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China Food Crisis ?

Commodities / China Sep 10, 2014 - 08:39 PM GMT

By: Chris_Orr


China is having the worst drought in half a century, which will result in a devastating harvest.

Or: China is going to have a record crop this year.

Those are the two stories coming out of China in just a two-week time span.

The country is not known for publishing reliable information — whether it is related to manufacturing, agriculture or anything else. Relying on the Chinese government for useful economic data is utterly futile, and the latest agricultural information is a case in point.

In mid-August, we were lead to believe that drought was wiping out much of this year’s crops.

Then, at the end of August, the government reported that they expected a bumper crop, creating such a large surplus that they’ll have to dump it on the world market at a loss.

Which is it, devastating drought or bumper crop?

China has trouble being truthful about much of anything, and this year’s information on the potential harvest is just another example of that. You might think that it’s much ado about nothing — after all, does it really matter how large the country’s crop will be?

However, their crop, or lack thereof, can make a tremendous difference in world agricultural trade.

A report came out on August 13 that the Manchurian Plain is suffering through the worst drought in 50 years. The report, from China’s state media, said crops are withering in the fields and people are running low on water. According to the dispatch, hardest hit is the northeast province of Jilin, which is just north of North Korea. The weather bureau there reported that parts of the region were facing “zero harvest.”

The report went on to say one-third of China is in drought.

Two weeks later, on August 26, another report came out, this time saying that the country will hit record corn production at about 210 million tons.

The report, again citing the Chinese state media, said that China will have a total grain surplus of 150 million tons — twice last year’s surplus. The total includes rice, corn and wheat.

So we have two stories coming from government officials that are completely different, leaving the world market which is reliant on the outcome left to wonder: Which is true?

El Niño’s Impact on China

The first one about the widespread drought seems, on the surface, completely plausible.  El Niño often causes drought across several areas of eastern China.

To verify the drought, I looked at detailed satellite images of China’s vegetation. From what I see, it appears that the second story, the one from late August about a record crop production, is closer to the truth.

This is a satellite image of the Vegetation Health Index on a scale of 1 to 100. An index greater than 60 (color coded in dark green and blue) is good, while anything lower than 40 (orange, pink and red) means that crops in that area are stressed. This usually means drought or disease is afflicting the area.

While parts of the Manchurian Plain, located in the northeast region of the country, appear to be stressed, other parts are in great shape. El Niño is causing dry conditions across about half of the east-central Corn Belt, but the other half is in such good shape that it will probably even out the total production.

Southern China’s monsoon season was weak — also a product of El Niño — but when I compared the crop conditions of this past week to the same week last year, it looks like China is actually in better shape this year.

Based on my analysis of this satellite data, I believe there may be a grain of truth to both government reports. There are parts of east and northeast China that are dealing with some very dry weather, hence the reports of severe drought affecting crops, but satellite imagery indicates that these regions with “zero harvest” will be relatively small.

I expect this year’s grain harvest to be strong in China. However, unless there is a huge change in the weather, it will not be as large as last year’s.

Still, that’s not necessarily good news for us because China already has an oversupply of grain, meaning U.S. farmers won’t have an export market there since China will have a surplus. The USDA estimates that the U.S. will have a record crop and we could definitely use a large export market, otherwise our corn prices will likely fall even more this autumn and winter.

While U.S. farmers will make very little money, the lower prices will be good news for every company that uses corn and corn byproducts, such as soda companies, poultry producers and ethanol producers, because they won’t have to spend as much on production.

There’s a silver lining in every cloud,

Chris Orr Editor, Weather Trader
© 2014 Copyright  Ted Baumann - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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