chinese wheat production, the FAO reported. Shandong province, China's second-largest wheat-growing area, has had less than half an inch of rain since September and is heading for its worst drought in 200 years, according to reports from China's official news agency.

Not all of the wheat crop is at risk. The FAO, quoting Chinese officials, said about a third of the 34 million acres under cultivation could be damaged. The most immediate threat is the cold: Less-than-average snow cover makes the crops more susceptible to freezing, and an FAO official said if temperatures drop below zero, the cold could easily kill the winter wheat seeds, which are planted in fall and lay dormant until spring.

If precipitation remains inadequate during the spring growing period, the government might need to step in with more extensive irrigation efforts, said FAO economist Kisan Gunjal.

Food prices rose sharply during the last half of 2010, driven by increasing demand, the rising price of oil and other inputs, and a cutoff of wheat exports from Russia as the country tried to cope with its own drought.

Food inflation contributed to the recent political unrest in Tunisia and Egypt, and officials at the World Bank and other international organizations have said the world's major economic powers should work together to find a way to avoid volatile swings in the prices of staple goods.

Chinese officials have focused attention on the drought, with top leaders visiting the most hard-hit regions during the country's recent Lunar New Year festivities and moving to bolster water supplies. The Reuters news service, reporting from Beijing, said in some areas of Shandong province, firetrucks were hauling in drinking water for about 250,000 people.

The FAO said 2.6 million people and 2.8 million livestock are facing water shortages in the drought area.

Wheat futures prices jumped by about 2 percent Tuesday.

http://www.washingtonpost.com/wp-dyn/content/article/2011/02/08/AR2011020804288.html?hpid=topnews