McKinsey: Climate change putting China's bread basket at risk
25 billion renminbi needed annually over the next 20 years to fight the effects of climate change on agricultural output in China

(Beijing, November 25, 2009) - Improvements in irrigation, soil preservation, water storage, and seed engineering could cut agricultural losses due to drought by up to 50% in Northeast China and North China, says a new study conducted by global management consultants McKinsey&Company, "From Bread Basket to Dust Bowl? Assessing the Economic Impact of Tackling Drought in North and Northeast China."

Considered the "bread basket of China", the provinces comprising Northeast China (Heilongjiang, Jilin, Liaoning) and North China (Hebei, Shanxi, Beijing, Tianjin) produce as much as 25% of China's total annual grain output of 510 million tons, an amount greater than the total grain production of Brazil.

The study, conducted in collaboration with the International Cooperation Center of the The National Development and Reform Commission and The Chinese Academy of Agricultural Sciences, noted that drought has caused more damage to China's agricultural output in recent years than other severe environmental disasters such as flooding or tropical cyclones combined.

Between 2004 and 2007, drought affected 21 million hectares of crops, compared with 9 million hectares and 3 million hectares that were impacted by flooding and tropical cyclones during that period, respectively. 1 in 6 farmers in China lose on average one-fifth of their incomes due to drought each year.

This year, China has seen some of the worst droughts in half a century. In February, severe drought damaged 4.5 million hectares in eight provinces in North China, a region encompassing one-half of China's total wheat growing area. In May, Heilongjiang suffered its worst drought in nearly 60 years, with 6 million hectares affected. And in August, drought affected nearly 10 million hectares of crops and dried up drinking supplies for 7 million people in Central and Northern China.

Climate change is expected to lead to increased instances and severity of drought, according to the report. Unless more is done to mitigate the effects of drought, China's major grain growing region could suffer substantial agricultural losses in coming years. In the report's "moderate" climate change scenario, which assumes that the concentration of CO2 in the atmosphere reaches 560 ppm by 2040, Northeast China and North China could see yield losses rise as much as 50% to 18 billion renminbi by 2030, from an expected 14 billion renminbi (a level of losses that assumes no impact from climate change). Most of these losses are expected to occur in Northeast China, which is far more vulnerable to drought than North China, according to the report. Under the most extreme drought scenario examined in the study, crop losses could reach as much as 37 billion renminbi.

Today, much of the region does not employ adequate irrigation measures. In 2007, only 58% of North China was irrigated; in Northeast China, a mere 28% of the region was irrigated. China spends around 10 billion renminbi annually nationwide on irrigation techniques and new technologies to mitigate the effects of drought. McKinsey's analysis shows, however, that this is only 60% of the 16 billion rmb that will be required annually nationwide over the next 20 years for irrigation measures needed to mitigate the effects of drought caused by impending climate change.

McKinsey estimates that China will need to spend up to 25 billion renminbi per year nationwide between 2010 and 2030 to counter the affects of drought and avert substantial agricultural losses. In North and Northeast China alone, China will need to spend up to 5 billion renminbi annually on a host of measures including drip and sprinkle irrigation, soil conservation, seed engineering to make crops more drought resistant, and reservoirs and dams. Through such measures, the study shows that China could avert as much as 50% of expected crop losses, representing 9 billion renminbi worth of crops in 2030 in North and Northeast China.

The study also highlighted the need for agricultural insurance to protect farmers' livelihoods from the inevitable loss of crops and livestock that are inflicted by drought. Today, only 25% of China's farmland is covered by agricultural insurance, compared with 75% in the US.

"Much more needs to be done to protect China's 'bread basket' from the effects of climate change. While tackling drought in China will require substantial investment in the coming decades, most of the measures we looked at in our study yield positive economic returns. Through public and private sector investment in improved irrigation, soil conservation and water storage measures, China's farmers can protect - and indeed increase - their incomes in the face of the ravages brought on by climate change" said Martin Joerss, a Beijing-based partner at McKinsey & Company who leads the firm's climate change initiative in China.

"Drought has been one of the thorniest environmental issues facing China's agricultural sector over the past few decades. The effects of climate change are expected to exacerbate the problem. Without sufficient measures in place, China's long-term food security, and indeed social stability, could be put at serious risk. This study aims to address these issues by providing a new fact base and a set of practical solutions for policy makers as well as for private sector leaders," said Martin Joerss.

About the study
This study is part of the global initiative of The Economics of Climate Adaptation Working Group, which was formed in September 2008 under the initiating sponsorship of the Global Environment Facility. Other sponsors include Swiss Re, a leading global reinsurer, which contributed to our research in quantifying climate risk; ClimateWorks, an international network of foundations focused on achieving low-carbon development; the Directorate General Development of the European Commission, which focused on developing a practical methodology to assist adaptation in the most climate-vulnerable developing countries; the Rockefeller Foundation, which brought its deep experience of building climate resilience in developing countries; and Standard Chartered Bank, a global bank with a focus on the emerging markets of Africa, Asia and the Middle East, many of which are among the most exposed to climate risk.

In China, McKinsey & Company has closely cooperated with the International Cooperation Center of The National Development and Reform Commission (NDRC) and The China Academy of Agricultural Sciences (CAAS) to understand the future extent of drought loss in North and Northeast China in the context of climate change.

About McKinsey&Company
With over 8000 consultants deployed from over 90 offices in 50 countries, McKinsey & Company is a global management consulting firm that advises companies and public institutions on issues concerning strategy, organization, operations, and technology. McKinsey's Greater China Practice comprises offices in Beijing, Hong Kong, Shanghai and Taipei. McKinsey has completed more than 1000 projects in Greater China in the past two decades, helping leading local enterprises boost their global competitiveness, as well as assisting multinational companies seeking to expand their business in the region.  www.china.mckinsey.com