Here in Shanghai, we’re bundling up since temperatures across most of China have been dipping sharply over the past week. Between November 29and December 1 much of China saw temperatures dropping 6-8 C with much of eastern and northeastern China dropping as much as 12-14 C. These sharp drops in temperatures could affect the winter wheat crop and have big impacts, but first let’s examine the wider context.
Wheat production has continued to grow in China, albeit at a relatively slow pace. In comparison, domestic consumption has increased rapidly in the past two years.
Food use has always been the biggest driver of wheat demand in China, but the pace of growth has accelerated in recent years as China continues to adopt more western-style eating habits. An example of this type of growth in western diets is the Canadian coffee and doughnut company Tim Hortons. After opening their first store in 2019, they rapidly expanded to 300 stores today and are targeting to reach 2750 stores in the next 5 years. As diets continue to change, China is likely going to see increased wheat demand for food products.
In addition to the growth in food demand, China has seen rapid growth in using wheat as animal feed. The past year saw corn rise to record-high prices in China and unusually was more expensive than wheat. This led to an increase in wheat feeding and an increase in wheat consumption.
The increase in demand puts more focus on the production because any losses in yield will either mean higher prices or higher imports. In the 20/21 marketing year, China saw record production of wheat at 134.25 million tons, had record imports of 10.6 million tons, and still had an estimated supply deficit of more than 5 million tons. The USDA estimates the supply deficit will narrow to 2.1 million tons in the current marketing year, but that is still with new record high production and 10 million tons of imports.
This year, the sowing of the winter wheat crop faced some challenges, and the current cold temperatures could cause some yield losses. Farmers had to deal with wet fields and cold snaps which made planting difficult and much of the crop was planted later than normal. The current cold weather is forecast to push much of the Henan are below the freezing line in the coming days which could damage areas of more vulnerable crop that aren’t sufficiently hardened. The cash market seems concerned about this and wheat prices remain high. Recent auctions in Jiangsu province had small batches of wheat trading at levels up to 2800 yuan per ton ($448 USD per ton).
Within China, the wheat supply and demand situation is already tight, so any losses could mean state-run COFCO might source imports to help keep prices under control. Outside of China, wheat prices have seen a strong rally over the past several months, so additional unexpected buying from China could be bullish.