September 24, 2004

US Wheat Growers Encouraged By China's VAT Action

China's Ministry of Commerce recently announced that their value added tax (VAT), which amounts to 13%, will not apply to wheat imported through the end of December 2004.

The U.S. Wheat Associates (USW) are encouraged by this decision. The group says as recently as last week, Chinese government buyers and private buyers have expressed interest in additional US wheat purchases, although specifics are not available.

USW says in the 2004/05 marketing year, Chinese buyers have contracted for 1.9 million metric tons of US wheat, purchasing hard red spring, soft white and soft red winter wheat. By mid-September, they had shipped over 60 percent of this year's US purchase commitments, with new shipments currently departing on a regular basis.

"Millers in China like US wheat for blending with domestic wheat or, in the case of US hard red spring wheat, for producing high gluten flour that is used in quality bread and noodle products," explains USW regional vice president Matt Weimar. "The US soft wheat classes enjoy a strong reputation among China's bakers for production of low gluten strength premium cake, cookie and cracker flour."

China's domestic wheat production estimates for the total 2004 winter and spring wheat harvest are topping the 90 million metric ton (MMT) mark, up from their 2003 harvest of 86.4 MMT. The 2004 crop year saw ideal weather conditions and, in some spring wheat production areas, an increase in sown area. Looking forward to the 2005 winter wheat crop, some experts are predicting as much as a 4 percent increase in area sown, they note.

Despite the increases, however, production continues to fall short of estimated annual usage by anywhere from 10 to 15 MMT, depending on the source of estimates, says USW.

"While some commentators predict China's imports to fall in the second half of 2005, much will depend on the available stocks, new crop planting and the weather," Weimar explains. "In the end, without ideal conditions, there will be a continued drawing down of domestic stocks and a growing supply-demand gap. We expect that China will import wheat, particularly with qualities not available domestically, in order to meet overall demand in a growing and diverse consumer market."