Wheat Price Forecast Before Spring Festival: Wheat Prices Steady with a Slight Rise, Flour and Bran Follow Suit

In November, wheat prices were steady with a slight rise. The average purchase price of standard-quality wheat in China's main producing areas was basically 1.27 yuan/jin or above, and flour and bran prices also rose accordingly, with notable increases, greatly improving the profitability of processing enterprises. It is expected that before the Spring Festival, wheat prices in the main producing areas will remain firm at high levels, with some areas possibly seeing a slight rise amid stability.

Tight Circulation of Grain Sources Supports the Wheat Market

In November, China's wheat supply and demand remained tight, and prices in the main producing areas stayed at high levels with fluctuations.

According to market information, at the end of the month, the purchase price of standard-quality wheat (with about 10% unsound kernels) in areas north of the Yellow River remained at 1.29-1.33 yuan/jin; wheat purchase prices in central and eastern Henan, northern and central Jiangsu, and northern Anhui were mostly 1.25-1.28 yuan/jin; the purchase price of ordinary wheat (with 15% or more unsound kernels) in other areas was 1.15-1.22 yuan/jin.

As the state successively released 2015 market-support wheat in Shandong, Hebei, and Jiangsu, market supply increased to a certain extent, curbing price increases, keeping prices firm and stable in early and mid-November; however, heavy snow across North China in late November blocked transportation, affecting both enterprises' procurement of raw grain and the shipment of finished grain, causing prices to edge up.

Raw Grain Costs Push Flour and Bran Prices Higher

Affected by rising raw grain purchase prices, flour ex-factory prices also rose rapidly. According to market information, at the end of November, the mainstream ex-factory quote for 30 flour from processing enterprises in the main producing areas was 1.65-1.70 yuan/jin, up 0.03-0.06 yuan/jin from the previous month; the ex-factory price of 60 flour was mostly between 1.55-1.60 yuan/jin, up 0.02-0.04 yuan/jin.

Due to steady growth in demand and relatively tight market supply, bran prices rose steadily. By the end of November, mainstream bran quotes in the main producing areas were mostly between 0.78-0.83 yuan/jin, and large-flake bran had risen to around 0.90 yuan/jin. Factors such as high raw grain prices leading to insufficient enterprise operation, the slow recovery of corn prices, stable feed consumption demand, and tight transport capacity driving up freight rates jointly pushed bran prices higher.

Improving Market Supply: Three Provinces Release New Grain

In November, a total of 5 auctions of temporarily stored wheat were held, with an average weekly volume of 2.71 million tons, an increase of 226,000 tons from the previous month; the average weekly transaction volume was 317,000 tons, up 271,000 tons month-on-month; the average transaction price was 2,487.49 yuan/ton, down 17.75 yuan/ton month-on-month. The average weekly transaction volume rose sharply, setting a new high since April 2014.

At present, the delivered-to-factory price of wheat in North China is basically around 1.29 yuan/jin, and the delivered-to-factory price of medium-quality wheat (with about 15% unsound kernels) in other main producing areas is also around 1.25 yuan/jin. Considering procurement costs and convenience, temporary storage auctions have become the main channel for enterprises to obtain raw grain.

The base price for 2015 market-support wheat auctions remained unchanged from 2014. For Hebei and Shandong, where raw grain supply is relatively tight, and Jiangsu, which generally suffered meteorological disasters, the release of 2015 market-support wheat was undoubtedly a “timely rain,” not only easing local market demand for raw grain but also easing the pressure of outbound shipments to surrounding markets.

Total Imports Grow, Overseas Market Fluctuates at Low Levels

Customs data show that in October China imported 263,000 tons of wheat, down 53,000 tons year-on-year and 169,000 tons month-on-month; the average import price was 229.55 US dollars/ton, down 69.89 US dollars/ton year-on-year and 6.98 US dollars/ton month-on-month. However, cumulative wheat imports from January to October reached 3.123 million tons, exceeding the full-year cumulative import totals of 2.972 million tons in 2014 and 2.973 million tons in 2015; the average import price also fell sharply. As of October, the average price of imported wheat in 2016 was 239.25 US dollars/ton, far below 299.09 US dollars/ton in the previous year and 323.87 US dollars/ton in 2014.

The strong rise of the US dollar index and the continuous depreciation of the RMB against the US dollar will be unfavorable for enterprises trying to control the procurement cost of imported wheat, and the possibility of a large increase in wheat imports later is relatively small.

The loose supply-demand pattern put pressure on CBOT wheat prices, pushing them downward, with the US wheat index falling to a low of 409.4 points in the first half of November. Affected by the US dollar's pullback after hitting a high, as well as reduced US wheat planting area and drought in the US Great Plains, US wheat prices rebounded from lows, but after rising to 431 points, they lacked fundamental support and turned back down.

Single Supply Channel, Steady Growth in Consumption

Entering December, wheat price trends will mainly depend on the supply-demand pattern in China's main producing areas. From the supply side, the current main market supply channel should be the release of temporarily stored wheat. A rough estimate suggests that current temporary storage wheat inventories should be no less than 65 million tons. Among this, apart from the market-support wheat collected in 2016 remaining completely untouched, about 37 million tons of market-support wheat from 2014 and 2015 remain, sufficient for current market consumption demand.

At the same time, supported by the spot market, the possibility of a reduction in the base price for temporary storage wheat auctions is relatively small, which will help adjust the inventory structure of existing wheat. Other supply channels, such as grain held by farmers and inventories of trading enterprises, are very limited and can hardly improve market demand.

On the consumption side, some recent macroeconomic factors have gradually expanded group flour consumption, downstream flour traders have adopted a positive purchasing attitude, and processing enterprises' profitability has improved, further boosting their enthusiasm for operation. The increased cost of corn entering the customs from Northeast China, the narrowed price gap between feed wheat and corn, and the year-on-year decrease in total imports of feed substitutes have supported wheat feed consumption.

Comprehensive analysis shows that before the Spring Festival, wheat will be in a market environment of “single supply channel, limited supply quantity, solid basic consumption, and increasing incremental consumption,” and the possibility of a significant price decline is relatively small; the possibility of short-term price fluctuations due to blocked transportation affected by rain and snow cannot be ruled out, but there will not be many opportunities for sustained large increases later. It is expected that before the Spring Festival, the ex-factory price of medium standard-quality wheat (with about 10% unsound kernels) in areas north of the Yellow River may be between 1.30-1.35 yuan/jin, and the price of wheat in other areas (with 10%-15% unsound kernels) may be between 1.25-1.30 yuan/jin.