China's Hunger

It made gloomy reading.

"As has become evident in recent months, high international prices for food crops such as grains continue to ripple through the food value/supply chain, contributing to a rise in retail prices of such basic foods as bread or pasta, meat and milk," The FAO said.

Rarely has the world witnessed such a widespread and commonly shared concern on food price inflation, a fear which is fuelling debates about the future direction of agricultural commodity prices in importing as well as exporting countries, be they rich or poor.

"The price boom has also been accompanied by much higher price volatility than in the past, especially in the cereals and oilseeds sectors.

"Increased volatility highlights the prevalence of greater uncertainty in the market.

"Supply tightness in any commodity market often raises price volatility in that market. Yet, the current situation differs from the past in that the price volatility has lasted longer, a feature that is as much a result of supply tightness as it is a reflection of ever-stronger relationships between agricultural commodity markets and other markets," the FAO said.

Drought in Australia has been a major factor, as has the rise of financial speculation in some commodity markets, such as wheat and corn. World dairy prices are at record levels because of rising demand and the drought in Australia.

But the major demand factor has been twofold: the rising demand from biofuel producers such as biodiesel (canola) and ethanol (corn); and China, where improving and changing diet is leading to greater imports, and where sharp rises in domestic food prices, especially for edible oils, has promoted a surge in Chinese imports.

This has come at a time when canola, the main biodiesel feedstock, especially in Europe, is in greater demand. China's forays into the edible oils market has sent the price of canola and other oilseeds and grains higher, pricing them out of reach of the subsidy driven biodiesel producers.

Likewise rising demand for corn from China and other emerging nations with growing meat consumption has boosted prices at the same time as ethanol production is growing rapidly in the US.

World wheat prices at record and near record levels have helped drag corn prices higher, and also boosted soybean prices (US and Brazilian growers switch between the three). Now there's a glut of ethanol capacity in the US because producers can't afford to pay higher prices for corn.

Now drought is a concern in southern China which threatens the latest rice crop.

This week we saw comments from a Chinese Government grain trader about China's needs next year.

A fall in plantings by Chinese farmers will mean China will be a more active player in world markets for soybeans, palm oil and other oil seeds (canola especially).

The news is good for south east Asia's palm oil producers in Malaysia, Indonesia, Vietnam and the Philippines. It's bad news for the biodiesel producers (especially in Australia) which have sought to use palm oil as the feedstock.

China is the world's biggest consumer of vegetable oils.

And its imports in the next year could account for as much as 45% of international trade in soybeans by volume in the year to September 30, 2008.

Its imports of vegetable oils could account for 20% of world trade in the same time.

Bloomberg reported some of a speech this week of Wang Yinji, deputy general manager of Chinese buying agency and trader, Cofco Ltd.

He said China's vegetable oil consumption will rapidly rise for a few years,' because per capita consumption of 17 kilograms a year is below the world average and compares to 25 kilograms in Taiwan, which has a similar diet structure, and nearly 40 kilograms in the US".

According to traders, Chinese buying has helped push up the price of soybeans traded on the Chicago Board of Trade by more than 50% so far this year, and helped push palm oil prices up 49%.

Mr Wang said that soybeans will continue to be the leading source of vegetable oil for China, accounting for 41% of total supply by 2010-11, up from 37% now while palm oil will jump to 31% of the total from 21%.

There will be an annual shortfall of two million tonnes a year of vegetable oils in China over the next three years as Chinese gross domestic product doubles in the same time, according to Mr Wang.

Soybean, palm oil and rapeseed (Canola) oil will make up 88% of China's total supply, compared with 78% in three years time, but canola will fall from 20% to 16% because of a fall in plantings.

China's soybean and canola plantings fell by 20% and 23% this year, hence the move to the world stage for extra supplies, according to Mr Wang.

Meanwhile reports this week said that large areas of south China are suffering from serious drought, with water levels on two major rivers in rice-growing provinces dropping sharply.

According to state media reports rainfall since the start of October have dropped 90% in Jiangxi and 86% in neighbouring Hunan, the country's largest rice-growing province, compared to monthly averages.

The Xinhua news agency said the Gan and Xiang rivers running through the two provinces had seen their lowest water levels in history.

There's a shortage of drinking water and river transport has stopped, but the biggest impact has been the sharp fall in the amount of water available for irrigation. (Sounds familiar to those along the Murray-Darling basins in Australia).

Water levels on China's longest river, the Yangtze, and on the Pearl River in the southern province of Guangdong had also dropped, according to the Xinhua report.

Drought and floods are perennial problems in China where meteorologists have complained about the increased extreme weather, partly blaming it on climate change.

The impact on the rice crop has so far not been computed, but earlier this month the China National Grain and Oils Information Centre estimated rice production this year would rise by 2% to 186.5 million tonnes.

A shortage of rice is the last thing China needs.

Shortages of pork, vegetables, eggs and cooking oil helped drive inflation to an annual rate of 6.5% in October, the highest for 11 years and equal to the rate in August.

The short supply won't change for the best part of a year. If rice prices rise then the Chinese government will be in for a struggle.

The Government has already frozen all government prices and charges until the end of the year (it will continue into 2008).

The only exception was a one-off 10% rise in fuel prices last month for domestic consumers, but that hasn't been enough to stop profiteering and hoarding.

Non food costs rose 1.1% in October, a manageable figure.

If the price controls were removed that figure might be pushed upwards.

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