China's grain prices are soaring as the worst dry spell in 50 years heightens fears of a poor harvest.

Wheat prices surged in the past two weeks in the wake of crop damage.

Wheat for March delivery at Zhengzhou Commodity Exchange (ZCE) peaked at 2,041 yuan (US$299) a tonne last Thursday, up by 6 percent on the January 23 closing price, the last trading day before Spring Festival.

But reports of coming rains and major drought-relief operations will likely soften the impact of the environmental crisis on markets, researchers and analysts said.

"Wheat for March delivery at the ZCE went down by about 1.5 percent to 2,010 yuan a tonne today, compared to its peak price last Thursday," Zhang Yongjun, senior economist with the State Information Office, was quoted by Tuesday's China Daily as saying.

"The expectation of a grain crisis went down with the recent reports of rains in the drought-affected areas as well as China's 'all-out' efforts in drought relief," he said.

The drought has parched more than 40 percent of the nation's total wheat cropland, in the country's major bread-basket--northern and central China, according to the Ministry of Agriculture.

Large-scale irrigation efforts have partially reduced the size of the affected area.

"It's still too early to estimate the severity of the drought on the harvest," Zhang said.

When snowstorms first hit south China early last year, prices of rapeseed oil futures leapt, as most people expected a poor harvest.

But output was unusually high later that year.

Ma Wenfeng, a grain analyst at Beijing Orient Agri-business Consultant Ltd, believes that the drought may reduce the wheat harvest in summer by 2 to 5 percent, or 2 million to 5 million tonnes.

But the country's grain reserve is sufficient to cover the loss, according to Xu Xiaoqing, deputy chief of the department of agriculture at State Council Development and Research Center.

"Even if the extreme weather cuts China's grain production by half, the nation still has enough grain reserve to feed its people, "Xu said.

(Xinhua News Agency February 10, 2009)