China's drought likely to weigh on food prices

By Kim Young-gyo HONG KONG, May 25 (Yonhap) -- China's persistent drought will likely add upward pressure to rising food prices, fueling the inflationary risks the world's No. 2 economy has been facing, a British investment firm said Wednesday. Central China along the Yangtze River was severely hit by a drought that lasted about 200 days. The worst drought in four decades affected more than 1.3 million hectares of farmland across seven provinces, which serve as the country's major agricultural producers. Barclays Capital said in a report that the recent extreme weather conditions have created upside risks to food inflation in the second half of 2011. "Drought-like conditions in the Yangtze River basin and eastern Shandong are likely to weigh on Chinese food production and increase import demand," said Wai Ho Leong, an economist at Barclays Capital. Eastern Shandong is also experiencing one of its worst droughts, seeing rainfall of only 12 millimeters since last September. About 40 percent of the province's wheat crop was reported to have been lost. "Water shortages could also have a secondary impact on energy demand through lower electricity production from hydro-power plants," Wai added. The investment bank warned that higher raw food prices in an environment of elevated energy costs may also put further pressure on the prices of prepared foods, which have been climbing in the past three months. In an attempt to relieve the impact of the drought, Chinese officials opened some of sluices, discharging 9,500 cubic meters of water per second for 12 hours. "This action has resulted in power shortages since hydroelectric power accounts for one-fifth of Chinese electricity production," he said. "If repeated, this action could raise the risk of an energy crisis ahead of the summer."