(Reuters) - China surely does not need any more wheat in its bins, but Beijing’s latest pricing nearly ensures that the country’s oversupply will remain burdensome both for the Chinese and the world through at least next year.
Beijing has set its 2017 state wheat purchase price at 2,360 yuan ($349.18) per tonne. This is unchanged from the previous two years, despite the fact that global wheat prices have fallen at least 20 percent from late 2014 levels.
This guarantees that Beijing will purchase wheat from farmers at $9.50 per bushel, a price not seen on the free market since the commodities bubble of 2007-08. For comparison, cash prices for SRW wheat in the U.S. city of Toledo, Ohio, are close to $4 per bushel, or $147 per tonne.
Although the East Asian country imports a small fraction of wheat compared with what it produces and consumes, the support price is also noncompetitive with China’s international purchase price, which in September 2016 was $6.44 per bushel, well below the year-ago price of $8.15.
China introduced a support price for wheat in 2006 in an attempt to protect farmers from losses and promote self-sufficiency in agricultural products. At the end of 2005-06, Chinese wheat stocks had dropped to the lowest levels in 23 years (reut.rs/2eAKTtj).
But today, domestic wheat stocks are at least three times larger than they were in 2006. The record volume of wheat in storage is estimated by the U.S. Department of Agriculture at approximately 111 million tonnes, but some groups peg this number as high as 250 million.
China’s wheat stockpile has artificially inflated world wheat supply, and with the state purchase price of wheat remaining intact through 2017, this problem will endure – or worsen.
More than 85 percent of China’s wheat consumption is for food, seed, and industrial purposes, but use in these categories has remained flat for 30 years at around 100 million tonnes.
The remainder of Chinese wheat use is allocated to feed, which has increased considerably over the past decade but with a limited impact to overall consumption due to its small share.
Feed wheat has been competing with the likes of barley, sorghum, corn, and corn’s ethanol byproduct, distillers’ dried grains with solubles (DDGS) in recent years. But since wheat and rice are the two remaining staple food commodities subject to government support prices, they have become less competitive with other products.
Domestic corn prices have dropped significantly since a year ago when Beijing lowered the support price for the first time, and prices have remained suppressed – and increasingly lower than those for wheat – since the complete scrapping of the price support program in March (reut.rs/2eAIpeD).
At the same time that corn support prices were axed, the government said it would be reviewing the policies for wheat and rice. Reviewed or not, it was decided to leave the policy for wheat unchanged into next year.
Lower prices of alternative feed grains – along with the shift of China’s diet toward more protein – do not make the case for a significant pickup in either human or animal consumption.
Given that Chinese farmers have no incentive to have lowered wheat plantings for the 2017 harvest, production will likely remain at the relatively steady level of the past three years, assuming no weather hardships. Wheat area in China has been nearly flat for the past eight years (reut.rs/2eAGzdA).
With no reason to believe that any of China’s wheat production and use habits will change in the upcoming year – even ignoring a potential downtick in consumption – China could add in the neighborhood of 15 million tonnes to an already-bloated world wheat supply.
In fact, without a change to production, it will be nearly impossible for China’s wheat stocks to fall in 2017-18, unless the country has a sudden change of heart about the possibility for export, as it recently did for corn.
Many grain market analysts have made a habit of comparing world supply and demand forecasts with and without China. This dual approach will continue to be worthwhile, because without it, a decline in tradable world wheat could slip by undetected.
(The opinions expressed here are those of the author, a market analyst for Reuters)
Reporting by Karen Braun in Chicago; Editing by Matthew Lewis