SHANGHAI (Interfax-China) -- Wheat production in Henan Province, China's largest wheat producing region, is being threatened by disappointing financial returns, disease outbreaks, and pests, according to a survey by the National Bureau of Statistics.
"Diseases are not new and they damage the crop every year, although some people are more concerned about diseases this year. Sharp eyespot disease (SED) is one of the most destructive diseases for wheat, and one we cannot completely cure," Kong Weichuan, a government grain officer in Henan's Puyang City, told Interfax.
More importantly for farmers, production costs, particularly fertilizers, pesticides and labour, have risen substantially and affected the economic attractiveness of wheat.
High fuel prices might affect irrigation and this year's harvest by raising costs. Kong said high fuel costs are a new challenge for the industry and the impact may be more heavily felt after the start of large-scale harvesting in late May.
"It is true that wheat farmers are unhappy [with rising production costs]. A large number of young people would rather do odd jobs in the city than work in wheat fields. Only elderly people and children are available to manage fields," Kong said.
However, better-than-average weather conditions this season may offset the many problems affecting production this year, and keep wheat production in Henan stable with last year's, Kong noted.
Below is a table specifying Henan's wheat output from 2002 to 2007:
Zhengzhou Commodity Exchange wheat futures extended losses on Thursday amid a gloomy price outlook, with the September contract falling 1.66% to RMB 1,952 ($279.66) per tonne.
The technical outlook is very poor, and all moving average lines are supporting a continued downtrend. Investors are advised to build short positions, commodity analyst Yang Jingyuan, from Sanli Futures, said.
Commentary
China is attempting to curb inflation by controlling the symptom of rising food prices, but has not successfully addressed the cause - rising production costs due largely to record high crude oil prices. Oil is used to fuel tractors, and to produce fertilizer and pesticide.
The current environment is the result of a supply chain that has only been partially deregulated. Refiners are suffering billion-dollar losses as they are only allowed to pass a portion of their increased costs on to downstream users. Farmers are in a similar situation - they have seen petroleum-based product prices soar, but the government has prevented them from passing it along to the end consumers in the name of controlling inflation.
Farmers are complaining loudly this year that grain prices are unacceptable. Unless the government addresses the rising costs facing farmers, either through increased subsidies or higher market prices (which are unlikely), we will see an increase of crop shifts to soybeans, where China's import dependence has made prices much more buoyant than grain crops, and in turn threatens China's current grain self-sufficiency. Of course there is another means of addressing this issue, a measure often espoused in these reports - a significant revaluation of the renminbi.
© Interfax-China 2008. For further information regarding Interfax China Commodities Daily Reports, contact David Harman at david.harman@interfax-news.com. Interfax also publishes a comprehensive China Grains & Soft Special Report, contact David Harman for details.
