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Area production in China increase for 1 MIO ha
In MY05/06, wheat area planted is forecast to increase by about one million hectares, almost 5 percent more than MY04/05. Responding to price changes, farmers in the North China Plain have reduced area for cotton and other cash crops. Increased imports of cotton led to lower cotton prices in 2004 as wheat prices remained high.

Overall wheat consumption has been stable or declining as consumer incomes rise and diets shift from more starch-based to more meat-based. Per capita food grain consumption is falling steadily and the trend will continue.
According to the National Statistical Bureau, per capita consumption of grain in rural households dropped to 222 kg in 2003 from 250 kg in 2000; per capita annual purchase of grain by urban households has dropped to 79.5 kg in 2003 from 82 Kg in 2000. This consumption data is not considered highly reliable.
Although demand for traditional wheat products (baozi, mantou) is falling, urban consumers purchase more convenience foods, including instant noodles, biscuits and bakery products.

The government classifies grain stock data as a state secret. Most off-farm grain stocks are government-owned: state grain storage enterprises totaled 22,345 as of 2003. Obtaining accurate data on actual grain reserves from so many facilities would be extremely difficult. Lack of credible information on grain reserves has been a long-standing problem for analysts and policy makers.
In 2005, the National Statistical Bureau (NSB) will adopt a new survey system intended to include data on grain held by all kinds of entities. In the past, NSB required that only stateowned companies report routinely on grain stocks and marketing information. The new system requires all entities --state owned or not, including processors, feed millers, retailing/ wholesale markets and chain stores-- to submit relevant information on grain stocks and marketing regularly to NSB. It remains unclear whether such information will become publicly available or if the new system will produce reliable or accurate information.
Stocks were drawn down sharply in MY03/04, but post expects stocks to rema in fairly constant from the beginning of MY04/05 through the end of MY05/06, at about 40 million tons.

Despite higher production in MY04/05, wheat imports are expected to continue. Given the continued demand for quality wheat, wheat imports for MY05/06 are forecast at 6 MMT, 1.5 million lower than post’s estimate for MY04/05. The forecast is lower than the estimate for MY04/05 because state stocks have been restored to adequate levels. In principle the state storage companies exist to balance the market, but it is widely believed that some state companies failed to follow government instruction to sell into a rising market. Such behavior contributed to unchecked market price hikes in 2003.
Post believes that the government failed to evaluate the actual supply situation in MY03/04.
The unexpected price hikes in grains in late 2003 prompted purchases of about 10 MMT of foreign wheat. Trade sources estimates that about 8 MMT of those purchases had been delivered to China through 2004; the rest of the contracts are to be implemented in the first quarter of 2005. Indicating the need to control prices, the government waived the 13 percent VAT on wheat imports in 2004. The trade does not expect this waiver to continue. Even if the VAT is waived, trade sources estimate that the landed price for imported wheat is still higher than current market price. As a result, most imported wheat entered the central or provincial state reserve facilities.
Taking soft red winter wheat as an example, trade sources estimate that the landed price for the imported wheat, even if VAT is waived, is more than RMB300/ton higher than the locally produced wheat. Domestic wheat price in 2004 averaged about RMB1,600/ton (see price in Tables section). Generally speaking, for the quality consistent factor, flour millers will pay a premium for imported wheat up to RMB300/ton In addition to the government’s need to import wheat to replenish the state grain reserves, millers need premium wheat to blend into flour.
Such premium wheat comes from either auction of imported wheat held by state reserve or millers’ direct imports. The auctioned wheat imports usually have been in storage for years.

Besides buying from the traditional suppliers such as the United States, Canada and Australia, China also sighed contracts with French supplier for 700,000 tons in 2004.
Post believes that the French purchase was a political decision as it followed a summit meeting. Over the long term, France is not expected to be a significant supplier of milling wheat to China.
Chinese flour millers are not familiar with French wheat varieties. Local media reports that in the past years the French wheat industry had provided samples for flour millers in southern China. In 2004, more samples were provided for milling trials.
Trade sources expect that Chinese buyers will become more particular on wheat quality specifications. In 2004, there have been complaints about dockage, foreign material, and vomitoxin. On a positive note, however, TCK has not been a problem. Some complaints may stem from contracting terms in China’s purchases.
MGR Archive 6.2.2005
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