Sunday, April 5, 2015

Wheat Quota Spins Profit for COFCO

COFCO, China's State-owned agribusiness giant, gets more wheat-import quota than the rest of the industry combined. With imported wheat 30-percent cheaper than Chinese wheat, COFCO's favored access to imports make easy money that offsets losses on the company's other operations.

According to news in March, COFCO had been given 1.5 million metric tons of wheat import quota so far this year, more than the 900,000-mt combined total distributed to private-sector companies.

China has had record wheat harvests in the last few years, but it has a shortfall of the types of wheat needed to make western-style breads and baked goods. These products are in strong demand, but Chinese farmers are not producing these types of wheat in adequate quantities. Last month industry people said Chinese traders had purchased 300,000 mt of no.2 high protein white wheat from Canada and 100,000 mt of Australian prime hard wheat.

Wheat can only be imported by traders awarded a share of the government's 9.6-mmt annual import quota determined by its WTO commitments, but most of the quota is reserved for COFCO. According to the company's web site, COFCO has exclusive rights to handle the 90 percent of China's wheat import quota reserved for state-trading. The remaining 10 percent of the quota is divided up among all other applicants.

For example, in Henan Province's Hengyang Prefecture only one flour mill got an 83-ton allocation of wheat import quota.

The price of quality wheat has soared far above global prices. The news report illustrated the price gap as of mid-March 2015. The FOB price for hard red spring wheat at U.S. Gulf ports was equal to US$ 220 per ton. Freight to China was quoted at $31 per ton. Adding duties and taxes, the total cost of imported wheat would be about $286. By comparison, the price of quality China-produced wheat at Shenzhen ports was $492 per ton.

Another recent article about COFCO reports that its near-exclusive import rights contribute significantly to its bottom line. This article quotes industry insiders who say COFCO has a cost advantage over other flour-millers due to its privileged access to import quota. The industry insiders estimate that COFCO earns 200-to-400 yuan per ton on 1 million metric tons of wheat imports annually. (The numbers above suggest that earnings this year are much larger.) They say COFCO uses these profits to offset losses incurred in milling grain.

According to its annual financial report, COFCO made a modest profit of HK$ 80 million on flour-milling during 2014. The numbers above suggest that all the profit came from importing cheap wheat. COFCO lost HK$ 200 million on rice-milling during 2014. COFCO does better in flour-milling than in rice- milling because it has bought a number of mills with popular flour brands. The article says brands are not as valuable in the rice industry.

Both industries have huge excess capacity with only 30 percent of capacity utilized. Many wheat mills only operate for a few months after the harvest. It points out that the government's intervention in grain markets has made Chinese grain prices the highest in the world, cutting into the bottom line of millers. The article suggests that flour-milling margins will be even narrower in 2015. One factor is a plunging price of wheat bran byproducts (used for feed).

No comments: