August 8, 2006

 

Bumper wheat harvest in China puts reserves system to the test

 

 

A bumper wheat harvest in China is expected to put the country's reformed grains reserves to the test as wheat prices fall.

 

China's winter and spring wheat harvest could rise 5.8 percent this year to 103.1 million tonnes, forecasts CNGOIC, a state think-tank.

 

Many newly privatised grains reserves companies that were formed in the last two years as China reformed its grains reserves system are bracing for losses at the bigger harvest. These companies were the result of reforms which aimed for the private sector to buy and sell at commercial prices to balance grains markets.

 

Two years of improved harvest have followed heavy imports in 2004.

 

Almost the entire grains industry lost money, said a grains official in Anyang, in central China's wheat heartland, Henan province.

 

Still, businessmen in those companies may not be losing sleep despite these losses, as most companies are bankrolled by the Agricultural Bank of China.

 

Money-losing firms have the option of selling to the state their excess grains, straining the state budget and defeating the purpose of the reforms, which was to shift risk to private companies in the first place. 

 

However, China still holds the option of exporting the surplus, traders said.

 

In Anyang, wheat prices are now at RMB 1,390 (US$174.3) a tonne, 5.4 percent below their levels in early August last year. Prices would probably have been lower, if not for the government's minimum price of between RMB 1,380 -1,440 (US$173-US$180.5) a tonne.

 

That minimum price is causing reserves silos to fill quickly, as farmers deliver grains to the reserves rather than sell to private buyers for less.

 

Buyers who accrued stocks early last year are probably looking at losses but they can wait until the price rises again, said Li Quanti, a grains depot manager in Shandong Province.

 

Beijing has stressed that reserves depots must buy at the minimum price, and warned against large sales of old grains that could cause prices to crash.

 

However, the expectation that prices could fall further is causing trading companies to wait until after the minimum price policy ends on Sep 30.

 

Farmers, on the other hand, are rushing to sell to depots before the policy ends, helping the reserves fill more quickly.