China's Quality Wheat Shortage

A recent Chinese wheat market commentary is the latest to call attention to the shortage of high quality wheat in China.

China had a big wheat harvest during 2014, but the country is still short of certain types of wheat not widely produced in China. China's wheat predominantly has moderate levels of gluten, but western-style breads need wheat with high gluten, and crackers and cookies need low-gluten wheat. Both are in short supply in China.

Millers have reportedly been paying 2800 to 2900 yuan per metric ton for strains of Chinese wheat that are considered high quality. The cost of imported U.S. wheat for March arrival is estimated at about 1917 yuan/mt.

Flour mills are eager to get access to imported wheat, but only 10 percent of the import quota is made available to private-sector users. During January 6-8, the government auctioned off wheat from its reserves and linked the distribution of quota to purchases made at these auctions. Millers are so eager to gain access to import quotas, they bid aggressively at the auctions.

Then, on January 21 and 28 the government held more auctions. But this time they sold American wheat they had imported in 2013 and held in storage until now. Most of the wheat imported has been socked away in the government's "temporary reserve." They offered 196,000 metric tons during the January 21-28 auctions and about half of it sold at an average price of 2465 yuan/metric ton, or just under $400 per metric ton.

The purpose of the auctions was to add supply to the market ahead of the spring festival holiday season. By adding to the supply, there was speculation that this would bring down the price of high-quality wheat which had been driven by the lack of supply.

There were worries that this would leave the bidders from the January 6-8 auctions "embarrassed" that they had bid so aggressively to get access to wheat import quotas, only to have to government dump more quality wheat in the market two weeks later, driving down the price.

Chinese officials who run agricultural policy are still stuck in the past when wheat was a generic commodity that peasants grew and consumed themselves as noodles or steamed bread. Their silly food security slogan, "Chinese food bowls must be filled with Chinese grain," ignores the fact that Chinese malls all have European-style bakeries selling croissants and pastries that can't be made with Chinese grain. Their ham-handed approach to controlling markets is not appropriate for the increasingly sophisticated food market that is developing in China today.