Wednesday, May 30, 2012

Wheat Reserves Falling

As the wheat harvest approaches the Economic Observer last week discussed the prospects for the government to buy wheat at the minimum price this year.

Last September the National Development and Reform Commission (NDRC) announced that this year's minimum price for wheat would be 1.02 yuan/500g. That was a relatively large .09 yuan increase from last year. On May 23 NDRC issued an announcement of this year's minimum price purchase program.

In early April, the government auctioned grade 3 wheat from reserves at 2040 yuan/mt (1.02 y/500g), the same as this year’s minimum. The market wheat price rose slightly in April, and the current price is at about 1.04-1.08 yuan. Some in the industry were speculating that the minimum price would be boosted higher to 1.04 yuan since the market price is well above the 1.02 yuan minimum, but there was no change.

Wheat was not purchased at the minimum price last year. Reserves are believed to be down to about 20 million metric tons, consisting mostly of wheat bought in 2009 and 2010. The NDRC and Grain Bureau are said to be eager to buy more wheat this year to replenish stocks, one factor behind the rumors of an increase in the minimum price.

Another factor depleting reserves is the increase in feed use of wheat. Due to high corn prices, many feed mills have been substituting wheat for corn. Last summer a big feed company in Jiangxi Province began offering a pig feed product composed entirely of wheat, sold at a 100-yuan discount. The China Grain Net estimated that feed use of wheat rose 6 mmt to reach 14 mmt in 2010/11. Most of the increase in wheat use this year is attributed to feed use. Total use is projected at 111.25 mmt.

The National Grain and Oils Information Center projects a 2.02% increase in wheat production this year. With the market price above the minimum, industry sources think there probably will not be purchases at the minimum price this year. However, in southern Henan and parts of Anhui and Jiangsu Provinces surges in production may be big enough to push prices back down to the minimum.

Flour mills complain that wheat they buy from government reserves has serious quality problems.  According to Economic Observer, there are more than 1000 depots that take part in wheat policy purchases. Some buy excess amounts to collect more subsidies, creating quality problems for reserves. In the government’s annual checks these depots use various tricks, falsifications and methods to "muddle through." The flour mills have to go into the open market to buy wheat instead of relying on purchases from reserves.

As far back as 2009, the Wudeli flour milling group sent a letter to NDRC and the Grain Bureau complaining about deteriorated and adulterated wheat and other illegal behavior. The departments have begun investigations, but no results have been made public.

After corruption was exposed at Sinograin’s Henan Branch last year, Sinograin cleaned up management of warehouses. Economic Observer learned that 306 grain companies in Shanxi Province were stripped of their policy procurement qualifications. In Henan depots stockpiled wheat and “round tripped" grain. Thirty-three noncompliant depots received a notice of criticism and 32 people received party and/or government discipline.

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