Monday, October 14, 2013

HIgher China Wheat Price Announced for 2014

Chinese authorities announced a wheat support price of RMB 118 per 50kg that will be in effect for the 2014 harvest in major wheat-producing provinces. This is an increase of RMB 6 from the 2013 minimum price. The minimum price doesn't go into effect until May 2014, but authorities announce the minimum price in the fall to encourage farmers to plant the winter wheat crop.

While this announcement continues the China National Development and Reform Commission's practice of raising the support price for wheat each year, the increase was not as large as many market participants expected. A Futures Daily commentary anticipates that the tight supply of wheat will cause the market price to exceed the minimum by the time the 2014 crop is harvested. Futures Daily thinks the government will not have to buy wheat and the price will be determined by market forces rather than policy.

A second commentary by a Chinese wheat merchant criticizes the wheat support price intervention policy, claiming that only middlemen benefit from the annual price increases. This commentary argues that subsidies for holding grain encourage depots to hold grain, artificially reducing the volume available in the market, pushing prices upward. The policy builds in expectations of ever-rising prices, reinforcing the tendency to hold grain as long as possible. The commentator insists that all the benefits of the price support policy accrue to intermediaries while farmers' costs rise faster than wheat prices and consumers pay higher food prices. The commentator says farmers don't hold their grain; they sell it as soon as it is harvested because they need to generate cash to plant summer crops, plus they have insufficient labor to dry and store the grain.

The articles fail to acknowledge that global wheat prices have been falling while China's have been rising. This probably is the main reason for the smaller-than-expected boost in the Chinese price support.
U.S. wheat prices fell during 2012-13. source:

The second commentator worries that the support price policy is contributing to food price inflation in China. He says many people are unaware that Chinese prices for many commodities exceed international market prices. At an exchange rate of 6 RMB/$, next year's wheat support price would be equal to $10.70 per bushel. U.S. wheat futures prices for May 2014 delivery are in the range of $7.04 to $7.68 per bushel.

China's wheat supply has been tighter than production statistics suggest. The National Grain and Oils Information Center (NGOIC) reports that wheat output was 122 mmt this year, up 1.7 percent from 2012. However, heavy rains and storms at harvest time caused sprouting and lodging in some areas, reducing quality. Grain bureau statistics say that by September 30 a total of 54.5 mmt of wheat had been purchased by various enterprises in 11 major producing provinces. That total was 3.13 mmt less than last year, a decrease of about 5.7 percent. (Purchases of other summer-harvested crops--early rice and rapeseed--are both up slightly this year.)

The Futures Daily article points out that current ex-warehouse cash prices for wheat in China's production areas are above next year's support price, at RMB 2580-2620 per mt--about $11.70-$11.88 per bushel. The article reports that flour mills face cost pressure--strong wheat prices and weak flour prices--and calculates that mills face negative profit margins now that the peak demand season around the October 1 National Day holiday is finished.

With Chinese prices higher than international prices and its flour mills facing raw material cost pressure, there is strong impetus to import wheat. Despite the big wheat harvest, NGOIC estimates that China could import 7.5 mmt of wheat during the 2013/14 market year. NGOIC reports that China has already committed to purchase 3.7 mmt of U.S. wheat, 2.2 mmt from Australia, and 220,000 mt from France.

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