China’s lockdowns pose risks to grain production

The Chinese government’s strict Covid-19 mobility restrictions may cause disruptions to spring-planted grain production and increase rice and corn imports, though the country’s abundant grain reserves will keep national food security largely intact, Fitch Rating says.

Domestic grain prices, however, will rise in 2022 amid tighter supply and demand, and higher global agricultural commodity prices, squeezing hog breeders’ margins, Fitch said in a report.

The latest Covid-19 wave led the government to implement city-wide lockdowns to contain the spread of the Omicron variant since the start of March; 87 out of the top 100 cities by GDP in China had been affected by the restrictions as of mid-April, according to research firm Gavekal.

The scope of the lockdowns may continue to widen, as more cities take pre-emptive actions to enable mass testing. This may disrupt the transportation of planting inputs and farmers’ mobility, reducing the production of spring-planted grains, mainly rice and corn.

Fitch said it expects a modest production impact from the strict pandemic prevention measures at this stage. Wheat production that accounts for around 20% of national grain output is not affected as it is an autumn planting grain. The large outbreak in Jilin province – China’s second-largest corn producer – is disruptive, but the province only accounts for roughly 11% of national corn production.

The local government has stepped up efforts to speed up planting input preparations, with seed and fertiliser preparation rates reaching 94% and 80%, respectively, as of 6 April, according to official data, beating the three-year average. However, the wider logistical disruptions caused by road closures in many areas could pose rising challenges for the timely delivery of farming inputs from other grain production regions despite the central government’s vow to ensure spring planting. Escalation in lockdowns or pandemic prevention measures within China could add to the production disruptions, Fitch said.

“However, we expect a limited impact on China’s grain security as grain reserves remained high at end-2021, sufficient to meet 76%, 103% and 48% of China’s wheat, rice and corn consumption in 2021, respectively. We expect China’s grain imports to remain high in 2022 amid weak domestic production, especially for corn, which has already experienced tight supply and demand since 2017, but the imported grains’ share of China’s total grain consumption will remain low. Corn imports in China, while surging to a record high in 2021, accounted for only 10% of total corn consumption,” it added.

Nevertheless, grain prices in China could rise further amid the higher global agricultural commodity prices and domestic demand. Wheat and corn prices in China rose 5% and 3% in March from a month earlier, largely a result of the Russia-Ukraine war. Ukraine was China’s second-largest corn supplier, accounting for 29% of China’s total grain imports in 2021, and Russia is also a main grain and fertiliser exporter globally.

“We expect China’s corn consumption to increase in 2022 despite weaker feed demand amid a hog oversupply because livestock producers are likely to continue switching back to corn amid record-high wheat prices, a trend that started early this year,” Fitch added,

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