How Will China's "Three Highs" Wheat Landscape Play Out?

According to the State Administration of Grain, as of August 31, grain enterprises of various types in 11 major wheat-producing areas including Henan and Shandong had purchased a cumulative total of 69.84 million tons of newly harvested wheat, an increase of 20.5 million tons over the same period last year. At this point, China's wheat has taken on a "three highs" pattern of high prices, high purchase volumes, and high inventory levels.

In the wheat purchases of the past 5 years, volumes decreased year-on-year in 2010 and 2013, and increased year-on-year in 2011, 2012, and 2014, with the increase in 2014 reaching as high as 41.5%.

The primary reason for the rapid increase in China's wheat purchase volume is that the state's minimum purchase price for grain has risen year by year to exceed the market price, prompting grain sources to flow to policy-driven purchasing enterprises.

Starting in 2004, China adopted a minimum purchase price policy in major grain-producing areas to protect farmers' enthusiasm for producing grain. Since 2008, the minimum purchase price for wheat has been raised year by year. By 2014, the minimum purchase price for wheat had risen to 1.18 yuan per jin, an increase of 63.9% and 71% respectively compared with 2006 (when no minimum purchase price for wheat was implemented in 2004 and 2005), when white wheat was 0.72 yuan per jin and red wheat and mixed wheat were 0.69 yuan per jin.

Before this year's new wheat came onto the market, in China's earliest market area in the south —— Xiangyang City, Hubei Province, the market price of wheat was 1.10 yuan. Because the market price was lower than the minimum purchase price, Hubei Province took the lead nationwide in launching the wheat minimum purchase price implementation plan on May 27. Since then, the wheat minimum purchase price implementation plan has been fully launched in major wheat-producing areas. According to the Hubei Provincial Grain Bureau, as of August 29, grain-operating enterprises of various types across the province had purchased a total of 7.13 billion jin of new wheat, 1.88 billion jin more than the same period last year, an increase of 35.8%.

While the domestic wheat market price was lower than the minimum purchase price, the wheat market price on the international market was also far lower than the domestic market price.

Before the new wheat came onto the market, the price of US wheat delivered to Chinese ports fell in a straight line. On May 8, the price of US No. 2 soft red winter wheat for July delivery delivered to Chinese ports was 2,558 yuan per ton, falling to 2,263 yuan by May 23; by June 24 it had fallen to 2,065 yuan, and on July 2 it fell further to 1,982 yuan, and on July 14 it fell to this year's lowest point of 1,882 yuan.

With profits to be made, foreign wheat entered the Chinese market at an accelerated pace this year. In the first 7 months of this year, China imported a total of 2,671,456 tons of wheat, up 56.61% year-on-year.

As the main body implementing the wheat minimum purchase price, Sinograin's wheat purchase volume this year hit a new high. As of August 25, Sinograin had purchased a cumulative total of 25.34 million tons of wheat through market support, 3 times the same period last year.

The Sinograin system, which purchased nearly 90 million tons of grain in 2013, saw a sharp increase in summer grain purchases this year, and with autumn grain about to come onto the market, warehouse capacity is extremely tight.

To free up warehouses, since mid-May Sinograin has stepped up policy grain auctions. As of mid-August, a cumulative total of 29.98 million tons of policy grain had been sold in 3 months, and Sinograin said the target of selling 32 million tons before the end of October is expected to be completed ahead of schedule.

⟧ To make way for new grain, Sinograin spared no expense. Despite the inversion of production and sales prices and the widening price gap between new and old grain, from January to July this year Sinograin strongly promoted the rotation of central reserve grain, losing 560 million yuan. As of the end of July, 61% of old grain rotation out had been completed, and 43% of new grain rotation in had been completed, faster than in previous years.

Although China's wheat minimum purchase price has been raised again and again, the area planted with wheat by farmers has not reached expectations. Over the 6 years from 2009 to 2014, the winter wheat planting area, which accounts for about 85% of China's total wheat planting area, has been declining continuously. It fell from a year-on-year increase of 0.36% in 2009 to -0.1% in 2014.

One important reason the wheat planting area has declined year after year is that farmers have not fully received the benefits of the minimum purchase price policy.

Although the state raises the minimum purchase price for grain every year, the prices of means of production and labor costs also rise accordingly.

The minimum purchase price refers to the price at which farmers sell grain to state-designated grain purchasing and storage depots. Chinese farming households are scattered in residence, the geographical area is large, and the designated grain purchasing and storage depots are limited. In addition, the grain purchasing season is precisely the busy season in rural areas, so many farmers sell their grain right at their doorstep, getting a few cents less per jin.

Looking at conditions across various regions, the returns from planting wheat are very limited. Below, we take Henan Province, which accounts for one quarter of China's wheat output, and Anhui Province in the south as examples for analysis and explanation.

On July 22, the Henan Provincial Local Economic and Social Survey Team released the results of a wheat production cost survey of 600 farming households in 120 townships (towns) in 40 counties (cities, districts): the surveyed farming households' production cost per mu of wheat planted this year was 583.7 yuan, basically flat compared with 580.5 yuan the previous year. Among these, material costs were 238.6 yuan, down 3.1% from the previous year; production service expenditures were 155.5 yuan, up 4.9% from the previous year; and labor costs were 189.6 yuan, up 1.9% from the previous year.

This year, the province's average wheat yield per mu was 410.5 kg, an increase of 9.7 kg over the previous year, up 2.4% year-on-year. Farmers' income from planting each mu of wheat was 431.1 yuan, an increase of 67.8 yuan over the previous year, up 18.7% year-on-year, the highest increase since 2010.