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| Earthquake Impact on China's Grain Production |
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Since the devastating earthquake in Wenchuan, Sichuan Province of China on 12th May, many domestic and international analysts have been assessing the disaster's impact on the overall Chinese economy. The majority view is that the earthquake would not cause serious consequence to China's economy, but it may worsen the existing inflation problem.
Food inflation concern
Analysts' reasoning is that Sichuan has always been a major grain supply province of China, so the current disaster may create a significant impact on this year's grain supply. And the resultant change in food supply balance may in turn cause a substantial increase in food prices in China, hence higher inflation for the rest of 2008.
The consumer price index (CPI) released in April showed that food prices in China went up 22.1% on a yearly basis, higher than the previous 21.4% released in March. Sichuan is a major producer region of grain, oil, silk cocoon, pigs, fruits, vegetables and many cash crops in China, and due to the damages on farmlands, food crops and road infrastructure by the earthquake, as well as the psychological impact on food and pork markets, it is possible that food and pork prices may go higher in the short term, especially in the next few months. |
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But it is likely that the above impacts will remain for a short term only, not longer than July.
Furthermore, although food price accounts for almost one-third of the CPI weighting, we also need to look at another important inflation factor, the so-called tail-raising factor, which measures the statistical impact on current price calculation from average price changes in the previous period. The tail-raising factor went down to 5% last May, and further down to 2% since last September. Coupled with other price containment factors, it is expected that consumer price should not experience significant increase from its pre-earthquake level, even for the upcoming May, June and July numbers. And after July, the impact of earthquake on China's CPI should mostly disappear.
What have been affected
The factual reasons for the above conclusion are as follows. It is true that Sichuan is China's major agricultural province, whose 4.52 million-hectare arable land accounts for 3.8% of China's total farmlands, and Sichuan produced 6.89% of China's total grain output in 2007. But it may be somewhat far-fetched to say that the earthquake will cause severe impact on Sichuan's agricultural production. This is because although the earthquake has led to enormous damages to the quake area, the affected range is nevertheless limited to several counties and cities such as Wenchuan County, which are mostly mountainous areas, instead of the fertile farmlands in the Chengdu Plain. Grain output from those affected areas is less than 2% of national total. In addition, in terms of natural disaster damage on agricultural production, earthquake's impact will be far less than those caused by flood or draught. Unlike flood or draught disasters which can directly destroy crops, earthquakes largely destroy human lives and physical properties, with a lesser destruction on farmlands.
What should be really alerted is the earthquake's impact on the pork market. Pig farming is a pillar industry in Sichuan's rural economy. It is reported that Sichuan has the largest hogs-on-hand number nationally, and its slaughtered number, pork production and inter-provincial pork trades all account for 10% of national total. So if the earthquake has indeed done serious damages to Sichuan's pig farming, it may affect the national pork market to some extent, such as higher pork price. But again, hog production in the epicentre area doesn't hold a big proportion of the province's total, and stockfeed supply for pigs should be sufficient due to the light damage on grain production by the earthquake. So earthquake-related pork price fluctuation should not be a key factor for higher inflation.
On the other hand, although the earthquake has done severe damage to transportation infrastructure in the affected counties and cities, but for the overall Sichuan Province, access gateways are largely unimpeded. National food aids to Sichuan should not be affected, nor should the transportation of Sichuan food products to other provinces. Therefore transportation-related food and product price increases should be minimal.
China's grain supply landscape
If we look back to the history of past 30 years, it is even easier to conclude that Wenchuan earthquake will not cause serious impact on China's grain production. China produced 502 million tons of grain in 2007, up 64.5% from the 305 million tons in 1978, equivalent to 1.74% growth per year. The growth rate between 2004 and 2007 was particularly rapid, reaching 16.4% pa. On the other hand, since late 1990s, China's accelerating urbanisation has transferred plenty of agricultural resources to non-agricultural aspects, resulting in massive loss of farmlands and deserted lands. In the context, China's grain production is still growing, mainly thanks to the advancement of agricultural technologies and investment in industry modernisation. For example, China is the world's largest user of plastic film covering technology, a seemingly simple agricultural technique which has increased the utilisation area of hundreds of millions of farmlands in China, effectively offsetting the consumption of arable lands by urbanisation.
In terms of China's grain supply regions, the country's grain production landscape has changed significantly since the 1990s. Grain production centre in China has been gradually moving from southern regions to northern regions, and from eastern and western regions to central provinces. Those traditional grain production regions, such as lower reaches of Yangtze River, south-east coastal area and south-west inland area, have been on a decline in their national grain output share. Especially in recent years, Sichuan, with its large population, has actually been one of the provinces that imports grain from other provinces. This means that Sichuan's contribution to national grain output is probably not as significant as many people thought.
In conclusion, even if Wenchuan earthquake may have some impact on China's grain output, it could only be psychological and short term impact, which shall not cause significant effect on national grain output this year. As a result, we should pay attention to, instead of over worrying about, the higher inflation from Wenchuan earthquake.
Produced by www.chinabizintel.com; Source: www.chinairn.com
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