One of three conjectures on how the state reserve affects wheat prices

Recently, under the influence of two factors - weakened demand caused by a lower operating rate at flour milling enterprises and the gradual decrease in the amount of wheat circulating in the market - domestic wheat prices have entered a period of stability. As is well known, a stable period is the most difficult trading period, because at this stage market conditions tend to stabilize, price differences among regions narrow, trade profits are limited, and events that could affect market fluctuations may occur at any time, making it very difficult to judge later trends. Therefore, most traders and flour milling enterprises adopt a wait-and-see strategy during stable periods, either suspending purchases and sales or replenishing only as needed. The author (Yang Jinshan of China Grain and Oil Information Network) believes that a wait-and-see strategy is a very correct choice, but during the wait-and-see period one should not merely observe changes among nearby competitors; one should first identify what the main factors affecting future trends are, then conduct analysis and verification, so as to make judgments in advance, formulate targeted solutions, and seize the initiative. So what are the main factors that will affect the wheat market in the near term? The author believes that the state reserve wheat release policy will have a relatively large impact on later market conditions. In the coming days, the author will make conjectures from three aspects - the state reserve starting auction price, special auctions, and subsidies for flour enterprises - and give judgments for everyone's reference. In this article, the author will elaborate in detail on the first conjecture: whether the state reserve will lower the starting auction price.

The market has already made attempts, and a price cut can be accepted

Recently there have been rumors in the market that state reserve wheat auctions will begin in January 2016, and that the starting auction price will be lowered from 1.23-1.25 yuan/jin to 1.19-1.22 yuan/jin. This leads to the author's first conjecture: whether the state reserve will lower the starting auction price. The author believes it is hard to say exactly how much it will be lowered, but the possibility of a reduction is very high. First, let me show everyone a set of data. Southern Wheat Trading Market Co., Ltd. will hold a spot wheat bidding transaction on December 25, 2015, and Taizhou Gaogang Grain Purchase and Sales Company plans to sell 2,700 tons of red wheat. The starting auction price is announced as follows:

From the above data we can see that wheat auction prices in the Jiangsu market have already declined somewhat, and the starting auction price for red wheat in the Jiangsu region is already between 1.19-1.22 yuan/jin. In addition, according to the author's inquiries with some persons in charge of flour milling enterprises in the Jiangsu region, because the volume offered is not large, it has little substantive effect for large flour milling enterprises, so their willingness to participate in the auction is not strong, but they all say the starting auction price is fairly reasonable. In other words, the price of 1.19-1.22 yuan/jin can be recognized by the market. Moreover, such a starting auction price is also higher than the state reserve purchase price, so there is a very high possibility that the state reserve will adjust the starting auction price with reference to market prices.

State reserve stocks are huge, and a price cut can clear inventory

Now that there is a price level acceptable to the market, will the state reserve accept it? Below, the author will tell everyone another set of data. From 2015 to now, China has cumulatively sold 6.3722 million tons of domestically produced temporary reserve wheat, down 7.3538 million tons from the same period last year, a year-on-year decline of 53%. At present, very little of the 2013-produced temporary reserve wheat remains, but cumulative sales of 2014-produced temporary reserve wheat amount to only 1.15 million tons. In addition, 2015-produced temporary reserve wheat has not yet been auctioned, and the remaining quantity of temporary reserve wheat is still relatively large. According to statistics, as of early December, the remaining stock of the national temporary reserve wheat was 38.96 million to 39.96 million tons. Among this, Jiangsu had 8.426 million tons, Anhui 9.251 million tons, Henan 18.336 million tons, and Hubei 2.003 million tons. What concept does a wheat volume of about 40 million tons represent? It is equivalent to at least 4 months of domestic market consumption even if all wheat from other channels in the market stopped being supplied. How to handle such a huge inventory will certainly be an important topic for the state reserve to consider, so lowering the price for reserve auctions to stimulate transactions may be a powerful means for the state reserve to clear inventory.

In summary, it can be said that under the situation in 2016 where wheat continues to implement the national market-support reserve and the price will still be the 1.18 yuan/jin third-grade grain purchase and storage standard, clearing state reserve wheat inventory is very important. In addition, given the continued depression of the flour milling industry in recent years, the possibility of lowering the starting auction price to benefit flour milling enterprises is also very high. Therefore, the author's first conjecture is that the state reserve will lower the starting auction price for wheat, and it is expected to adjust the starting auction price to around 1.20 yuan/jin. Regions where recent wheat market prices are below 1.20 yuan/jin can stock up appropriately, but do not excessively gamble on pressing down the later market, especially flour milling enterprises. This is because the author's second of the three conjectures is whether the state reserve will launch special auctions again. If launched, flour milling enterprises keeping inventory for special auctions will be more powerful for later cost control. Whether the state reserve will launch special auctions again will be elaborated in detail in the author's next article. Please look forward to it.