Monday, February 14, 2011

Update on Chinese Winter Wheat

Here at Profarmer we have been tracking the latest developments on Chinese winter wheat growing regions. It is interesting to see how the story has snowballed, first little snippets getting picked up the middle of last month, and then gradually you hear more on trade wires which then eventually appear on main stream media after it was made official by a United Nations Report.

With the previous seven months producing nothing but bullish news to push the grain markets to 2 ½ year highs, we may see the record prices of 2008 being eclipsed if China starts buying more wheat. Depending on the weather reports that you read, some key wheat growing regions haven’t had a good drink since October, and although a dry winter is the norm, it seems it is the driest for some regions in 100 years. However saying this, if the spring rains do eventuate, winter wheat production (which accounts for 85- 90% of total wheat tonnage) is reversible. Considering the current global climatic conditions, anything is possible. If rain isn't on the horizon when the crop flowers in April, Australian grain will easily fill the void.

The provinces hit hardest in China are Shandong, Jiangsu, Henan, Hebei and Shanxi, which accounted for 67 % production last year. China has 14 million hectares planted with winter wheat in those areas, of which about 5.16 million hectares are recording historical low levels of rain. China is the undisputed world wheat powerhouse, and is largely self sufficient in wheat, producing 115mmt of wheat last year. While production has plateaued out the last couple of years, domestic consumption has sky rocketed. Last marketing year (Oct ’09 – Sept ’10) Australia exported 850,585mt to China, the highest amount since 2004/05.

The Chinese government not wanting a repeat of the waves of unrest that has been hitting Northern Africa and Middle East are preparing to take any measures necessary to avoid a food shortage. Thus it was announced that USD 1.96 billion would be spent to bolster grain production and fight drought. This includes releasing reserve stocks, and importing wheat (this could be anything over 4 mmt!) this may lead inventories potential dropping to 6.4% this year.

So how much wheat would the Chinese buy if there were a serious shortage? Chinese domestic wheat is about US$465 mt, a reasonable premium to US$390 mt FOB for east coast Australia. With runaway inflation and a country getting increasingly frustrated at rising food prices, the government is making domestic food sustainability their number one priority.

Chairman Mao once said that if the communist party lost support of the peasants it would lose control of China. So how much is too much to pay when insuring there is adequate food and no riots? Especially with China having an extremely strong undercurrent of anti-government feeling amongst the 800 million marginalised peasants. They could purchase 10 mmt of foreign wheat and not put a dent in their currency reserves, but what would this do to international prices!

The reality is that it is far too early to be calling Chinese production levels down, and with huge stocks in China, there is no guarantee that a drop in production for the coming harvest will have any effect at all. It is stocks outside of China that are of more importance, and they are high. Current USDA estimates have got US wheat stocks at three times the levels in 2007/08.

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