by Xinhua writers Zhang Yi and Wang Zichen
BEIJING, July 27 (Xinhua) -- A lingering drought in the U.S. has hiked global grain prices to a historical high and spawned jitters of another food crisis, but analysts say the price surge is unlikely to fuel inflation or consequently constrain the current monetary easing in China.
Over the last two months, the drought hitting the world's largest grain producer and exporter has sharply driven up prices of corn, wheat and soybean (CWS), data from the Chicago Mercantile Exchange (CME) show.
Ryland Maltsbarger, director and principal economist with IHS Agriculture Services, says it's too early to tell if the prices of agricultural products have peaked. "The market is still figuring out. Prices will further go up if we have worse information of the drought in August."
The market will have a clearer picture in September and October, but prices of soft commodities will likely remain relatively high for the rest of this year, Maltsbarger told Xinhua in a telephone interview.
According to the CME, prices of corn, wheat and soybean have surged 33.5 percent, 42 percent, and 15 percent respectively on growing supply concerns since June 11.
"By the end of 2012, the CWS prices can further hike by 10 percent from current high ground if the drought continues to worsen while the U.S. dollar remains stable," Maltsbarger said.P As food accounts for 30 percent of China's commodity price index (CPI) basket, people fear the grain price rises might stoke inflation. But analysts generally believe this year's upward trend, triggered by a supply setback, will not be severe enough to make regulators reverse monetary easing.
China's central bank, alarmed by deteriorating economic prospects, have cut interest rates twice since June, lowering the yearly benchmark rate of lending by 0.56 percent.
"While China is going to be increasingly exposed to bouts of food inflation, there are little signs of a meaningful food event on the near-term horizon, even if assuming a further 20-40 percent pick-up in global grain prices," a report from Barclays said.
The report, co-written by economists Huang Yiping and Chang Jian, states the immediate pass-through of overseas wheat and corn price surge will be small, since China is self-sufficient in wheat and its corn imports only constitute about 5 percent of total consumption.
China's good harvest is predicted to cushion imported inflation. Wheat production grew 3 percent in the first half from a year earlier, and agricultural businesses in corn-belt provinces like Jilin and Heilongjiang said their corn production will continue to increase if no major disaster occurs.
The price of pork, which was a major contributor to food inflation in China last year, actually has been declining since the fourth quarter 2011. Rising prices of stock feed are unlikely to alter the downward trend in CPI immediately, according to an emailed note from Societe Generale.
The biggest impact on China's food inflation will be rising soybean prices, as China imports over 80 percent of soybeans for domestic use. Reports say COFCO and Yihai Kerry, two major edible oil suppliers in China, already have increased prices of their oil products.
The Barclays report says the soybean price's effect on CPI "cannot be ignored" but will be small. "Oil/fat accounts for 4 percent of food consumption. In 2007-08, when the oil/fat prices rose by nearly 50 percent at its peak, it added 0.6 percent to CPI inflation."
Despite the overseas grain price jump, Barclays economists say China's inflation is under control with CPI growing 2.9 percent this year, a big decline compared with 5.4 percent in 2011, since "rapid rises in food prices were more a symptom than a cause of inflation problem, and excess liquidity, output gap and inflation expectation are well anchored in 2012."
A Citi research report by Johanna Chua echoes Barclays' findings, stating that China's central bank can still cut rates as long as any spillover impact on rice inflation is contained.
"Risk to food-led inflation can be partly offset by oil-led dis-inflation, and the base effects on food inflation in the third quarter are still decent," the Citi report says.
China can also mitigate the impact of the soybean price jump with government stocks, Maltsbarger says, in which case "importers can delay large volume imports until December and January, when expectations of a large upcoming crop in South America will decrease the prices."
Although analysts believe this year's price spike will unlikely lead to a food crisis the world suffered in 2008, they say global authorities should still remain cautious, especially about rice.
If prices retreat through the northern hemisphere's harvest and continue to correct through the south's harvest in the first quarter 2013, policy makers that are concerned about inflation should probably look through this spike and not react, said Jeremy Friesen, Asia Commodities Strategist with Societe Generale.
The Citi report warns authorities to closely monitor the possible price spill-over of rice, as Asia's headline inflation on average is 20 percent more sensitive to rice than to CWS.
"Agricultural commodity prices tend to be highly correlated, both because they are influenced by common factors and can act as substitutes in food staples or inputs for other items," the Citi report says.
This year's weak monsoon in India has aggravated the concerns. India became a big player in the global markets in 2011, topping Vietnam and Thailand to emerge as the biggest exporter of rice. But the weak monsoon is reported to have severely hampered its agricultural growth.