Great potential for wheat in shoring up weak links, boosting agricultural supply-side reform

The Central Rural Work Conference held on December 24-25, 2015 proposed for the first time the “agricultural supply-side structural reform”, charting the course for agricultural and rural work in 2016 and the “13th Five-Year Plan” period. The conference pointed out that efforts should be focused on strengthening the agricultural supply-side structural reform, improving the quality and efficiency of the agricultural supply system, so that the quantity, variety and quality of agricultural product supply meet consumer demand, and truly form an effective supply of agricultural products with a reasonable structure and strong guarantees.

High-quality wheat production needs to “shore up weak links”

The Central Rural Work Conference clarified the direction of the agricultural supply-side structural reform: at present, great importance should be attached to destocking, reducing costs and shoring up weak links.

The conference pointed out that in advancing the agricultural supply-side structural reform, the bottom line of safeguarding national food security must always be upheld and must never be breached at any time.

It is necessary to ensure the supply of staple grains such as rice and wheat, protect arable land, protect production capacity, and protect grain production in major producing areas, especially core producing areas, so as to ensure basic self-sufficiency in grains and absolute security of staple grains.

In the author's view, wheat is less urgent than corn in terms of “destocking”, but there is still great potential in “shoring up weak links”. China has the world's largest wheat output, but still has rigid import demand for high-quality wheat every year.

China's minimum purchase price policy only has grade price differences based on quality, but does not focus on the variety price difference between high-quality wheat and ordinary wheat, making it difficult to reflect the principle of higher prices for better quality. This leads farmers to be more inclined to grow high-yield ordinary wheat.

As the effect of “ordinary wheat driving out high-quality wheat” strengthens, farmers increase the planting of high-yield ordinary wheat and reduce the planting of high-quality wheat, which is not conducive to the adjustment of the grain planting structure and leads to the adverse elimination of high-quality varieties. Therefore, it is suggested that China issue relevant policies that can encourage farmers to grow high-quality wheat, so as to promote the production and development of high-quality wheat in China.

Domestic wheat prices are expected to be mainly stable in the later period

Monitoring data show that in the week ending December 30, 2015, wheat prices in China's main producing areas were stable with slight fluctuations. Among them, the factory-gate price of ordinary wheat in Jinan, Shandong was 2,390-2,400 yuan/tonne, and in Suzhou, Anhui it was 2,400-2,420 yuan/tonne, both flat with the previous week; in Xingtai, Hebei it was 2,380-2,400 yuan/tonne, down 10 yuan/tonne; in Zhoukou, Henan it was 2,340-2,370 yuan/tonne, and in Taizhou, Jiangsu it was 2,400-2,440 yuan/tonne, both up 20 yuan/tonne.

As the Spring Festival approaches, flour milling enterprises in some areas have increased their stockpiles, resulting in a local tightening of grain sources, and flour milling enterprises have slightly raised wheat prices. However, sales by flour milling enterprises are still below expectations, and the overall trend of wheat prices remains mainly stable.

There are currently many bearish factors in the wheat market. Despite the support of the pre-holiday peak season, wheat prices are still expected to find it difficult to rise in the later period. Not considering temporary storage inventories, current market grain sources are mainly concentrated in the hands of traders and grain depots.

According to what the author has learned, the pace of grain depot shipments in 2015 was relatively slow. A large grain depot in Shandong said that in the same period last year, rotated grain had basically sold out, while the current wheat rotation ratio was still less than 10 percent; in addition, the storage capacity for self-operated traded grain had also increased significantly compared with the previous year.

The situation in previous years in which flour milling enterprises purchased large quantities before the holiday did not appear. In addition to the decline in downstream flour demand, the dumping of wheat by some traders was also a reason why flour milling enterprises reduced purchases from grain depots.

In addition, farmers still have some surplus grain on hand.

Since the new wheat came onto the market in 2015, wheat price trends have been unsatisfactory, and farmers have sold grain at a slower pace than in previous years. There may be a peak in grain selling before the Spring Festival.

With wheat inventories in both grain depots and farmers' hands increasing over the previous year and traders dumping grain, and considering weak downstream demand, domestic wheat prices are expected to have little room for overall increase in the later period, but a slight rise in wheat prices due to regionally tight grain sources cannot be ruled out.