Chinese purchases buoy wheat market

Canadian sales estimated at 500,00 tonnes | High protein quality wheat sales from Canada and the U.S. improved prices

Right when the hard red spring wheat market needed China, China stepped in.

Big purchases of high protein, high quality wheat from Canada and the United States have put some pep back into wheat prices, which had been suffering the same harvest market weakness of the other major crops.

“Probably at the elevator, people have been hearing that there’s no market for 14 (percent protein) and they get hammered on the spreads (to lower protein wheats), but this is a sale that was made specifically for those higher quality parameters,” said CWB market analyst Neil Townsend.

“The rest of the world wheat trade doesn’t look like it wants to pay up for that (high quality wheat), but that’s exactly what the Chinese came in for.”

Trade sources in Canada and the U.S. say China has recently made large purchases of hard red spring wheat. Purchases from Canada alone are estimated to be 500,000 tonnes or more, with most coming in recent weeks.

The sales were made by a number of grain companies, including the CWB’s pool program, sources say.

The market reacts each time new, big sales to China are announced, showing that buyers and traders aren’t relaxed about the diminishing supplies of quality wheat in the world.

“That’s pretty unusual,” said John Ulrickson of the Money Farm in Fargo, North Dakota, on the morning of a day when big sales of American wheat to “unknown” destinations were reported.

Prairie farmers will benefit from the new interest in hard red spring wheat because high quality wheat has lost much of its premium over lower quality hard red winter and soft red winter wheat in recent months.

The lower premium is partly the result of the U.S. Midwest drought, which hit the SRW and HRW zones but only touched the edges of the HRS area. However, it has also been caused by the weakening world economy, with buyers backing away from premium-priced crops.

The outlook in Europe is grim, China is slowing and emerging markets are anxious about sales of commodities to advanced countries. As a result, traders have discounted the ability of quality niches such as high protein wheat to drive big premiums.

However, China’s powerful hunger for quality wheat suggests that either economic conditions are better than feared or its wheat harvest was poorer than many thought.

Townsend said China has wanted to rebuild high quality wheat stocks for more than a year, but wasn’t able or willing to until now.

“They deferred it last year, and I guess this year they didn’t want to defer it any longer,” he said.

Jon Driedger of FarmLink Marketing Solutions said no one should read a lot of implications into the Chinese purchases, but they could be the start of something significant.

“If this is where it begins and ends, I’d caution against reading too much into it, but if this is a sign of them needing to build up their purchases, that would be positive,” said Driedger.

“They’re able to suck up a lot of grain when they want it.”

Wheat’s overall improving outlook has surprised many, considering it seemed the weakest of the big North American crops just a few months ago.

However, production losses in the U.S. and the former Soviet Union, new Chinese demand and questions about Australian production have suddenly made wheat look less plentiful than most thought.

“(Canadian) exports are expected to increase six percent to 14.8 million tonnes due to growing demand for wheat in the food market and lower production in some other exporting countries, especially Australia, Argentina, Kazakhstan and Ukraine,” said Agriculture Canada’s Oct. 18 market outlook.

Because of production problems, Russia and Ukraine will likely have little to export after November. That, plus the problems in the U.S. and possibly Australia, have worried buyers.

“Things are starting to heat up,” said Townsend.

“There’s a gap there. There’s just not enough in the traditional wheat suppliers to satisfy all of the market.”

Greg Kostal of Kostal Ag Consulting in Winnipeg said Canadian and U.S. wheat now have a chance to serve new demand, but the question is how strong is the demand.

“There is a window here for North American wheat to become more of a leader here,” said Kostal.

But given the world’s underlying economic problems, a wheat price rally is not certain.

“Importers have not demonstrated a willingness to chase prices higher,” said Kostal.

“That’s part of their learned behaviour from three to five years ago.”

The last strong wheat rally saw many buyers purchase wheat as it went higher than $20 per bushel, and they aren’t keen to get caught long again on an overvalued commodity.

Townsend said he’s mildly bullish on wheat compared to other crops.

“You should see wheat appreciate compared to corn and (soy)beans,” he said.

Driedger agreed.

“We’re not wildly bullish, but we’ve always felt that as you look forward, it looked better,” said Driedger.

“It’s not exceptionally tight, but you whittle away a little bit here and a little bit there and buyers get a little more anxious to get coverage on.”

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