Posted by: Mahdi Ebrahimi | February 2, 2008

Impact of Bad Weather May Spread to China Organic Agriculture

It has been called the worst snow storm in half a century and it is still going on. Many parts of China, especially the central and eastern regions, are paralyzed, due to disruption in transportation leading to brown outs (coal not getting through), a drag on the upcoming Chinese New Year celebrations, and as is becoming more and more evident, a disastrous impact on winter food crops.

According to reports, this is what is happening:
1) Heavy snow is causing many greenhouses to collapse leading to crop destruction;
2) Disrupted rail service is stranding food that cannot be adequately refrigerated thus causing spoilage; and
3) Insufficient produce getting from the hinterlands to the cities leading to skyrocketing food prices and exacerbating out-of-control inflation.

I want to look at what impact this situation has on China Organic Agriculture (CNOA.OB), a leading producer of organic rice in China. On one hand, rice is (fortunately) not a winter crop. In the north, where CNOA operates, rice is planted in May/June and harvested in August/September. It is worthwhile to remember that CNOA is based in Jilin Province (think of this territory as the northern extension of North Korea, which it borders), and the Nen River, which irrigates CNOA’s fields, is usually frozen from November to April. When I last looked, the temperature there was minus 25 degree Celsius.

On the other hand, CNOA’s newly acquired food transportation company (Huiming Trading) may be in trouble. Huiming distributes food products in northern, central and eastern China, coinciding with the worst affected areas. We know that the company transports beans, corn and processed foods, but that’s the extent of my knowledge based on public information. I suspect while Huiming’s exposure to perishables may be limited, it does little to mitigate the lost income when apparently only 20% of usual demand is currently getting through to the eastern cities. There’s now even talk of the possibility of public unrest, potentially signaling a return to state-enforced food prices, which would be a big blow to food producers indeed.

In a way, this winter has given us an illustration of how vulnerable China’s economy is, even if it is growing and morphing like never before. And while the storm’s financial impact on CNOA cannot be quantified for now, given that this is one of the peak consumption periods due to the Chinese New Year celebrations, I dare say that the company’s foregone revenues will not be insignificant. This is especially so as the weather pattern is expected to sustain and possibly worsen in the northern provinces. What an inauspicious end to the year of the Golden Pig!



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