China's wheat crop has suffered more severely than previously thought from frost in the growing period and rain during the harvest, and import demand to compensate for the damage could see the country eclipse Egypt as the world's top buyer.
Interviews with farmers and new estimates from analysts have revealed weather damage in China's northern grain belt could have made as much as 20 million tonnes of the wheat crop, or 16 percent, unfit for human consumption. That would be double the volume previously reported as damaged.
Higher imports, which have already been revised upwards on initial damage reports, will further shrink global supplies and support prices, fuelling new worries over global food security.
The U.S. Department of Agriculture on Thursday raised its forecast for China's imports in 2013/14 to 8.5 million tonnes from 3.2 million tonnes in the previous year, prompting U.S. wheat prices to rally to more than two-week highs.
But overseas traders and analysts estimate imports could rise above 10 million tonnes, surpassing the 9 million tonnes the world's biggest buyer Egypt is expected to buy.
Competition from China for more imports would force other buyers, such as Egypt, to pay more for grains, in a new blow for the Middle East country after two years of political turmoil has left it struggling for funds to pay for food imports.
In China's top wheat producing province of Henan, farmers visited by Reuters said kernels shrunk because of the frost early this year followed by more damage with grains germinating due to the rainstorms in May. Henan is in the northern grain belt, which accounts for about half of China's output.
"The kernels this year are half their normal sizes," said Feng Ling, a 55-year old farmer in Xuchang, central Henan, where some growers have seen their production slashed by 40 percent from year ago. "The harvest was terrible."
China has already booked around 3 million tonnes of wheat for shipment in the year to June 2014, nearing last year's purchases.
That would be the biggest volume imported since the near 10 million tonnes China booked in 2003/2004 after a sharp decrease in the domestic harvest. In a normal year, China accounts for about a fifth of global wheat production and consumption.
"We expect between 15 to 20 million tonnes of wheat will be downgraded to use for animal feed, which will reduce wheat supply for milling purpose," said Li Qiang, chief analyst at agricultural consultancy, the Shanghai JC Intelligence.
The crop damage across large swathes of China's farmland is adding to concerns over global food supplies after unfavourable weather in top wheat exporters the United States and the Black Sea region resulted in quality downgrades.
"The end users have been very relaxed about the wheat supply outlook," said Abah Ofon, a commodities analyst at Standard Chartered Bank in Singapore.
"But as the season is unfolding we are seeing bumps emerge. The market now has to readjust based on the new fundamentals which suggest the demand is going to be more than what the market was expecting."
Global output is expected to rise this year from last, but will still be below demand and leave the world with the lowest wheat stocks since 2008/09.
Chinese analysts and traders see less of a shortfall than those overseas, and have smaller estimates for total wheat imports of around five million to six million tonnes.
This is because they expect limited availability of U.S. soft red winter wheat at a price at which China is interested in buying. China is also likely to draw down its stocks to meet some of the demand.
The weather impact on China's wheat crop will make it harder for Beijing to maintain self-sufficiency in grains. As cities encroaching on arable land and rising incomes drive up demand, China is finding it harder and harder to feed the world's most populous nation with domestic supply.
China has also been snapping up corn shipments in recent weeks with imports forecast to climb to an all-time high of 7 million tonnes this year, according to the USDA.
Not Fit for Milling or Storing
Chinese farmers have traditionally relied on Beijing's annual stockpiling programme to protect their income. But the crop quality this year is so bad that even the state granaries are turning grain away.
At Xuchang city, trucks piled high with bags of wheat queued outside the state grain reserve warehouse. Several farmers looking to sell their wheat waited outside the building even though officials had rejected the stocks.
"The rains have caused the kernels to start sprouting, so the warehouse has refused to buy our wheat," said farmer Li Xiaohua, who has been waiting outside the warehouse to sell her stocks. "What can we do now."
She said her family could normally harvest about 500 kg of wheat on one mu (0.07 hectare) of land, but the volume has slumped to just 300 kg this year.
The wheat crop, hit by frost and rains in China, cannot be milled into flour and most of it will be used to feed animals.
The supply situation has been further strained, as some of the wheat in government reserves since 2009/10 is deteriorating. China does not publish data on its state reserves, but analysts said state stockpiler Sinograin still holds between 20-30 million tonnes of wheat.
Serious Crop Losses
In addition to around 10 million tonnes of wheat being downgraded in Henan, production in Anhui, Jiangsu and Hubei provinces has also taken a hit.
The four provinces produced nearly half of the China's wheat output in 2012, with Henan accounting for 26 percent of the country's total. Analysts expect Henan's output to fall some 20 percent from last year's 32 million tonnes.
"Good-quality wheat is in a short supply," said Liu Xuepeng, a purchasing manager with a major flour mill in Zhengzhou, capital of Henan.
Millers will need to blend lower-quality wheat with high-quality domestic and imported grains to make flour, he said.
Sinograin is focusing on buying soft red winter wheat from the United States and similar varieties from France and Australia. Flour mills are keen to import high-quality Canadian and U.S. hard red winter wheat to blend for making flour for making bread and biscuits.
Higher imports of top-grade wheat by China would drive up premiums for protein-rich spring wheat traded on the Minneapolis Grain Exchange <0#MWE:> and hard red winter wheat on the Kansas City Board of Trade <0#KW:>.
Although the global wheat market was underpinned by Chinese buying last week, U.S. wheat prices are still around 9 percent below domestic prices of similar quality cited in Jiangsu province, encouraging imports.
Chinese buyers have been locking in cargoes for shipment even in the first quarter of 2014, which shows the shortfall in domestic supplies is likely to last over the next 12 months.
"The way they are buying is something very unusual," said a Singapore-based trader. "They have been signing deals for Australian new-crop wheat and other origins for shipment in the first quarter of 2014. This shows some serious problems with the crop."