Wheat Market Polarization: Minimum Purchase Policy Should Remain Stable

Editor's Note: The 2016 wheat market has entered the second half. This year's new wheat opening purchase price was low, and buying and selling were not active. In addition, wheat harvest in Henan, Anhui and other places encountered rainy weather, and the wheat market once cooled. With the implementation of minimum purchase price policies in various places and the progress of wheat purchase and sales, the wheat market now shows the characteristics of price divergence. It is again the wheat planting season. The wheat whole-industry-chain analysis and early-warning team of the Ministry of Agriculture and our reporter bring readers first-hand information on the wheat market.

High-quality wheat prices have room to rise

In order to understand this year's summer-harvest wheat purchase and sales situation and grasp the later price trend, the wheat whole-industry-chain information and early-warning team of the Ministry of Agriculture recently organized a special consultation.

Overall, this year's new wheat opening purchase price was low and buying and selling were not active. Since July, with the strengthening of the minimum purchase price policy, wheat purchase progress has accelerated somewhat; it is expected that the later market price trend will diverge markedly, and high-quality wheat prices have room to rise; all parties in the consultation suggest that the 2017 wheat minimum purchase price policy should remain basically stable and should not undergo major adjustments.

Affected by excessive precipitation during the harvest period, the quality of summer-harvest wheat in southern producing areas generally declined this year. Coupled with weak market demand, this year's new wheat opening price was relatively low and market purchase and sales were not active. In early June, Hubei, Jiangsu, Anhui and Henan provinces fully launched the minimum purchase price plan, but because a large amount of low-quality wheat could hardly meet warehousing requirements, and continuous rainy weather in the south affected purchase progress, the “market support” effect of the minimum purchase price was limited. According to monitoring by the Ministry of Agriculture, in June the average purchase price of wheat by state-owned grain enterprises was 115.49 yuan per 100 jin, down 2.7% year on year; the average purchase price by individual grain traders was 104.10 yuan, down 7.7% year on year. On June 30, Shandong and Hebei provinces launched the wheat minimum purchase price implementation plan, and new wheat purchase progress gradually accelerated. As of August 20, various grain enterprises in main producing areas had purchased a cumulative 61.58 million tons of wheat, an increase of 4.83 million tons over the same period last year. As various places successively introduced policies to promote the purchase of substandard wheat, new wheat prices rose steadily, and the month-on-month increase gradually widened. According to monitoring by the Ministry of Agriculture, in July the average purchase price by state-owned grain enterprises was 115.43 yuan per 100 jin, basically flat month on month, down 2.9% year on year; the average purchase price by individual grain traders was 104.69 yuan, up 0.6% month on month, down 8.2% year on year. In the first three weeks of August, the average purchase price by state-owned grain enterprises was 115.82 yuan per 100 jin, up 0.3% month on month, down 2.4% year on year; the average purchase price by individual grain traders was 105.58 yuan, up 0.8% month on month, down 8.1% year on year.

Judging from the situation in each main producing province, Hebei and Shandong had the most obvious increases in new wheat prices. In Hebei, the average purchase price by state-owned grain enterprises rose from 114.92 yuan per 100 jin at the end of June to 117.33 yuan in late August, a cumulative increase of 2.1%; in Shandong, the average purchase price by state-owned grain enterprises rose from 115.19 yuan per 100 jin at the end of June to 116.35 yuan in late August, a cumulative increase of 1.0%.

Because the quantity of substandard wheat increased this year, the supply of high-quality wheat is relatively short, and the effective supply of the whole market has declined somewhat. It is expected that later wheat prices will show a pattern of “high-quality rising, low-quality weakening.” After September, the peak flour consumption season arrives, flour milling enterprises will speed up stockpiling, the operating rate will rise somewhat, raw material demand will further increase, and with the volume of wheat purchased under the minimum purchase policy exceeding last year's, the tight grain supply situation for high-quality wheat in the market may intensify, and prices still have room to rise. At the same time, as new corn in the North China Huang-Huai-Hai region comes to market successively, it will become more difficult for large amounts of low-quality wheat to enter the feed sector, and market prices may continue to decline, so sales progress needs to be accelerated.

It is expected that after the minimum purchase policy purchase period ends, the 2017 minimum purchase price policy will be the key factor affecting the trend of the wheat market. Especially against the background of this year's corn storage system reform, the market's attention to the direction of wheat minimum purchase price policy reform is increasing day by day. Experts, cooperatives and enterprise heads participating in the consultation all hope that the 2017 wheat minimum purchase price policy should remain basically stable and should not undergo major adjustments. On the one hand, this is to protect farmers' enthusiasm for growing grain. Because this year's new wheat declined in quality, yield per unit area fell, and prices dropped, farmers' planting returns declined, many large-scale growers suffered serious losses, and some even terminated leases. If the minimum purchase price level is lowered next year, farmers' enthusiasm for growing grain will be severely hit. In the wheat cost survey base counties of Henan, farmers' average net income per mu was 283.21 yuan, down 16.79% from the previous year, and it has declined for two consecutive years; in Anhui, the average net income per mu of ordinary growers (below 100 mu), medium growers (100-500 mu) and large growers (above 500 mu) was 143.48 yuan, -260.22 yuan and -309.99 yuan respectively. According to a preliminary intention survey for autumn and winter planting by the agricultural department of Jiangsu, 42% of farmers said they would keep their wheat area stable next year, 51% would reduce area, and 7% said they would not plant it, and none of the surveyed farmers said they would increase wheat area. On the other hand, this is to protect the interests of the downstream part of the industry chain. Processing enterprises report that farmers in main producing areas now do not store grain, and after wheat is harvested most of it is sold directly. Processing enterprises do not have enough funds and warehouse capacity to purchase all of it. Without a policy purchase entity such as Sinograin, farmers may find it “difficult to sell grain,” and processing enterprises would also lack a stable source of grain supply. Therefore, it is hoped that the state can retain the wheat minimum purchase price policy, and the price should also remain basically stable. The focus of policy reform should be to advance supply-side structural reform of wheat by improving the purchase and reserve-release mechanism and promoting production-sales linkage; if the price level really needs to be lowered next year, the margin should not be too large, and subsidy policies for farmers must keep pace. In addition, the minimum purchase price policy should be announced as early as possible to release positive market signals and avoid the “cliff-edge” drop in wheat prices after last year's minimum purchase policy purchase period ended.

Cao Hui and Li Songlin, chief analysts of the wheat whole-industry-chain team of the Ministry of Agriculture

(Cao Hui is an expert at the Rural Economy Research Center of the Ministry of Agriculture; Li Songlin is an expert at the Information Center of the Ministry of Agriculture)