Tuesday, December 4, 2018

Price Cut Despite Poor Wheat Profits

Chinese authorities announced a reduction in next year's floor price for wheat, despite poor profits from this year's wheat production. Authorities face a challenge of reducing their intervention in the wheat market while guarding against farmers abandoning the crop.

On November 16, China's National Development and Reform Commission announced that the minimum price for the 2019 wheat crop would be set at 112 yuan/50kg (equal to 2240 yuan/mt or about $320/mt), down from 115 yuan/50kg (2300 yuan/mt) this year. This is the second year in a row the Commission has cut the wheat price by a relatively modest 3 yuan/50g (less than 3%) after holding the minimum price steady at 118 yuan from 2014 to 2017.

In a press conference, the Commission explained that the minimum price needs to be brought into line with market prices to eliminate big gaps between Chinese and foreign prices. The Commission explained that the minimum price will be restored to a floor under the market price--it will no longer be the prevailing market price. Purchases at the minimum price will be made only when the market price falls--the minimum price program will no longer be the main channel for marketing wheat. Authorities say they hope to coax farmers to produce the grades of wheat demanded by the market instead of producing maximum volume to sell to the government. Reductions in the minimum price are being made gradually to prevent disruption, and the price cuts are intended to break expectations of ever-rising prices that took hold when the price was raised every year from 2007 to 2014, the Commission said.

Farm production cost surveys in several major wheat-growing provinces indicate that returns for China's wheat growers took a plunge this year due to low yields, poor quality of the crop, and a rise in farm chemical prices. In Shandong Province, the wheat yield measured by the survey was down 7.9 percent and was the lowest since 2010. Shandong had a long, dry winter, late spring, and heavy rains and typhoons that reduced yield, caused lodging, poor quality, molds and rusts in parts of the province. Anhui Province was hit the hardest with weather problems, as average yield was down 24 percent, the lowest in five years. In Henan, problems were concentrated in the southern part of the province, and the province-wide average yield was down 3.2 percent. The Henan survey mentioned that "quality" strong gluten wheat varieties were especially susceptible to fungus and disease. In Hebei Province, the test weight was down by a full grade, on average.

Wheat yields and prices in Chinese provinces, 2018
Province Yield Change from 2017 Price Change from 2017
KG/mu Percent Yuan/mt Percent
Shandong 421 -7.9 2374 -2.7
Henan 417.5 -3.2 2240 -1.3
Anhui 338.2 -24.4 2040 -9.7
Source: Provincial production cost surveys.

Declines in wheat prices received mainly reflected poor quality of the crop. Prices for grade 3 and higher wheat were generally higher than the minimum price, so most localities did not launch the minimum-price purchase program. It was estimated last summer that just 2 mmt of wheat would be purchased at minimum prices this year. Large volumes in Anhui were sprouted or low-grade wheat that did not meet the standards of the minimum price program. The average price in Anhui was just 2040 yuan/mt, down 9.7 percent from last year. State granaries were ordered not to accept substandard wheat, especially wheat with vomitoxin--to preserve food safety.  Large volumes of the off-quality wheat was purchased for feed. High-quality wheat remains in short supply, and prices were about 10 percent higher than the price for common wheat. In Anhui, the Grain Bureau reported average prices of 1900-2200 yuan/mt versus 2400 yuan/mt for standard quality wheat. With lower prices and lower yields, wheat growers in the three surveyed provinces experienced lower gross income from wheat.

Wheat prices reported by the State Administration of Grain illustrate the divergence between low- and high-quality wheat. The low price slipped from 2040 yuan/mt in May to 1900 yuan/mt in July-September as large volumes of sub-standard wheat drove down prices at the low end. The highest prices reported went up over the course of the marketing season, reflecting the tight supply of the best quality wheat. The average price exceeded the minimum purchase price of 2300 yuan/mt.

China average wheat purchase prices, 2018
Date Low Average High
Yuan/metric ton
May 28 2040 2369 2760
June 25 2000 2337 2760
July 23 1900 2362 2752
Aug 27 1900 2379 2777
Sept 25 1900 2390 2784

Labor and land production costs for wheat have stopped their rapid increase. Surveys showed small increases or decreases of 1-to-2 percent in these items. In Anhui, the survey reported that farmers had cut back on their labor input because of low profitability from wheat. Some cut labor input by selling wheat immediately after harvest without drying the grain. Land rents are steady or falling, also due to weak profitability of wheat. The largest increase in cost was due to an increase in fertilizer prices.

The cash return for wheat farmers in Anhui Province was 228.5 yuan/mu, down 60 percent from last year. In Shandong the net cash return was 540 yuan/mu, down 20 percent. The net return in Henan was down 15 percent.

The National Development and Reform Commission assured farmers that the cut in the minimum price for wheat does not mean that market prices and returns will fall next year. The Commission promises to continue the quality grain project next year and experiment with pilot programs for insurance against cost increases and income fluctuations as a tool to stabilize farmers' income.

1 comment:

Godfree Roberts said...

Prices are considerably above Australia's