Wheat | China Drought Threatens Crop

The wheat drought in China could end up being more of a worry than a reality as the country rolls out heavy irrigation efforts to save the wheat crop.

China's main wheat crop may yet emerge mostly unscathed from a dire drought as Beijing moves to fund last-minute irrigation, reviving crops that might otherwise have been left to die by farmers struggling with low prices and oversupply.

A domestic media outcry and public hand-wringing about the severity of the drought triggered some speculation that the world's biggest wheat producer might resort to imports, but experts say fears over the impact of the drought -- which officials have called the worst in half a century -- are misplaced and overblown.

On Thursday Beijing declared an emergency over the drought in parts of northern China that lie between Beijing and the Yangtze river, which have seen little snow or rain since November. Among the areas hardest hit is China's biggest wheat producing province, Henan, which grows a quarter of the crop.

The drought area covers almost half of China's winter wheat fields, but only a fraction have suffered real damage so far. Much potential damage could be prevented if farmers irrigate their fields in time, researchers said. The Agriculture Ministry said on Thursday half the affected fields had been irrigated.

"If all the measures are implemented, we will be able to keep losses to within 2.5 percent" of the total harvest, said Xiao Ziniu, an official at China Meteorological Administration.

A forecast for rain across much of the area this weekend should help, although too little is expected to end the drought.

Even so, President Hu Jintao has ordered "all-out efforts to combat the severe drought" and the government has mobilised millions of farmers to water their dry fields by offering subsidies and sending experts to help drought relief, which should minimise the impact on seedlings.

That could keep losses to less than 3 million tonnes, pulling overall production back from last year's record 112.5 million tonnes towards 2007 levels. That might prompt some sales from China's swollen granaries, but would be unlikely to spill over into calls for large imports from the international market.

While farmers are not yet in the clear -- the damage could get worse if crops are starved of water during their critical growing phase in March and April -- China also has a sizeable supply cushion should the damage spread.

Last year China exported only 126,000 tonnes before the government suspended exports, concerned about a spike in global prices that could have drained its stocks. To prevent a glut and pressure on farm incomes, the state bought up 43 million tonnes of wheat, adding extra reserves to existing stockpiles.

"Even in the worst-case scenario, the government, with 60 million tonnes of wheat stocks, has the ability to ensure supplies and control prices," said Ma Wenfeng, an analyst with Beijing Orient Agribusiness Consult Ltd.

Even so, the drought has stoked anxiety among analysts and traders over short-term supply, combined with a drought in Argentina, Indian export controls and Pakistan imports.

"In the current environment, with a lot of nervous investors who think commodities will rally later in the year, they're waiting for a good story for that to happen. News can really turn a market," said Brady Sidwell, an analyst at Rabobank.

Chinese wheat futures <0#CWS:> are up 5 percent since the market re-opened on Monday after a holiday week, but physical prices <0#ASWHEAT-CN> have remained stable at the price set by the government for its own purchases.

On the Chicago Board of Trade, front month wheat futures Wc1 jumped 3.6 percent on Thursday, although they are still down since the start of the month, as reports of the worsening crop began to circulate.

China is the world's top consumer and producer of wheat, and almost 95 percent comes from China's winter harvest.

For a graphic on world wheat producers click: here

"MAYBE DROUGHT IS GOOD NEWS"

Even though the wheat crop is likely to fall this year, the impact on farmers' incomes may be slight, or even positive.

Wang Shaozhong, a wheat researcher in Henan Academy of Agricultural Sciences, told Reuters that after five years of bumper harvests and a trend of migration from the countryside to the cities, many farmers had not irrigated their winter wheat because the cost was too high and the profit margin was too low.

"Grain prices are not attractive enough for them to expend too much effort watering the fields," said Wang.

Wang's colleagues at the Henan Academy of Agricultural Sciences have been dispatched to villages to ensure that wherever farmers have access to water, they irrigate their crops.

"We ask them to water all the wheat fields within 10 days. In some areas, local governments pay subsidies to farmers who irrigate fields," said another researcher with the Henan academy.

Watering dry crops means extra labour and fuel costs and those far from rivers would have to dig wells to get water.

In some areas it would cost 70-80 yuan ($11.70) to irrigate one mu, a Chinese land unit equivalent to one fifteenth of a hectare. That means farmers need to spend $2 to protect $1 worth of crops against potential damage from drought.

"If you water the fields, you may get 50 jin (25 kg) more wheat per mu, but with wheat prices at 0.8 yuan per jin, what does it matter as long as farmers can ensure they have enough to eat?

And after five good years, most farmers have grains in store and are not worried about food, he said.

"Or maybe the drought is good news for farmers because potentially tight grain supply would help push up grain prices. Cheap grain prices are hurting farmers."

At China's weekly wheat auctions on Wednesday, no bidders were interested in 914,212 tonnes of old stocks of imported wheat offered by the government. The government plans to auction a total of 1.73 million tonnes next week.

China's government is always wary of tensions in the countryside that could spark unrest, especially as the economic slowdown adds to the number of unemployed. But behind its rhetoric, the government has allocated a mere 400 million yuan ($60 million) to deal with the drought.

Much more help is likely to come from a state economic stimulus plan which, at 4 trillion yuan, is 10,000 times bigger and includes funds to upgrade agricultural infrastructure such as irrigation systems.

The wheat crop looks like it'll have a good chance to survive the drought in China as the irrigation efforts are starting to pay off.