Periodic Tightening of Wheat Supply and Demand Pushes Prices Back Toward Policy Price

The scope of the launch of the minimum purchase price policy for wheat in major producing areas has further expanded, which is expected to drive the start of a periodic market trend for wheat. As grain sources in the domestic circulation market further decrease, combined with the consumption of inventory grain sources by flour processing enterprises, the new wheat circulation market will show a “declining supply and rising demand” pattern.

Minimum purchase price policy purchase volume gradually approaching last year's level

According to statistics, as of September 10, various grain enterprises in 9 major producing areas including Henan and Jiangsu had purchased 62.74 million tons of newly produced wheat, a decrease of 8.46 million tons from the same period last year, but the purchase volume was at the second-highest level since 2006.

Statistical data shows that from 2007 to 2014, the average wheat purchase volume by various grain enterprises in major producing areas was 54.53 million tons, with the highest volume during that period being 71.20 million tons (2014) and the lowest being 40.89 million tons (2007). Entering September, the expansion of the regions where the minimum purchase price policy for wheat has been launched in the northern wheat areas has strengthened market confidence to a certain extent and will also further compress the quantity of grain sources in the circulation market.

As of now, the minimum purchase price policy purchase volume for wheat in major domestic producing areas is close to 20 million tons. The minimum purchase price policy purchase cycle has been noticeably extended, causing the minimum purchase price policy purchase volume to gradually approach last year's level.

Wheat prices vary significantly due to quality differences

At present, wheat quality varies, and wheat prices differ significantly. Due to the scarcity of circulation grain sources of high-quality wheat, large-scale procurement is difficult, presenting a “price without market” pattern; while low-quality wheat is affected by the low prices of feed grain, the substitution quantity and price of feed wheat are significantly impacted, presenting a “no market, no price” situation.

In the Xinghua area of Jiangsu, the local purchase price of 2015-produced red wheat by flour processing enterprises is 2360-2440 yuan/ton; the delivered-to-factory price of white wheat by flour processing enterprises in Anhui is 2280-2320 yuan/ton, and the delivered-to-factory price for feed enterprises is 2020-2080 yuan/ton; the small vessel delivery price of 2015-produced third-grade white wheat in the Fengtai area of Anhui is 2230 yuan/ton; the new wheat purchase price by flour processing enterprises in the Heze area of Shandong is 2400-2410 yuan/ton; the average factory-entry price of 2015-produced third-grade ordinary white wheat in the Shijiazhuang area of Hebei is 2420 yuan/ton; the purchase price of 2015 first-grade white wheat in the Yanjin area of Henan is 2340 yuan/ton.

As market grain sources decrease, flour processing enterprises' willingness to purchase is strengthening, but the flour and bran markets are performing poorly, and demand is starting up relatively slowly, constraining their purchasing intensity. Statistical data from relevant institutions shows that in August, domestic wheat flour output was 11.9848 million tons, a year-on-year increase of 3.01%; from January to August, wheat flour output was 91.8955 million tons, a year-on-year increase of 2.8%. As of mid-September, the price difference between the average price of domestic special first-grade wheat flour and third-grade white wheat was 960-965 yuan/ton, narrowing somewhat on a month-on-month basis.

Temporary storage wheat auctions may gradually improve

Due to the difference between the wheat market price and the policy price, the transaction performance of state temporary storage wheat auctions is in sharp contrast between past and present. At present, the new wheat purchase price in major domestic producing areas is 2300-2400 yuan/ton, while the auction reserve price for state temporary storage third-grade wheat is 2460 yuan/ton. The cost advantage of new wheat procurement is obvious, which also makes its transactions sluggish.

Statistical data shows that since mid-to-late August 2014, the transaction rate and average transaction price in the state temporary storage wheat auction market have increased significantly. As of mid-September 2015, the remaining inventory of state temporary storage wheat was 18.24 million to 19.24 million tons, including 2.977 million tons in Jiangsu, 5.293 million tons in Anhui, 9.391 million tons in Henan and 1.447 million tons in Hubei.

Effective supply capacity of new wheat weakening

The circulation market is gradually entering a pattern of periodic tight supply and demand, which will prompt market participants to change their purchasing and selling sentiment. Given the ample supply of state temporary storage wheat, it is difficult for circulation market grain source prices to rebound significantly, and wheat prices will gradually return to the policy price. Changes in wheat market prices affect the purchasing and selling psychology of market participants and will also indirectly affect the supply and demand of the wheat market.

State temporary storage wheat auctions will still become the main channel of grain source supply in the later period. The trend of the domestic wheat market in the later period still needs to follow policy signals, and it is recommended to closely monitor the adjustment range of the minimum purchase price for wheat in the new year and regional and varietal market opportunities in wheat.