China's wheat prices remain high despite a recent moderation, which has added to cost pressures on downstream processing enterprises since the second half of last year, industry insiders told the Global Times Monday, highlighting the severity of the tight supply in the domestic market.
"The price increase has weighed down the processing industry as a whole, adding to cost pressures on enterprises in the field," Qiu Yongchao, general manager of Xuchang Qiushi Flour Co, told the Global Times Monday.
Domestic wheat prices have risen considerably after two rounds of price hikes in the second half of 2012. Prior to a slight drop this month, the average wheat procurement price had increased to 2,529.07 yuan ($405.41) per ton from 2,060.1 yuan per ton in early July, a jump of nearly 23 percent, according to data from cngrain.com, a grain portal run by the State-owned China Grain Reserves Corp.
Key factors in driving wheat prices higher included bullish market sentiment on an upward price trend buoyed by the central government's decision to raise minimum wheat procurement prices, and rising consumption demand during the traditional peak season from September to December, Jiao Shanwei, a researcher at cngrain.com, told the Global Times Monday.
Jiao stressed, however, that "in contrast to the government's report of continuously rising wheat yields, wheat production has actually decreased, particularly in some of the main wheat-growing regions including Jiangsu and Henan provinces, which is believed to have caused the tight supply that spurred up wheat prices."
"Multiple factors have pushed up prices, but I feel the falling wheat yield over the last year was the main reason," echoed Qiu, who believes the recent drop in procurement prices may ease his company's cost pressure.
The recent moderation is mainly thanks to the State reserve system, which has eased the tight supply by selling its stockpiles into the market, said an employee surnamed Guo with the local State grain reserve warehouse in Hengtai, a county in East China's Shandong Province.
"The local warehouse had run out of wheat reserves before the Spring Festival holidays," Guo told the Global Times Monday, pointing to tight supply in the market.
The local warehouse has filed for an allocation of wheat transferred from other areas with abundant stockpiles, but it remains unknown when that will happen, Guo revealed.
Wheat prices are likely to stay stable over the next few months, Jiao estimated, but he remarked that the current price moderation won't do much for processors that accumulated excessive stockpiles over the period of the upward spiral.
Cost concerns are heightening worries in the flour manufacturing sector, which has already been hit by overcapacity problems, Qiu noted.
With annual revenue of more than 50 million yuan, Qiu's company's profit margins are still suffering, and Qiu said raising flour product prices does not help much amid intense industry rivalry.