China Crisis?

News released late last week that the USDA's agricultural attache in China reckons that wheat and corn production numbers last year were artificially inflated appears to have been largely ignored by the market.

The notion that 8.5 MMT of the world's 'burdensome' wheat stocks never actually existing has been met with abject apathy in fact. Surely I can't be alone in thinking that it's highly unlikely that this was a one-off occurrence either?

With last years Chinese wheat crop apparently overstated by 7.4% (106 MMT not 114.5 MMT) what are the implications of similar "creative accounting" happening in previous years? A 7.4% overestimate for the past eight years equates to around 60 MMT, the size of China's supposed ending stocks for 2009/10 and almost a third of all the wheat stocks in the world.

It would also seem, unsurprisingly, that Chinese corn production estimates have also been similarly routinely exaggerated.

The fact of the matter seems to be that only the Chinese government know how much wheat and corn they really have in reserve, and they aren't likely to go telling anybody. Suffice to say that it is probably substantially less than official figures suggest.

Crop prospects for the season ahead then are likely to be particularly important as China ranks number one in the world as far as production and consumption of wheat is concerned. They are also number to for corn output and usage.

Around 90% of China's wheat is winter wheat, widely grown across much of the country, but centred around the central provinces of Shandong, Henan and Hebei. Spring wheat is about to start going into the ground in the northern provinces, with production concentrated in Heilongjiang, Inner Mongolia and Gansu.

Corn planting is underway in the southern provinces of Yunnan, Guzhou, Guangxi and Sichuan. They will begin planting northern corn next month where production concentrated around Jilin, Shandong, Heilongjiang.

The map below highlights the main growing areas, with corn on the left (major areas dark green) and wheat on the right (major winter wheat areas dark green, major spring wheat areas light green):

You can view these maps in more detail here: China corn; China wheat

The latest weather maps from the US CPC show showers during the past week falling mainly outside the corn and wheat production areas to the centre east:

An ongoing drought in China's south west has left at least 15 million people short of drinking water in the worst-hit regions of Guizhou, Yunnan, Sichuan and Guangxi according to media sources.

Villagers are pictured here queuing for drinking water at Ganhe village in Anshun where each household is restricted to just two buckets of drinking water every four days.

In Yunnan province in the south the average daily temperature between September and February was 2.2 C higher than normal, a record abnormality according to data going back to 1952. There have only been 31 days of rainfall in the past year in Yunnan.

Things aren't a whole lot better in the north. The drought here, that began last summer continued into the fall and winter, says Gail Martell of Martell Crop Projections. The winter climate in Northeast China is very dry so field moisture has not been replenished, a 6-inch rainfall deficit built up in Jilin, the top corn province, says Gail.

Is there more than meets the eye to the newly formed relationship with Kazakhstan? The development of improved rail links and the building of a joint venture grain store on the border of the two countries could be more than simply opening up a "gateway to the East". As far as China are concerned it could be a method of importing wheat (and even corn and soybeans too - which are crops the Kazaks hope to expand production of in the next few years) "off the radar".

Corn consumption in particular is expanding rapidly in China, up by more than 50% in the past ten years, whereas production has only increased by just over 30% during the same period. Meanwhile using the attache's production estimate for 2009, ending stocks in China have almost halved in the last ten years, and that is assuming that previous year's production estimates weren't overstated.