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China boosts its record share of world wheat stocks as excess output persists

With or without China, world wheat stocks are set to reach a new high by mid-2021, though record demand should prevent supplies from becoming too burdensome.

However, China is going on its eighth consecutive year of producing more wheat than it uses, further expanding already-massive stockpiles and nudging its share of global wheat supplies to a new record.

When China’s wheat carryout began rapidly escalating a few years ago, market analysts had to adopt the habit of subtracting China’s wheat supply from global estimates since China is relatively inactive in trade. The U.S. Department of Agriculture added that calculation into its global balance sheet last year.

Last week, USDA boosted its prediction of the 2020-21 global wheat crop, lifting world ending stocks excluding China to a record 154.2 million tonnes, about 1% above the prior high set in 2017-18.

The associated stocks-to-use ratio of 19.1% would be up 1 point from the previous year and matching that of three years ago. But the 2020-21 ratio is only a half-point above the recent five-year average, evidence that demand is projected to keep the record stockpile in check.

USDA predicts record wheat use in China for 2020-21. But inventory will keep building, and the agency pegs Chinese stocks to reach a new high of nearly 162 million tonnes next year. That would be 41% larger than 2016-17’s carryout, which had broken a 17-year record at the time.

Wheat feeding has decreased because of the outbreak of African swine fever in China’s hog herd, but most of China’s wheat is used for food, seed and industrial purposes. Wheat-based snack food consumption is expected to continue rising this year.
‘MOAR’ WHEAT

Chinese wheat supplies have surged in recent years as the crop has increased while demand was stagnant or rising more slowly. USDA pegs China’s stocks-to-use at 124% in 2020-21, meaning the country will have nearly 15 months of supply on hand at the end of the marketing year.

The United States is also notorious for maintaining large stores of wheat, but consumption usually outpaces production. On average over the last decade, U.S. wheat use has been about 7% larger than output, whereas in China it has been 5% smaller.

The 2020-21 U.S. stocks-to-use projection of 45% is substantially higher than in other major exporters, although it would be a six-year low. That suggests the carryout would cover a little over five months of use.

China is expected to have 51% of the world’s wheat supply in storage at the end of 2020-21, fractionally edging last year’s high. India and the United States are seen holding the next-largest stockpiles, accounting for a respective 10% and 8% of the world total.
NO CUTBACK PLANS

China introduced a support price for wheat in 2006 in an attempt to protect farmers from losses and promote self-sufficiency in agricultural products. As of late last year, Beijing continued to stress the importance of self-reliance, stating plans to complete development on 66 million hectares (163 million acres) of high-quality farmland over the next two years in order to keep grain production elevated.

Since the implementation of price supports, Chinese farmers have been incentivized to produce wheat regardless of market fundamentals. Including the current harvest, the country has grown an excess of nearly 73 million tonnes (2.7 billion bushels) of wheat over the last eight years.

The 2020 wheat support price is 2,240 yuan per tonne ($316), unchanged from 2019 but down 5% from the 2015-2017 levels. However, that is substantially above current export prices in major suppliers, which are in the vicinity of $200 per tonne.

China’s wheat support price is also substantially above benchmark Chicago futures, which settled at $4.83-1/2 per bushel ($177.66 per tonne) on Thursday. China’s Zhengzhou futures for strong gluten wheat are nearly double that price but at the lowest levels for the time of year in at least eight years.

Because of China’s huge wheat stocks and the use of import-regulating tariff rate quotas, it is unlikely that U.S. wheat would become instrumental in helping Beijing fulfill the Phase 1 trade commitment.

The United States shipped about 550,000 tonnes of wheat to China in the 2019-20 marketing year that concluded May 31. That is relatively average for recent years, and China currently has about the same volume booked for 2020-21.

The opinions expressed here are those of the author, a market analyst for Reuters.
Source: Reuters (Editing by Matthew Lewis)

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