Examining China’s wheat import history

For the first time since China joined the World Trade Organization (WTO) in 2001 and agreed to establish a tariff-rate quota (TRQ) to increase wheat imports, the country appears poised to reach that quota of 9.6 million tonnes, according to a recent report from the Economic Research Service (ERS) of the US Department of Agriculture.

Although China has imported less than half that amount most years, frustrating foreign wheat suppliers and domestic flour millers, soaring demand for wheat as a feed source in 2021 has the world’s most populous nation and largest wheat market in position to finally fill the quota, the report said.

The ERS noted that through the first seven months of the year, China imported 7.2 million tonnes, up 50% from the same period in 2020, putting it on record pace. The only other years since the turn of the century in which China filled more than half of its wheat import quota was in 2004 to stem rising domestic grain prices and in 2013 to restock government reserves, the report said.

The reason for the surge in feed wheat demand in 2021 was corn prices eclipsing wheat prices in China, the ERS said.

“The wheat-to-corn price inversion prompted widespread substitution of wheat for corn in livestock feed in China during 2020-21,” the ERS said. “Chinese authorities held numerous sales of wheat reserves to satisfy the demand for feed wheat. According to the CNGOIC (China National Grains and Oils Information Center) and other sources, some imported wheat was also used for animal feed.”

The question is will 2021 be an anomaly or the start of a trend in which Chinese wheat imports reach or come close to reaching the 9.6 million-tonne-quota on an annual basis?

Accounting for an estimated 19% of the world’s wheat consumption, outpacing second-place European Union’s 15% share, China would certainly appear to be a candidate to reach the annual import quota. But the ERS study, “Cracking Open China’s Wheat Import Quota,” revealed that, based on the application rates for wheat quotas, demand for imported wheat often has exceeded what was typically awarded.

The ERS report said that while China’s wheat market has been evolving from subsistence farming and rudimentary flour mills to larger farming operations and larger, more modernized flour mills, the current wheat import quota system continues to reduce Chinese flour millers’ access to overseas wheat suppliers.

Although China lifted the monopoly on wheat imports when it joined the WTO, 90% of the wheat imported as part of the tariff-rate quota is set aside for end users who must import through a state trading enterprise (STE) designated by the Chinese government, the report said. The current STE — China Oil and Foodstuffs Corporation (COFCO) — is the same company that once monopolized grain trade prior to China joining the WTO 20 years ago.

“China’s delegation to the WTO has fielded many questions from counterparts about how the TRQs were administered, their opacity, and why the quotas were not filled,” the ERS said. “China’s TRQ mechanism, in place since 2001, had remained mostly unchanged until the United States initiated a WTO dispute that challenged the administrative practices China used to manage wheat, corn and rice TRQs.

“In 2019, a report issued by a WTO Dispute Settlement Body found that some of China’s procedures for allocating quotas were not transparent, predictable, or fair to applicants. The WTO report also revealed that Chinese authorities had used criteria to assess applications that were not revealed to the applicants.”

China has since revised application instructions beginning with the 2020 TRQ that allowed applicants to request both STE and non-STE quotas and stipulated new capacity requirements for applicants. But the ERS report noted that despite these changes, WTO member countries remained unclear as to whether the revisions addressed issues raised in the dispute, as Chinese authorities did not reveal whether changes in procedures complied with requests made in the WTO report.

The ERS said the increase in feed use for wheat raises more questions about the TRQ’s operation and its future role in China.

“The wheat TRQ guidelines stipulate minimum capacity requirements at flour mills and for food processors but nothing for feed mills,” the ERS said. “Some animal feed companies nevertheless applied for wheat TRQ, but their numbers dwindled from 31 in 2015 to 2 in 2020 and 8 in 2021. Branches of some of China’s largest feed companies appeared on the lists.”

China, the world’s biggest wheat producer most years, is forecast to harvest 137 million tonnes in the 2021-22 marketing year, according to the Food and Agricultural Service (FAS) of the USDA. However, while production has been relatively steady in recent years, consumption last year jumped to a record 150 million tonnes — 24 million tonnes above the previous high in 2019-20. Only a slight drop-off is predicted this year as intake is projected at 148.5 million tonnes.

Earlier this year, China announced it would be almost entirely self-sufficient in staple grains such as wheat and rice by 2025.

“The grain production will keep increasing and China’s food security will be absolutely guaranteed during the 14th Five-Year Plan period,” said Mei Xurong, vice president of the Chinese Academy of Agricultural Sciences. The five-year plan runs from 2021-25.

However, living up to that proclamation could be difficult if consumption continues to increase at the rate of the last couple of years.

While China is known for its consumption of rice, wheat flour is the main ingredient in many of the country’s staple foods, such as steamed bread, noodles, scallion-filled pancakes, deep-fried dough, and dumplings in heavily populated northern regions. More recently, flour-based instant noodles, hamburger buns, snack foods, and European-style bread and pastries have become popular nationwide.

Over the last 20 years, even as China’s annual wheat use grew from about 110 million tonnes to 145 million, the wheat import quota (9.63 million tonnes) remained unchanged, the report said.

Given the growing popularity of flour-based products, it’s not surprising that most of the Chinese applicants for wheat imports are flour milling companies that report a combined milling capacity of 100 million tonnes (wheat equivalent), which represent about half of the industry’s total, according to the report. Thus, the 3 million to 4 million tonnes of wheat imported most years represents a small fraction of the industry’s milling capacity.

The ERS said data show that applicants who are awarded quotes receive small allocations, with a few city-level offices announcing that only one or two milling companies in their districts received quota allocations for a few hundred tonnes of wheat.

The biggest grain processing companies consistently have submitted applications for wheat quotas in recent years. The report showed that Wudeli submitted 81 applications from its various locations between 2015-21, COFCO submitted 72 applications during that time, and Yihal Kerry, a part of a Singapore-based multinational conglomerate that is in the grain and oilseed processing business in China, submitted 106 applications.

“While no public information is available on which quota applicants import wheat, there are indications that not all companies are given equal consideration,” the ERS said in its report. “Minimum production capacity requirements for quota applicants may preclude smaller plants from importing wheat.”

Where the mills are located also appears to have a bearing on whether their applications are accepted or rejected, the ERS noted.

“A comparison between the regional breakdowns of quota applicants and wheat imports indicates companies in wheat-growing regions have reduced access to wheat that can be imported under the TRQ,” the ERS said.

Wheat-growing provinces consistently accounted for about three-fourths of TRQ applicants, the report said, but Chinese customs data indicate these provinces account for an average of just 10% of wheat imports.

Among the wheat imports that go to non-wheat-growing areas, Beijing-based companies comprise the majority, with 69% of wheat imports, which the ERS said reflected the dominance of COFCO, whose headquarters is in Beijing.

The ERS said information from China indicates Beijing-based companies stored imported wheat in various facilities around the country or sold it to other companies.

“However, steering imports to certain companies also gives those companies favorable profit margins denied to companies in wheat-growing areas that are not awarded wheat imports under the TRQ,” the ERS said in the report.

WORLD-GRAIN.com

Tags: China, COFCO, wheat, WTO, импорт, TRQ, wheat flour, ERS