China wheat stock could boost prices

A downturn in Chinese wheat production could result in higher global prices, though in the short term at least, global wheat stocks provide a sufficient buffer to hold prices down, according to a report issued Tuesday by Westpac Banking Corp.

A senior economist at the bank, Justin Smirk, said that without the widespread uptake of biotechnology, or another Green Revolution, which saw global grain production more than double in the period 1950-1984, global production of grain could struggle to meet rising demand, in part due to increasing use of grain in livestock and animal feed.

In an article entitled "A New Dawn for Wheat Prices" in Westpac quarterly regional economic report, Smirk said Chinese imports of wheat and flour are rising again and the nation trade surplus in grains is shrinking. China is the second-biggest producer and consumer of wheat, after the European Union.

"One poor season and China would again be a significant importer of wheat as their current level of stocks isn't high compared to recent history," he said.

Over time, as Chinese demand continues to grow and its output is constrained by the limits of arable land, China will turn into an importer of wheat, he said.

China has typically been a net exporter of wheat, with the recent exceptions during the drought years of the mid-1990s and again in 2004, he said.

Prospects for the Chinese crop to be harvested in 2010 have improved, indicating 2009-10 wheat stocks could return to 2003 levels, he said.

But even this increase would leave Chinese stocks about one-third lower than they were in 1999-2000, he said.

Westpac forecasts that the current cycle in wheat prices will bottom in the March quarter of 2010, falling to US$4.75 a bushel from US$5.10 in the current quarter, before rising steadily to US$5 by June next year and US$6 by December next year.