The market expected bearish wheat news from the U.S. Department of Agriculture’s new-crop supply and demand report on Tuesday, but the news was way more bearish than anyone had surmised.

However, the new wheat balance sheets may be slightly distorted because of China.

USDA projected world wheat reserves to climb to a record 257 million tonnes by the end of the 2016/17 marketing year. The figure topped the high end of the pre-report range of estimates from analysts and traders by a couple million tonnes.

If realized, next year’s wheat carryout will be 15 million tonnes larger than that of the current year. But if China is removed from the mix, the global wheat balance sheet for the new crop year tightens.

China is the world’s largest wheat producer by a long shot and is expected to harvest 130 million tonnes in 2016/17, roughly equal to the previous crop. With a likely drop in domestic use, Chinese wheat stocks are anticipated to swell by 21.7 million tonnes on the year to 118 million tonnes.

However, the East Asian country hardly participates in global wheat trade, averaging less than 4 million tonnes of combined imports and exports over the last 10 years. Since China has produced all the wheat it needs in recent years, its wheat has been a non-factor in the international marketplace.

When Chinese wheat carryout is subtracted from the world total, a year-on-year loss of 7 million tonnes is revealed. This method also suggests the adjusted 2016/17 world wheat carryout will be smaller than it was in 2014/15, 2011/12, and 2009/10.

In addition to the Chinese over-inflation of world stocks, the 8-million-tonne decline in world wheat production and the 3-million-tonne increase in consumption on the year add just a little fuel to wheat’s tank for the 2016/17 marketing year.

Assuming good weather to finish the harvest at the end of next month, USDA is unlikely to alter China’s wheat numbers drastically unless the domestic demand structure suddenly changes. But it will take a policy change to remove the effect of Chinese stocks on the global balance sheet in the long term.

Wheat Begs Reform

Within the last decade, China has become notorious for its stockpiling of grains in an effort to become self-sufficient. No other country deliberately produces more wheat than domestic consumption plus exports would account for, but China is expected to do so to the tune of 18.5 million tonnes in 2016/17.

Reforms to China’s grain policies began last September when Beijing cut the government support price for corn, only to eliminate it altogether in January. Wheat and rice, both main staple crops for the country, are the only grains that still have a minimum purchase price.

At the end of March, Beijing announced the end of its expensive corn stockpiling program to draw down on the large reserves. In the same statement, China said it would also look into reforming wheat and rice, though no further plans have been mentioned since.

The 2017/18 wheat crop seems in the distant future, but in reality the Chinese begin planting this crop just five months from now. If reform does not hit before then, Chinese wheat farmers have every incentive to “keep on keeping on” and world wheat stocks could remain artificially inflated until at least mid-2018.

It is almost certainly too aggressive to use the word “bullish” in the same sentence as “wheat”, especially following Tuesday’s report, but in reality the wheat picture may be a little less bearish than meets the eye.