Friday, February 18, 2011

China grain hoard concerns helps lift wheat

Wheat prices hit a 30-month high Monday on weather worries and increased demand from the politically volatile Middle East and North Africa, with one analyst suggesting China’s massive stockpile of grains has become an “aggravating concern” in the global food market.
The continued upward pressure on food prices — which helped trigger the upheaval in Egypt — could become a hot political issue, starting this week in Paris as Group of 20 finance ministers and central bankers gather. As head of the G20 this year, France wants policymakers to tackle the issue of taming commodity prices.“When food is scarce in the world, food becomes more important than money,” said Carl Weinberg, chief economist at High Frequency Economics of Valhalla, N.Y.

Wheat futures surged in trading on the Chicago Board of Trade to a high last seen in August 2008. Dry weather in key growing parts of China and the United States was one concern. But so was increased demand, as Tunisia and Iraq placed orders for U.S. wheat — in an effort to ward off citizen unrest — and Afghanistan said it would place a 200,000-tonne order in the next few months.“The world is short quality wheat and the United States is the only store in town for it,” said Greg Kostal, president of Kostal AG Consulting of Winnipeg.
Corn also rose, hitting highs last seen in July 2008, before retreating in Chicago trading.

In a note distributed to clients, Mr. Weinberg highlighted the massive stockpile of primary grains — wheat, corn and rice — that China holds and the impact it might have in the recent run-up in food prices. In December, the UN’s Food and Agriculture Organization declared food prices surpassed record-high levels reached in June 2008.

At present, China holds 41% of the world’s stockpiles of primary grains but consumes just 21% of the global supply, according to data compiled by High Frequency, citing the U.S. Department of Agriculture’s monthly global supply and demand estimates. Broken down further, China holds a third of the world’s wheat stockpiles, but consumes only 17% of total supply.In an interview, Mr. Weinberg said Chinese hoarding wouldn’t be of great concern if grain production were at “normal” levels. But floods in Australia, and dry weather in other parts of the world, including in Canada and China, are squeezing supply and brings Beijing’s practices into focus.

“The fact that we are seeing a shortage of grain production in a number of places at once makes this subject a little more politically charged than it otherwise might be,” Mr. Weinberg said. “The Chinese are not causing prices to go up by doing this. The real problem is that it looks as if there will be shortfall of supply from a number of different regions. That’s the biggest factor at work. The hoarding is just an aggravating concern.”

Mr. Kostal said Chinese hoarding has gone on for some time, and it is how Beijing and other Asian economies manage food prices. China, the world’s largest wheat grower, dips into the grain inventory in the event of a sudden price hike, in an effort dampen political and social dissent over higher costs for food.

Mr. Kostal said upward price pressure on wheat would remain in place for at least another four months until countries can buy grain from the 2011 crop. In addition, Russia may loosen controls on grain exports, imposed last year, if output returns to more normal levels after dry weather.

Based on Mr. Weinberg’s research, global grain stockpiles will total 82 days of consumption by the end of the current crop year, which is just below the 50-year average of 86 days. But exclude China from the equation and there are enough stockpiles for only 63 days of consumption, which is “very low” by historical norms.

The hoarding from China “comes at a cost to the rest of the world, with prices rising for all grains,” Mr. Weinberg said. “If it were to lower its stockpiles so that they were in line with its consumption … perhaps prices would not be rising so fast on world markets.”

Financial Post
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