Global grain woes grow, but impact on China may be limited

Since the beginning of the year, global grain prices have been at high levels, leading to a rise in the domestic grain CPI (consumer price index) of 2.7 percent year-on-year, a record not seen since 2016. It is a result not much beyond expectations after the conflict between Russia and Ukraine broke out, as the two counties are major suppliers of wheat and corn.

In 2021, Russia's wheat and corn exports accounted for 22 percent and 3 percent, respectively, of global total while Ukraine's stood at 11 percent and 17 percent. Based on this, we believe future changes of output and exports from the two countries will undoubtedly continue to weigh on the global grain market.

In terms of wheat, the conflict has affected spring planting in Ukraine. The country's 2022-23 wheat output is expected to fall to 21.5 million metric tons, down 11.5 million tons from 2021-22. Global output is expected to be 774.8 million tons for the 2022-23 period, down 4.5 million tons from 2021-22. By the end of 2022-23, there will be a 5 percent loss in global wheat stocks, which will then fall to 267 million tons, the lowest level in six years.

In terms of corn, global production is expected to fall from 1.22 billion tons in 2021-22 to 1.18 billion tons in 2022-23, a decrease of some 2.9 percent. This is mainly due to production declines in Ukraine and the United States. Inventories of corn are expected to fall 1.4 percent to 305.1 million tons by the end of 2022-23.

Worsened forecasts for wheat and corn have been well reflected by the market. From January to May, international spot prices for the two commodities once jumped more than 30 percent, and the absolute price level has exceeded the level seen in 2008, when an earlier food crisis emerged.

There are fears that worrying effects brought by global price surges may further drive the domestic CPI. Indeed, the rise of international food prices has affected domestic food prices. But how much of an impact will there be? To answer this, there are two factors to consider. One is the import reliance of China on certain products, and the other is the gap between domestic production and demand.

Based on this, we can divide the main food crops－rice, wheat, corn and soybeans－into three categories based on China's dependence and price transmission from global to domestic markets.

In simple terms, price transmission is a change in one price that causes a corresponding price change. Generally, it is measured in terms of transmission elasticity, defined as the percentage change in the price in one market given a 1 percent change in the price in another market.

First is soybeans. China relies heavily on soybean imports, and they normally constitute more than 80 percent of domestic soybean consumption. Soybean prices in China basically follow the fluctuations in international prices. Since 2021, price transmission from the global soybean market to the domestic soybean market is between 85 percent and 100 percent.

Second are corn and wheat. Since 2020, due to declines in planting acreage and an increase in demand for livestock feed, domestic imports of the two soft commodities have surged significantly. In 2020-21, imports of corn and wheat took up 10 percent and 7 percent, respectively, in terms of domestic consumption, while in 2019 the figures were just 3 percent and 4 percent. Import pressure pushed up domestic prices of the two crops. Since 2021, price transmission from the global corn and wheat markets to the domestic market has been between 10 percent and 30 percent.

Third is rice, a commodity for which China is virtually self-sufficient. Imports of rice only account for 3 percent of the nation's total demand, and are mainly used to meet tastes for exotic varieties. Therefore, domestic rice prices are relatively independent and mainly follow minimum purchase price factors. The price sees very little influence from the international market. From January to May, international rice prices have surged 19 percent, while domestic prices edged up only 3 percent.

In China, consumption of wheat and rice makes up the bulk of total edible grain consumption. Looking at China's grain consumption structure in 2021, the consumption ratio of edible wheat and rice is about 80 percent, which is significantly higher than that of corn and soybeans, which are 3 percent and 28 percent, respectively, over the same period. Therefore, from the perspective of the trend of the grain CPI, it mainly depends on the fluctuation of wheat and rice prices.

Historically, when rising food prices have clearly pushed up domestic inflation, rice and wheat prices have always seen sharp simultaneous jumps. The weight of food in the CPI basket is about 2 percent－not a very high proportion. So when food prices fluctuate sharply, the impact it has on inflation will be relatively low. Since 2000, the impact of food prices on the CPI once reached 1 percent in 2004－a time when prices of rice and wheat both rose sharply, ranging from 40 percent to 50 percent－and the food CPI rose by 34 percent.

At present, domestic rice prices are at historically low levels, as adjusted for incomes and inflation, and act as a significant stabilizer to dampen the impact of rising food prices on inflation. On the one hand, being Asia the main rice cultivation area, rice prices are not directly affected by the Russia-Ukraine conflict. According to estimates by the US Department of Agriculture in May, global rice production in 2022-23 will increase and global inventories will reach new highs. On the other hand, the amount of government-held stocks is also at low levels, indicating that the actual supply of domestic rice is relatively sufficient.

For wheat, first there is always a certain loss in the transmission of international wheat price surges to the domestic market. And second, this year, there is an expansion of wheat production, narrowing the gap between domestic production and demand, and the inventory-to-consumption ratio is also higher than in the previous year, which also helps stabilize domestic wheat prices. Therefore, assuming that under extreme circumstances, if international wheat prices rise again by 100 percent in the near future, which may trigger a surge in domestic flour prices by 10-20 percent, due to stable domestic rice prices, the grain CPI will rise by 5-10 percent, pulling up the CPI by 0.1-0.2 percentage point, a relatively manageable outcome.

For corn, its consumption by humans is relatively low－less than 5 percent of the total－and that for livestock feeding purposes is as high as 60-70 percent. Therefore, the impact of global corn price surges is mainly reflected by the price of meat products, such as pork, and that on the CPI is indirect and minor.

From January to May, global corn prices rose 24 percent while domestic prices increased 6 percent. Although the domestic corn inventory-consumption ratio has remained at a low level since 2019, due to continuous reductions of live pig production capacity since the second half of last year, there has been a decrease in feed demand. Thus, domestic corn prices did not increase significantly in the first half.

However, with the expected further increase in pig prices in the third quarter, profits among breeders may gradually return to the black, and corresponding demand in the sector will improve accordingly, driving the increase in domestic demand for corn. Providing that there is still a gap between supply and demand of global corn, it's necessary to pay close attention to upward pressure on domestic corn prices going forward.

The writers are Gao Ruidong, chief macroeconomist at Everbright Securities, and Liu Xingchen, an analyst with Everbright Securities.

The views don't necessarily reflect those of China Daily.