August 16, 2010

 

Wheat rally will not motivate China, India to dump inventories

 

 

Despite surging prices, concerns about tighter global supply and food inflation make China and India, holders of nearly half the world's wheat reserves, reluctant to send large volumes to the market.

 

The world's most populous nations, China and India are estimated to finish the 2010/11 crop year with a combined stockpile of around 78 million tonnes, 44% of the world total of 175 million, according to the USDA.

 

"I don't think China will be an exporter because of increasing domestic demand, not even feed wheat," said Genichiro Higaki, head of the proprietary fund management team at Sumitomo Corp in Tokyo. "India will not be selling much, as, just like China, they have a huge population and a very big demand."

 

US benchmark wheat futures climbed to a two-year high last week, nearly doubling from June lows as a severe drought ravaged crops across the Black Sea region, prompting Russia to ban grain shipments.

 

Asian wheat importers vulnerable to cancellation of Black Sea cargoes have been expecting India to relax grain export controls and China to sell feed wheat. However, this is looking increasingly unlikely.

 

In India, grain bins are spilling over after bumper harvests and higher government purchases from farmers. Government warehouses are packed to capacity with about 42.5 million tonnes, while about 16 million tonnes of grains, mainly wheat and rice, have been stored under tarpaulin, said officials.

 

India could easily sell around 2-3 million tonnes of current wheat stocks of roughly 32 million with little impact on domestic prices, but policy makers will be even more careful before liquidating their high-value wheat stocks.

 

"As a matter of fact, we have become more cautious after the episode in Russia," said a senior government official in New Delhi involved in India's trade decisions on wheat. "We need to have pretty hard evidence that the next harvest will be equally good."

 

Last week, the government allowed 200,000 tonnes of wheat exports to Bangladesh but is in no hurry to let private traders sell grains until prospects for the next crop become clear.

 

Wheat buyers remain at risk of another rally if exporting nations follow Russia in banning grain shipments. Ukraine is considering grain export curbs for fear of a domestic food shortage and Canada is likely to have a smaller surplus of high-protein wheat due to excessive rains at planting time.

 

China, sitting on a mountain of 60 million tonnes of wheat, is expected to use some of its reserves to feed chickens and pigs as it faces a shortage of feed grain corn.

 

"China has big feed grain requirements this year, making it likely for some of their wheat to be used domestically as feed grain considering they have seen tightness in corn," said Luke Mathews, commodity strategist at Commonwealth Bank of Australia.

 

Some wheat in China, damaged by unseasonal rains at the time of harvest in April and May last year, can be used to make animal feed instead of corn.

 

China surprised the market in April with its first purchases of corn from the US in four years, a move that pushed up US corn futures more than 6%.

 

Analysts said concerns over food inflation in China and India will probably act as a dampener.

 

China's National Bureau of Statistics has warned that lower global wheat output could translate into inflationary pressure for the world's top producer and consumer of the grain.

 

"China will not export, as its own consumption is rising and if the country exports then domestic prices will rise immediately, which will push up inflation," said analyst Ma Wenfeng.

 

Hopes for exports from Pakistan, which had aimed to sell about two million tonnes of wheat after two straight years of bumper harvests, are fading fast after it was ravaged by floods. Floods destroyed about 500,000 tonnes of wheat, meaning a smaller surplus for the South Asian country this year, and also hit sugar and cotton, according to agriculture officials.