Wednesday, February 22, 2017

China Flour Mills Under Pressure

Profit margins for China's flour mills are under pressure from high wheat prices and weak flour prices, according to an analysis last week by Agricultural Futures Net.

The peak season for flour demand around the Chinese new year has now passed, and flour mills have been slow to restart production after the holiday due to slim profits. Some have taken the opportunity to retool machinery.

The cost of raw materials is up. Flour mills are paying an average of 1.33 yuan/500g for wheat, up from 1.19 yuan/500g last year. Wet weather in parts of China's wheat belt last summer have reduced the supply of good quality wheat in China this year.

Flour prices have not risen to match the rise in wheat prices. Salesmen reportedly have not been getting as many orders as they normally do at this time of year. The competition for customers has led to price wars for flour. The average ex-factory price for flour is reported to be 1.7 yuan/500g in Shandong, Hebei, and Henan Provinces, down from 1.8 yuan/500g a year ago.

Mills also rely on sales of wheat bran--the byproduct of flour-milling. Normally, flour and bran prices move in offsetting directions but recently both prices have fallen. About 80% of bran is used for making pig and poultry feed and the rest is used mostly to grow mushrooms. Feed demand is weak due to the campaign to demolish pig farms to comply with directives to create pig-free zones near cities and environmentally vulnerable bodies of water. The wheat bran ex-factory price is .70-.74 yuan/500g.

The Agricultural Futures Net analysis says China's flour milling industry suffers from severe excess capacity and may be facing a shake-out of small mills.  Large companies with financing and technological advantages are expected to survive while smaller mills may shut down.

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