Drought Threatens China’s Rice Crop as Domestic Food Prices Climb

Low rice prices have helped keep China’s overall food price inflation in check this year relative to the rest of the world, but record low soil moisture levels in Anhui and Jiangsu, key rice-producing regions, are now putting China’s rice production, and hence food price inflation at risk.

Soil moisture levels in these two major rice producing provinces, which account for about 16% of China’s total rice production, have reached a 20-year low, and Gro’s Drought Index (GDI) for these regions is at a record high.

Currently, China’s rice crop is in its grain filling stage, and across all of China’s rice-growing areas, GDI levels are elevated and soil moisture levels at 12-year lows implying that close monitoring of soil moisture and drought across all rice growing regions is critical over the coming weeks.

For China, the world’s top agricultural commodities importing country, a significantly diminished rice crop could pressure prices and stoke domestic inflation at an inconvenient time. If China’s rice import needs spike, the country will face higher import costs because of the yuan’s depreciation against the US dollar.

Since the beginning of the year, the Chinese yuan has depreciated about 6% against this US dollar, and last month China’s CPI rose by 2.7%, a two-year high, in large part because of a jump in domestic food prices. Pork prices, for example, have risen 40.2% year over year and 28.4% year to date, due to a relatively small herd size at the start of the year and producers’ reluctance to sell.  

According to a Chinese government report from last week, China’s food CPI increased by 6.3% in July. This came in close to Gro's predicted China food CPI increase of 6.76% which was forecasted in mid-July.

Gro’s China Ag Price Index is indicating further increases in food inflation across China and can be tracked on a daily basis here.