Rice Supply Tightening in China May Boost Imports, Inflation

June 30 (Bloomberg) -- Rice supply in China, the world’s biggest grower and consumer, may decline after drought and floods damaged crops, potentially boosting inflation and increasing imports.

The early indica harvest may drop in some areas, said eight of 12 officials, traders and farmers surveyed by Bloomberg News in Hunan and Jiangxi provinces, the top producers of the variety which represents 17 percent of annual output. The crop may increase or be about the same as last year, said four of those surveyed from June 21 to June 25. Output of this type already dropped last year to the lowest level since 2003, according to the statistics bureau.

Lower production may bolster rice futures in China that jumped 29 percent in the past year and increase imports that doubled in the first five months. Surging food costs because of drought and floods helped lift inflation to 5.5 percent last month, the fastest pace in almost three years. The rate may quicken to more than 6 percent in June, adding pressure on the central bank to increase interest rates, some economists said.

“Competition for the early rice harvest will be quite intense given expectations for low output, likely driving up prices,” said Zhang Ting, an analyst at Cngrain.com, a researcher owned by China Grain Reserves Corp., which manages the grain reserves. “Output may at best match last year” even as the planted area probably gained, she said in an interview.

Faster Inflation

Rough-rice futures in Chicago climbed 48 percent in the past year, trailing a 75 percent jump in corn. The export price from Thailand, the biggest shipper, gained 8.6 percent. The lagging performance of rice may be “separating us from a food crisis.” Abdolreza Abbassian, a senior economist at the FAO, said in March.

Inflation in China, the second-biggest economy, has been driven by gains in meat, grain and vegetables. The cost of food, almost a third of the consumer price index, jumped 11.7 percent in May from a year earlier, boosted by surging pork prices. The price of packaged rice climbed 19 percent in the year through June 24, according to the Ministry of Commerce.

Rising prices in China may boost imports from Southeast Asia including Vietnam, Cngrain.com’s Zhang said. Purchases in the first five months doubled to almost 300,000 tons, with imports shipped from Vietnam surging, according to customs data. Shipments were 366,192 tons for all last year, data show.

Early indica rice on the Zhengzhou Commodity Exchange climbed to 2,661 yuan a ton on May 30, the highest level in more than three months, and closed at 2,596 yuan today. The procurement price for unhusked early rice on June 23 was 19 percent higher than a year ago, according to a Cngrain.com index.

Lakes Drained

The total rice harvest in China may gain 1 percent to 197.6 million metric tons in 2011 from last year, according to the grain information center. State grain reserves amount to 40 percent of annual consumption, Zhang Ping, chairman of the National Development and Reform Commission, said in March.

Central China experienced the driest three months on record in the lead up to May, draining the biggest lakes and reservoirs and cutting irrigation. Between March and May, seven provinces including Hunan and Jiangxi recorded 60 days without precipitation, delaying the transplanting of early season seedlings, the China Meteorological Administration said June 2.

The drought was followed by devastating floods, which damaged at least 338,000 hectares (835,216 acres) in Jiangxi and Hunan this month, according to the Ministry of Civil Affairs.

Harvest Delays

In Xiangyin county of northern Hunan, one of the areas worst affected by drought, output may plunge as much as 40 percent from last year, according to Chen Youguang, general manager of Zhiyou Rice Industry Co., which processes the grain. Low temperatures also damaged the seedlings, while excessive rain since June flooded some crops, he said.

“Many of these plants haven’t formed heads,” which should have been completed by now, Chen said, standing next to green paddies. The harvest may be delayed by half a month, he said.

The government will set a price floor of 102 yuan ($15.75) per 50 kilograms for early-indica rice this year, 9.7 percent higher than last year, the State Administration of Grain said in March. Farmers will likely demand between 110 yuan to 115 yuan, according to the traders surveyed.

In Zhuantou village, eastern Hunan, 60-year-old farmer Yang Dawen said the drought was the worst he has seen. In addition to the drought, floods this month wiped out some crops, he said in an interview June 22. “Maybe I’ll get half as much as last year” from the half acre planted with early rice, he said.

Source: http://www.businessweek.com/news/2011-06-30/rice-supply-tightening-in-china-may-boost-imports-inflation.html