Analysis of the wheat purchase and sales end-period price market: which wheat can rise in price?

As domestic wheat supply continues to decrease, there is very little grain left that can circulate on the market, and after the state reserve began auctioning 2015 wheat, mills have also successively lowered their wheat purchase prices. At present, the mainstream purchase quotation for wheat with a test weight above 780 is around 1.30 yuan/jin. The current market wheat price looks calm, and it seems the price is also staying stable, but is that really the case? Does that mean wheat prices will have no chance to rise? If prices are to rise, what kind of wheat can rise? Next, Deng Chenguang, an analyst at the China Grain and Oil Information Network, will give everyone a brief analysis.

1. Raw grain shortage: high-quality wheat can no longer be purchased

Market wheat purchase and sales have now officially entered the final stage. Especially after the state reserve auction at the beginning of the month, traders who still had inventory in hand saw their psychology of hoarding grain and holding back sales weaken greatly. After a round of large-volume outbound releases, there is basically no wheat circulating in most parts of the country.

Although wheat purchase and sales have basically stopped, the demand from mills will not end because of this. Affected by the low wheat inventories of flour milling enterprises and the slow movement of flour, the operating rate has also declined slightly. In order to ensure their own flour quality, mills need enough high-quality wheat to maintain production, but given the current market situation, the quality of the remaining wheat is no longer what it used to be. The mills' purchase quotation of 1.3 yuan/jin is indeed stable, but in actual purchasing they mostly price by quality. In other words, there is now too little high-quality grain on the market, so rigid demand still exists for wheat that reaches Grade 1 or even higher quality. As high-quality grain sources continue to decrease, the problem of purchasing difficulty is also placed before the mills, and this provides the strongest support for a later price increase in high-quality wheat.

2. State reserve auctions: purchasing costs are really too high

Next let us look at the currently “very prominent” state reserve wheat auctions. At present, the state reserve 2015 wheat auctions have already been held three times. Apart from the first one ending perfectly, the transaction results of the other two can only be described as barely satisfactory.

From the transaction results for Grade 1 wheat in Hebei and Shandong provinces shown in the chart above, the transaction rates of the latter two wheat auctions fell sharply. Some mills that participated in the auctions said they were only purchasing wheat sold from depot points relatively close to their plants. At first glance, it seems that increased transportation costs have made mills less enthusiastic about participating in state reserve wheat auctions, but on closer examination, the real reason is still that the purchasing cost of the state reserve wheat itself is higher than the upper limit they can bear. The author learned from some large mills in Hebei and Shandong that if the auction transaction price of state reserve Grade 2 wheat is 1.25 yuan/jin, then after including storage fees, management fees and some miscellaneous fees, the outbound price of the wheat will reach 1.28-1.3 yuan/jin. This is only the outbound price. If it is to be transported to the plant, about 0.02 yuan/jin in transportation costs must be added. The quality of wheat produced in 2015 is indeed good, but precisely because its quality is excellent, it has brought cost pressure to the mills. In the auction held on November 15, the author noticed that the transaction prices of state reserve Grade 1 wheat in the Xingtai and Baoding areas of Hebei were on the high side. The wheat quality in that area is excellent, with the highest transaction price reaching 1.3 yuan/jin. If the earlier description is followed, it is not impossible that the purchasing cost for mills when they obtain this wheat will exceed 1.35 yuan/jin. Such high purchasing costs are not what flour mills hope to see. Since this fact cannot be changed, mills can only reduce their purchases of state reserve wheat at present and continue to focus their attention on high-quality wheat on the market. During the state reserve wheat auction in Shandong Province, the lack of bidding activity, with mills basically concluding transactions at the auction reserve price, precisely reflected the gradual decline in mills' enthusiasm for participating in state reserve auctions. This provides sufficient room for price increases in the later period for remaining high-quality wheat on the market.

3. Ample supply: ordinary wheat prices will find it hard to rise

So since Grade 1 wheat can rise, can wheat of other qualities also rise? In fact, when learning about market conditions, the author also found that at this stage a small number of industry practitioners still have unsold wheat inventory, retaining more or less some remaining grain, mostly within the Grade 2 range. These friends also told the author about the difficulty local flour mills are having in purchasing wheat. It is true that wheat purchasing is difficult at present, but this does not mean mills will be in a passive position, nor that wheat of ordinary quality will definitely rise in price later. First, ordinary-quality wheat is very easily replaced by aged grain from grain depots. Local grain depots have ample rotating grain supply, and its quality is similar to that of ordinary-quality wheat on the market. Second, although mills do not have much inventory, because their operating rate is low, wheat consumption is at a trough, and they can basically maintain use for more than one month. After entering December, the possibility of state reserve 2015 wheat auctions in Henan, Anhui and other provinces increases greatly, and the outbound volume of local rotating grain will also gradually increase. If the outbound price is 1.25 yuan/jin, mills can completely shift their wheat purchasing attention to aged grain. In that case, instead, remaining grain of ordinary quality on the market will fall into a passive position and may even be purchased by mills at depressed prices.

In summary, under the currently calm wheat market, there is in fact a restless heart for high-quality wheat. Against the background of continuously decreasing raw grain, high-quality wheat prices still have a great possibility of rising. It is preliminarily estimated that for wheat whose quality can truly reach Grade 1 or above, purchase prices at most domestic mills may show a slowly rising trend from late November to December, and after reaching a peak of around 1.35 yuan/jin from late December to January next year, they will stabilize. As for wheat of Grade 2 and Grade 3 quality, the risk of hoarding grain later increases, so it is still advisable to sell it as soon as possible in the near term as appropriate.