Four major obstacles stand in the way of domestic wheat price increases
Under the widely publicized news announced on October 10 that the 2016 national wheat reserve price-support policy price would still be maintained at 2.36 yuan/kg, the market's panic over the future of wheat gradually eased, and wheat purchase and sales prices gradually rose. After the wheat market experienced a cliff-like drop during the “October 1” holiday, some regions had already recovered to the level before the “October 1” holiday. This price fluctuation could be said to have given wheat market participants a psychological roller-coaster ride. At the current stage, with wheat prices gradually rebounding, is there really no trouble ahead for wheat prices later? Will there be another high-altitude skydive? How will the wheat market develop later? The author believes that if wheat prices want to continue rising, they will probably have to climb over four great mountains. Below are some analyses made by the author, and I hope to exchange and discuss them with everyone.
The first mountain: Large state reserve volume; the price-support policy actually brings no positive news
Data show that as of September 30, the Sinograin system had purchased a cumulative total of 20.7925 million tons of price-support wheat this year, a year-on-year decrease of 4.5521 million tons, or 17.96%. According to incomplete statistics, Sinograin currently has about 18 million tons of wheat in stock, which means that as of October 23, the national reserve wheat inventory was as high as about 39 million tons. This can basically meet domestic consumption for about 15 months, so the state reserve volume can be said to be quite huge. At present, price-support purchasing has ended, price-support purchasing enterprises have withdrawn from the market, the policy purchasing entity is absent, and the market's bottom-support effect no longer exists before next year's price-support purchasing. The author believes that although the state's 2016 minimum purchase price for wheat continues to remain stable at 2.36 yuan/kg, increasing the degree of grain marketization will be the general trend, and the price-support policy actually has no substantive positive support. With relatively loose supply, it is unlikely that wheat prices will show a continuous upward trend.
The second mountain: Imports have decreased, but the large price gap brings no benefit
According to the latest import data released by the General Administration of Customs of China, in September 2015 China imported 210,000 tons of wheat, while in August it imported 340,000 tons, a month-on-month decrease of 38.24% and a year-on-year increase of 57.19%. From January to September, a total of 2.2493 million tons of wheat were imported. It can be seen that imports are decreasing month by month, which is good news for the domestic wheat market, which is already oversupplied. However, as of October 22, the duty-paid price of US wheat arriving at Chinese ports was about 1,939 yuan/ton, while the selling price of domestic wheat of the same quality at Guangdong ports was about 2,450 yuan/ton, with a price gap of about 510 yuan/ton between the two. The price advantage of imported wheat is still obvious. Against the background that national policy tends to let the market determine prices, wheat prices are detached from market prices, and the room for continued increases is limited.
The third mountain: Flour enterprises are weak; there is no support for prices to spike higher
According to what the author has learned, since the second half of 2013 up to now, the domestic flour processing industry has been in a stage of recession and consolidation. According to data from the National Bureau of Statistics, the domestic flour processing industry has a processing capacity of 350 million tons, while domestic end-user demand is already less than 100 million tons. These data can explain why the overall operating rate of the flour processing industry has recently found it difficult to break through the 30% mark. In addition, according to feedback from flour mills in some regions, the theoretical profit of large flour enterprises in Hebei is 55-60 yuan/ton, while that of small flour enterprises is 15 yuan/ton; in Henan, the theoretical profit of large flour enterprises is 60 yuan/ton, while that of small flour enterprises is 20 yuan/ton. If the above data are true, then the future room for wheat price increases would be only between 0.02-0.06 yuan/kg. Against the background of flour enterprises struggling in production, there is no support for wheat prices to continue spiking higher.
The fourth mountain: Corn is cheap; feed wheat has no way out
Recently, after corn prices experienced an earlier continuous decline, the price of cleaned grain has basically stabilized between 1,600-1,700 yuan/ton. However, with large quantities of new-season corn coming onto the market, the market supply of dry grain will increase significantly, de-stocking state temporary reserve corn will become even more difficult, and the market will face a new round of supply pressure; coupled with the bearish impact of policy adjustments, old corn prices will continue to fall and move closer to new corn prices. In the short term, it will be difficult to change the weak pattern of the spot corn market, and falling prices will still be the main theme of market operation in the future. This will make the price gap between feed corn and feed wheat increasingly large, and wheat's use in the feed industry increasingly small, or in other words, feed wheat already has no way out, and wheat price increases may once again be limited.