Stockpiling Forces Wheat Price Increase

Chinese wheat prices rose during October due to an artificial shortage created by a policy that channels large volumes of grain into government warehouses where it remains for years until it becomes rat food.

A local Henan Province wheat trader told Futures Daily that a surge in wheat prices that began in September has market participants puzzled. Normally, the price starts to fall when the government finishes purchasing wheat for reserves on September 30, but this year the price started climbing in October. The price rally has been unexpectedly robust. The rising prices have prompted traders to increase their purchases. Flour mills have shifted from a wait-and-see approach to a more aggressive buying strategy.

Futures Daily reports that a flour mill in Xinxiang of Henan Province posted new purchase prices for wheat from various regions that ranged from 2580 to 2620 yuan/mt. The notice reminded traders to cover trucks with tarpaulins to keep wheat dry since the region has had rain and fog that has raised moisture levels in wheat.

According to cofeed.com, wheat purchase prices rose at rates of 3-to-9 percent during October 2016 in various parts of China's wheat belt. The average price at the end of October was 2553 yuan per metric ton, equal to about $378 per metric ton--more than double the Gulf of Mexico FOB price for U.S. red wheat.

Wet weather and the government's floor price stockpiling program have combined to create a tight supply of milling-quality wheat in the Chinese market. A large portion of the 2016 wheat harvest was degraded in quality by wet weather that caused sprouting and fungus on the grain. Much of it was used by feed mills, and there were programs to buy up the substandard wheat in Anhui and Jiangsu Provinces. The government bought up a large volume of the milling-quality wheat for its reserves to prevent the price from falling below the minimum level set for this year. This left less wheat available for commercial buyers this fall.

China's wheat production is down slightly in 2016--estimated at 128 million metric tons (mmt) versus 2015's record crop of 130 mmt. Purchases of the winter wheat crop harvested in May-June  totaled 78.5 mmt by September 30, up 9.5 mmt from the previous year. Most of the increased buying reflected larger purchases by the government's reserve corporation to maintain the minimum price of wheat. Purchases at the minimum price totaled 28.5 mmt, 22% of the wheat crop but 36% of all wheat purchases.

China wheat production and marketing 2015/16 and 2016/17 (million metric tons)
	2015/16	2016/17	Change
Production	130.2	128.0	-2.2
Purchased as of September 30:
--All buyers	69.0	78.5	+9.5
--Government intervention purchases at minimum price	20.8	28.5	+7.7

The government is the leading customer for China's wheat. Only 50 mmt (128 mmt - 78.5 mmt) of wheat was purchased by buyers other than government reserves, and a significant portion of that was purchased by feed mills, leaving less than 40% of the crop available for flour mills.

China's grain reserve corporation--also known as Sinograin--stores the wheat until it can be sold at a higher price. With little wheat available, the market supply relies on auctions of wheat from the government's reserves.

A trader in Shandong Province's Heze district told Futures Daily, "We can't find any bulk wheat supplies in Henan or Shaanxi, and supplies are tight in Shandong and Hebei."

The Chinese government's minimum price program guarantees there will be no decline in China's wheat price. The interest and holding costs of the government reserves are subsidized, so there is no incentive to sell wheat. On October 21, the National Development Reform Commission announced that the minimum price program for wheat will continue for the 2017 crop and the price will be the same as in 2016.

China has eliminated floor price programs for other commodities--except rice.With prices for other crops, like cotton, rapeseed, corn, and soybeans falling, the guaranteed minimum price for wheat is attractive for Chinese farmers. Reportedly, winter wheat planting this fall was stable. Also, spring wheat in northeastern provinces is one of the crops targeted for increases in the structural adjustment program. Thus, another big Chinese wheat crop is assured in 2017/18 even though global supplies are already abundant. Some market commentators worry that China will have a surplus of wheat when the new crop comes on the market next year. Authorities will likely need to purchase large volumes of wheat again next year to maintain the minimum price.

On November 1, authorities offered 2.8 mmt of wheat from reserves for auction, but only 473,000 metric tons sold at prices ranging from 2200 to 2520 yuan per metric ton. Most of the wheat was from 2012, 2013, and 2014, but some was from 2009 and 2010. On November 2, an auction of 48,817 tons of wheat held in reserves since 2010 in Henan Province found no buyers. The Nov. 2 wheat was grade 4 and 5, advertised as surpassing the limit on mycotoxins and 50%-75% poor kernels.

China is able to maintain its policy of ratcheting prices upward because authorities limit wheat imports with a quota system. Since imported wheat at lower prices is not accessible to most flour mills, they are forced to buy old, degraded wheat from reserves at high prices.