High-quality strong-gluten wheat prices may be undervalued, with room for further gains ahead
Since October, government stockpiling efforts have been relatively strong, reducing the circulation of relatively good-quality wheat on the market. As the peak wheat consumption season arrives, domestic wheat prices have generally risen. By contrast, the price increase for high-quality strong-gluten wheat has been relatively small.
The price gap between high-quality wheat and ordinary wheat keeps narrowing. According to monitoring, as of November 11, the factory-gate prices paid by flour mills for the high-quality strong-gluten wheat “Gaoyou 2018” were: Shijiazhuang, Hebei 2720 yuan/tonne, Hengshui, Hebei 2700 yuan/tonne, Heze, Shandong 2660 yuan/tonne, Xinxiang, Henan 2660 yuan/tonne, up 50-60 yuan/tonne from mid-October; the factory-gate prices for the high-quality wheat “Zhengmai 366” were: Zhengzhou, Henan 2630 yuan/tonne, Xinxiang, Henan 2630 yuan/tonne, Heze, Shandong 2640 yuan/tonne, up 50-60 yuan/tonne from mid-October; the factory-gate prices for the high-quality wheat “Jinan 17” were: Heze, Shandong 2640 yuan/tonne, Weifang, Shandong 2640 yuan/tonne, Nanjing, Jiangsu 2640 yuan/tonne, up 60 yuan/tonne from mid-October. Over the same period, the factory-gate prices of ordinary wheat rose even more, mostly by 100-140 yuan/tonne, causing the price gap between high-quality wheat and ordinary wheat to keep narrowing. Taking the price gap between “Zhengmai 366” and ordinary wheat in the Zhengzhou area as an example, it narrowed from 220 yuan/tonne in early October to 150 yuan/tonne at present, the lowest level since March 2014.
Most imported wheat is strong-gluten wheat. This year, the wheat-affected areas were mainly concentrated in southern Henan, Jiangsu, Anhui, Hubei and other places, which had a relatively large impact on the yield and quality of ordinary wheat, while the producing areas of high-quality strong-gluten wheat are mainly concentrated in Hebei, Shandong and northern Henan, and these areas did not suffer adverse weather during the wheat growing and harvesting periods, so the decline in domestic high-quality wheat output was relatively small.
The state implements a minimum purchase price policy for ordinary wheat. Because of the strong implementation effort, grain departments at all levels purchased more ordinary wheat than in previous years. After the purchase period ended, the market circulation of good-quality ordinary wheat dropped sharply, while there is no corresponding purchase policy for high-quality strong-gluten wheat.
Wheat imports are relatively large. Customs data show that in September China imported 431,800 tonnes of wheat, up 24% month-on-month and up 109% year-on-year; from January to September, cumulative wheat imports reached 2.86 million tonnes, up 27% year-on-year. Most imported wheat is strong-gluten wheat, and because international wheat market prices have remained low for a long time, imported wheat has a better cost-performance ratio than domestically produced high-quality strong-gluten wheat, bringing a certain impact to domestic strong-gluten wheat.
Ordinary wheat price rises hit a “ceiling”. After more than a month of continuous increases, the factory-gate price of ordinary wheat at flour mills in some domestic regions has now reached a high point of 1.325 yuan/jin, basically on par with the delivered price of the government's weekly routine minimum purchase price wheat auctions plus freight and other costs. Because the minimum purchase price wheat auctions are large in volume, have sufficient grain sources and stable supply, and flour mills are active in bidding, they can meet the market demand for ordinary wheat, causing the rise in ordinary wheat prices to encounter an insurmountable ceiling. By contrast, high-quality strong-gluten wheat prices appear to be undervalued. At present, the price gap between high-quality wheat and ordinary wheat is too small. As time passes and high-quality wheat inventories are gradually consumed, high-quality wheat still has considerable room to rise.
The domestic supply-demand gap for high-quality wheat is relatively large. In recent years, although local governments have actively adjusted the planting structure and vigorously promoted high-quality wheat cultivation, high-quality wheat has relatively strict requirements for growing conditions and requires relatively large inputs of labour and materials, while the government also has no corresponding support policy for purchasing high-quality wheat. For a long time, the increase in domestic high-quality wheat output has been relatively slow, and in addition, dedicated planting, dedicated purchasing and dedicated storage have not been achieved in production and procurement, so the quality of high-quality strong-gluten wheat is relatively poor.
It is estimated that China's current output of high-quality strong-gluten wheat is only 3 million-4.5 million tonnes. On the other hand, as people's living standards improve, demand for high-quality special-purpose wheat is rising year by year. It is estimated that current annual demand for high-quality wheat is 5 million-7 million tonnes, leaving an annual supply-demand gap for high-quality wheat of 2 million-3 million tonnes.
High-quality wheat is highly market-oriented and volatile. Since 2006, the state has implemented the minimum purchase price policy for ordinary wheat, purchasing on a large scale during the concentrated wheat marketing season and then carrying out routine weekly sales year-round, which allows domestic ordinary wheat prices to stabilise within a certain range. But for high-quality strong-gluten wheat, the government has no corresponding purchase and reserve-release policy, which makes strong-gluten wheat highly market-oriented and its prices highly volatile. In 2015, high-quality strong-gluten wheat once rose to a high point of 3000 yuan/tonne.
Therefore, although ordinary wheat prices are tending to stabilise because of the government's continued reserve releases and large transaction volumes, high-quality wheat, without reserve-release suppression, has considerable room to rise.
International wheat prices have successfully bottomed out and are expected to rise. Although world wheat output keeps increasing and the USDA's November supply and demand report remained bearish, since the end of August international wheat prices have continued to stabilise at the bottom and have recently edged higher. At present, US wheat prices have already reached the planting cost range, so room for further decline is limited. The successful bottoming of international wheat prices will raise China's wheat import costs and, to a certain extent, reduce the impact of imported wheat on domestic wheat prices.
As a high-end-use wheat, high-quality strong-gluten wheat should rise along with the overall rise in wheat prices, but its increase is now clearly too small, and its price appears undervalued. Because high-quality strong-gluten wheat is highly market-oriented and is not suppressed by forces such as reserve releases, it will have even greater room to rise later as demand becomes stronger and supply becomes tighter. Flour mills should seize the opportunity and stock up appropriately to avoid the embarrassment in the future of “the cleverest housewife cannot cook a meal without rice.”