Sunday, May 22, 2011

Wheat Overcomes Drought

The new wheat crop in Henan Province's Xinxiang City

A team from China Grain Net conducting a wheat tour last week reported that the crop appeared to be in pretty good condition. Last December and January there were histrionics about the wheat region being hit by the worst drought in 50 years, but it looks like the crop will be as big or bigger than last year as long as weather is OK between now and the harvest.

A farmer named Ma in northern Henan's Xinxiang City told the inspection team: “now the weather is pretty good, it looks like this year’s harvest will not be bad at all!”

Ma's fields, totaling 7 mu (a little over 1 acre), are in the northern plain of Henan, near the Yellow River. In this area, access to irrigation is pretty good, and Ma's crop was irrigated twice to stave off the effects of the drought.

Spraying pesticide on the wheat crop in Xinxiang

At Hengyang City, a grain warehouse boss estimated that this year's local wheat crop would be about 3.25 mmt, up 200,000 mt from last year. He said the area usually produces about 20% high-quality wheat, and if the weather is good from now on the crop's quality and volume could be similar to last year's.

Another team found similar conditions in the southern part of Henan.

These fields in Hebei Province are uneven because they are divided up among different farmers who plant different varieties. The farmers call it "two-story wheat"

The next day, the team visited Liaocheng in Shandong province, a major wheat-producing area that the government designated in 2000 as a pilot area for producing high quality wheat. Liaocheng is also expected to be up to 2.74 mmt this year, saved by irrigation during the drought. In Dezhou, another major agricultural area in Shandong, this year's wheat area was estimated to be up 6% and the yield up 2% from last year.

Managers of grain warehouses in several areas said they don't have that much room for the new crop. In Liaocheng City of Shandong, only about one-tenth of the warehouse space is now free, and space is said to be tighter than last year. A trader in Henan who was buying 1500 kg of wheat from an area encompassing 4-to-5 villages said he will have to beginning selling old-crop wheat to clear space for the new crop.

A Shandong farmer sells wheat he has had in storage since last year

In Gaocheng City of Hebei Province a recently-built government warehouse has a capacity of 100,000 metric tons. Last year they bought about 40,000 mt of wheat and only about 30,000 mt of space is free. The warehouse expects to buy 45,000 mt of this year's wheat crop.

In Hengyang, some people in the business said that probably more wheat would be used by local flour mills this year. Transportation costs are high and the local mills have excess capacity, so the wheat would probably be milled locally rather than shipped out to other regions.

In Hebei Province the team found flour mills operating at full capacity. However, a warehouse official in Gongcheng complained that the flour-milling industry in Shijiazhuang City has become extremely competitive. Several big companies have opened mills, raising the competition to buy wheat. Yihai Kerry (Wilmar), a Singapore Company, is singled out for having built the biggest plant. (China Grain Net regularly complains about Wilmar's recent forays into wheat and rice milling.) In this area the purchase price by flour mills is just under 1.10 yuan/jin.

Wheat prices peaked in March or so, and declined in April. The trader in Henan said the current price of about 1.10 yuan per jin is about where he expected it to be. Many farmers were hoping for a price above 1.10 yuan, but processing enterprises expect it to stay steady. Farmers are not optimistic about the prospects for a higher price.

In Gaocheng City, the premium for high-quality wheat is increasing, reflecting its relatively scarcity. Last year common wheat sold for about 1.02 to 1.05 yuan/jin and quality wheat sold for about 1.10 to 1.20 yuan. This year the prices are expected to be 1.07 to 1.08 yuan for common wheat and 1.35 yuan for quality wheat.

Interviewing a grain trader in Gaocheng City of Hebei Province

Traders say they are watching carefully to see what the government's new wheat policy is for this year. That will be the key to what happens to the price.

With the prospect of warehouses selling off inventories and a good harvest, it sounds like conditions are lining up for downward pressure on wheat prices...a very different situation from what was expected in January.

The wheat harvest has already started in Hubei Province

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