March 7, 2012

 

China's grain futures go higher on drought worries

 

 

Recently, wheat futures traded on the Zhengzhou Commodity Exchange (ZCE) have begun to rally after continuous price hike of corn and soy products, as drought in some grain producing areas brought concerns over output decline this year.

 

The most actively traded September contract on ZCE cumulatively soared 4.05% from February 28 to March 5. Analysts say that drought concerns, coupled with substitution effects of wheat for corn, pushed up wheat prices.

 

Wheat prices are the base for other agricultural commodities prices since wheat is a major source for grain and feeds. If wheat prices start to rise, other farm produce prices are also likely to follow the increase, some experts note.

 

"Zhengzhou strong gluten wheat futures saw smaller gains in the earlier period and thus desires a strong rise in the following period," Cai Ning, an analyst with an industry website www.cngrain.com said.

 

Currently, corn prices have increased for more than three months and are approaching the earlier high point. As the price parity between corn and wheat is narrowing, wheat's replacement effect for corn is strengthening significantly to attract technical buying.

 

Since the start of the Spring Festival holiday (January 22-28), the domestic wheat futures market has seen an eye-catching performance. The September contract closed at RMB2,497/ tonne (US$395.56) on January 20, with positions of 58,430 lots. By March 5, the contract price hit up to RMB2,698/tonne (US$427.41) and its positions also surged to 424,150 lots. The futures contract posted bigger rise both in price and positions after February 28.

 

Feed wheat demand helped prop up Zhengzhou wheat, said Cai. A survey by the industry website cngrain shows that as corn prices have been running at high levels, feed wheat's replacement ratio is on a rise and can reach about 60% given matured substitution technology.

 

Meanwhile, feed mills in south China's marketing areas also use a large amount of wheat to replace corn. "Feed wheat takes up a part of grain resources and this will shore up wheat prices," Cai predicted.

 

"The domestic grain prices have been rallying thanks to ample liquidity, improving fundamentals and favorable news," said Cai.

 

The drought in Yunnan, Hebei and northeast areas aroused worries over grain production and indirectly led to firm prices of grain futures as well.

 

However, cngrain's survey shows that majority of China's winter wheat growing areas has sound soil moisture conditions and drought's impact is limited on the wheat crops which have not turned green.

 

The country's wheat producing areas are mainly distributed in Henan, Hebei, Shandong, Shanxi, Anhui, Jiangsu, Gansu, and Shaanxi provinces, with the former three's wheat output accounting for more than a half of the national total. Now southern areas of Hebei and north of Henan see light drought.

 

"The drought-triggered rally of wheat futures reflect market worries over absence of effective rainfall in major winter wheat growing areas," Zhao Keshan, an analyst with JIFCO Futures noted. "Although the drought in Yunnan and northeastern areas has not exerted much direct impact on wheat, the market is still worrying about a decline in grain output this year," He added.

 

The domestic agricultural production usually moves to a key period from March to April. If there are no obvious rainfalls in that period, drought situation will worsen to finally affect prices.

 

Besides weather, Zhengzhou wheat would also get support from some other factors including increasing demand after the Spring Festival holiday, the government's hike of this year's minimum purchase prices for grain, compensatory growth after last year's sharp plunge and fund speculation, stated Zhao.