December 08, 2003
High Volatility of China Wheat Market Influence World Situation
China's recent forays into and retreats from the world wheat market prove two things about the giant nation.
It has the potential to be a huge player in the market, and its behaviour is hard to foretell, say analysts. Those two things proves the high volatility of the China wheat market.
"From one year to the next you don't know whether they're going to be an importer or an exporter," said George Morris Centre researcher Al Mussel.
"They have a huge production base and a huge consumption base."
That, combined with the heavy influence of the Chinese government, means the country's supply and demand can shift from year to year, causing surges and slumps in world grain markets.
With China continuing to develop its economy and increase its consumption of grains and oilseeds, it will add volatility to the market. But overall, it will strengthen world grain prices, one analyst said.
Dan Basse of AgResource in Chicago said China will emerge as the main driver of a global grain rally over the next few years because its government will have to import wheat to keep a lid on domestic prices.
He said international grain markets would return to the situation of the 1980s, when China's demand dominated the market and rumours of its buying interest would send prices surging.
Since this fall's harvest, the world wheat market has gyrated as analysts and traders have tried to anticipate whether and how much wheat China would buy.
Statistics that showed low Chinese wheat production and falling stocks buoyed prices, as did rumours that Chinese grain buyers, with government encouragement, would buy significant quantities of U.S. wheat in the lead-up to a December visit to the United States by the Chinese premier.But prices fell after the Chinese government, allegedly angered by U.S. tariffs on Chinese textiles, cancelled the grain buyers' trip.
North Dakota State University agricultural economist Bill Wilson said world grain markets are already twitchy because of tight stocks-to-use ratios in many grains, so rumours about China become magnified in importance.
"The market is pretty tight right now. It is looking for new and sustained news," said Wilson.
"When you get a story like China on top of the rest of these market (factors) it gets a little more volatile."
China has often bought Canadian wheat, but in recent years it has sold its own wheat. Last year it exported about 1.7 million tons.
Wilson said the Chinese are eating through a stockpile of wheat built up in a series of record harvests in the mid 1990s. Acreage and production have since dropped.
"For the past three to five years they've been shifting acres from wheat production into soybean production," said Wilson.
Consumption has outpaced production, causing a sharp draw down in stocks, he said.
Chinese demand for grains and oilseeds is hard for analysts to gauge because it is not a simple supply and demand calculation.
The Chinese government plays a large role in determining whether to import grain.
Beijing has vowed to increase grain production and improve the country's grain transportation system to alleviate regional shortages.
Mussel said the Chinese market is puzzling, because it isn't really a unified entity.
"A lot of the time you will find them simultaneously exporting from northeastern China and importing in southeastern China," said Mussel.
The country's biggest feed grains demand comes from southeastern China, where there are many livestock operations, but its main grain growing region is in the northeast.
Transportation links between the two are often inadequate, Mussel said.