One assessment of the prospects for the 2016 wheat market sees a big surplus of low-quality wheat that farmers in some areas may have trouble selling. Wheat is being harvested in the southern end of the wheat belt in central China, and it will move north through Jiangsu, Anhui, Henan, Shandong and Hebei Provinces over the next month. Weather conditions have varied widely across wheat-growing areas, and the quality of the crop is expected to be uneven. There is not much good quality old grain available, and the price is high.
The 2016 minimum price for wheat is set at 2360 yuan/ton. Big flour mills are buying small volumes of good quality new wheat at 2300-2340 yuan/ton. Corn prices are 620-to-900 yuan lower than wheat prices in various parts of the wheat-producing region, so use of wheat to feed livestock is expected to be low this year. Wheat bran prices are down too.
Low-quality wheat will have weak demand, and the government is likely to become the buyer of last resort. In some southern regions granaries already have a lot of wheat in storage from last year, but there is less wheat in storage in northern provinces. Most of the grain in storage is poor quality.
With scale of production increasing, the marketing of wheat is gradually changing. Many traditional wheat traders have been stung by financial losses in the last couple years and are cautious about purchasing wheat this year. The article anticipates that government purchases of wheat this year will exceed last year's total. In Anhui, government purchases are expected to reach 5.5 mmt, accounting for more than half of this year's wheat sales. In Henan, government purchases are expected to grow 30% from last year to 12 mmt.
Another article highlights the difficulty wheat mills have in finding adequate volumes of high-quality wheat. China's wheat production has not kept pace with changes in consumer preferences which have shifted from steamed bread and noodles to fancy breads, buns, and processed foods that need special types of flour. The food service and baking industries have responded by offering new products, but they can't get enough strong-gluten flour to make them. Wheat grown in China is predominantly medium-gluten. A couple of companies have begun contracting with farmers to procure strong-gluten wheat. One company has begun operating its own farm.
A start-up company that sells bread products online to Beijing customers is an example of how the baking industry is decoupling from farming. This company was started by five young IT and marketing professionals who saw a niche to be filled as consumers seek out new high-end products and alternatives to traditional shops. The company offers various bread products that can be delivered anywhere inside Beijing's 5th ring road and claims to get 10,000 orders daily.
Bread product offered by a Beijing Internet start-up
Traditional steamed bread
With a big surplus of low-quality wheat and a shortage of high-quality wheat, the price premium for high-quality wheat is expected to be high. Analysts anticipate that farmers in some regions with poor quality wheat may have trouble selling their wheat if granaries fill up.
This year's wheat market is another example of how China's leadership is out of step with their country's development. The "food security" strategy of paying a minimum price for grain to ensure a big supply is based on an outdated concept of generic grain produced and consumed by peasants who eat noodles and steamed bread. The Chinese diet is rapidly diversifying, and the population no longer wants to eat the same bland food day in and day out. Grain is no longer a generic commodity in which one ton is the same as any other.
Chinese officials have been trying to upgrade the quality of wheat for decades with little to show for their efforts. As long as officials offer a floor price to buy whatever farmers produce, their warehouses will be filled with unwanted and unneeded grain. Meanwhile, they ration a tiny import quota that the few lucky recipients can use to import high quality wheat from overseas and sell at sky-high prices.