Economic development and high rates of urbanisation over the last decade have altered the structure of flour consumption in China. The country’s burgeoning food processing and prepared foods industries are not only changing how flour is consumed but also the kinds of wheat and milling technologies required. Only five years ago, household consumption of general purpose (GP) flour accounted for over 60 percent of the market. Household consumption is now estimated at below 45 percent and is expected to drop further. Millers are currently in an awkward position: they must invest to respond to the changing market but face an uncertain situation in how they source their raw material. The gap between supply and demand of flour suitable for the modern prepared-foods industry is widening.Changes to China’s subsidy policy this year will substantially raise the purchase prices for red wheat varieties meaning that flour millers located in the southern growing areas of China, whose principle output is GP flour, will be at an increasing disadvantage in the market. Millers will either have to outbid the State Reserve to access supply, or else negotiate directly with the State Reserve for supply that could be of questionable quality. Millers with the scale to operate in both GP and industrial segments and with presence in multiple origination zones, will have a greater range of options when it comes to originating different wheat varieties for blends and supplying those blends to industrial flour users.To achieve a larger production platform, wheat flour millers must consolidate despite the fact that, in the short run, the blending behaviour that this drives is haphazard and volatile. Foreign investments in the sector have been restricted, so much of this incremental capacity expansion will come from domestic companies. Due to the importance of relations with the State Reserve, and as access to import markets is limited to a small number of companies that have import quotas, much of the scale will be achieved by key state-owned enterprises (SOEs). The need for scale is driven as much by policy as it is by the achievement of stronger negotiating positions with grain suppliers, plus the fact that the major supplier to the industry is the State Reserve system.Due to platform requirements, preferential access to import quotas, and restrictions on foreign investment, SOEs and select large domestic corporates are the likely primary beneficiaries of the developments in the wheat and wheat flour industries in China. They are rapidly growing their businesses in order to negotiate with the State Reserve system, which itself is expanding down the value chain into both the GP and industrial flour segments. This brings into focus one of the more bizarre characteristics of the Chinese commodity markets and the key conflicts along the agribusiness value chains: the end-game in the flour industry looks to be a battle between competing milling SOEs, negotiating with the central supplier SOE, with users of flour in the food industry anxiously awaiting the outcome.