Australian wheat likely to lose competitiveness further on output concerns
Australian wheat may further lose its competitiveness in the 2019-20 (October-September) marketing year on likely higher domestic prices led by another below-average production year and increased competition from the Black Sea.
The country also faces a challenge from the growing acceptance of Argentinian wheat in Southeast Asia, its key export region.
Another dry summer in key regions of Australia prompted analysts to lower their forecast for the country’s wheat production and exports.
According to estimates from ABARES, Rabobank and Australian Crop Forecasters, Australia’s wheat production in 2019-20 (July-June) is expected between 18-22.1 million mt, below the five-year average of 23.22 million mt.
Australia’s wheat exports for 2019-20 are estimated at 11-12 million mt, down from the five-year average of 15.92 million mt.
This would be the third straight year that production and exports will be coming in below their five-year average.
“That (lower export competitiveness) is quite likely given how the weather condition have been in the recent years. We will have lesser products to sell, therefore we are not going to be there in the market,” Brian Fisher, managing director of Kingston ACT-based economic consulting firm BAEconomics, told S&P Global Platts.
A combination of factors including higher prices, lower production and gradual acceptance of somewhat improved quality of Black Sea wheat has led to the erosion of Australia’s market share in Indonesia, its largest wheat export destination and the world’s largest wheat importer.
Since 2015, Australia’s share in Indonesian wheat imports declined by 26.6 percentage points to 31% at the end of March 2019, according to reports from Indonesia’s Central Bureau of Statistics and the USDA.
Market share of Ukraine and Russia in Indonesia grew from 9% and 3.5%, respectively, in 2015, to 21% and 14% in March 2019.
Argentinian wheat has also gained acceptance as a “filler wheat” in Southeast Asia, thereby placing further price and market share pressure on Australian wheat exports to that region, according to a report from the Australian Export Grains Innovation Centre in December 2018.
RISING AUSTRALIAN PRICES
The Australian Premium White wheat’s average price on a FOB basis in 2018 was $256.94/mt, up almost 22% from the average price in 2016, Platts data showed.
Between May 15-July 2, the Australian Premium White wheat has risen 3.7% on a FOB basis to $236/mt, according to Platts assessment.
In comparison, the Russian deep sea port wheat with 12.5% protein content on a FOB basis was at $192/mt as of July 5, according to Platts assessment.
Prices are expected to remain firm in Australia going forward as weather conditions are now unlikely to make any amends to the later-than-ideal start of the planting season.
“With Australian grain stocks run down, stock rebuilding and our expectations of another below-average harvest volume in 2019/20, basis [the differential between the domestic price and the price in the futures market] is expected to remain elevated,” a Rabobank report from June said. “Australian basis has been running at historically high levels in most port zones, limiting the competitiveness of Australian grains in export markets.”
RECLAIMING MARKET SHARE
Getting back its market share will be a Herculean task for Australia.
“Increased use of Black Sea and Argentinian origin wheat in Southeast Asian markets during 2018/19, will present a challenge to Australia’s market positioning when exportable surpluses do return to average,” Rabobank said in its June report.
Expanding flour mills, import restrictions on corn for feed, demand for cheaper alternatives to high priced local corn, resulted in many mills in Indonesia turning to lower quality Black Sea wheat, according to a report from the USDA in March.
Gradually, mills blended more of the lower quality wheat with that imported from traditional suppliers to meet demand for medium protein flour, which constitutes half of the flour market in the region.
Ukranian and Russian wheat has also significantly improved in terms of quality in recent years, according to the USDA.
Australia has had inconsistent supply due to weather-related problems. It is likely to face drier-than-average weather in July-September, the country’s Bureau of Meteorology said in a note on June 27.
Australia has already encountered a dry summer, following which many of its major crop regions entered the traditional sowing period with below average soil moisture, according to Rabobank’s report.
The traditional wheat sowing window in Australia can be across a four to six week period from April to June.
There were less favorable conditions at the time of planting in Western Australia, northern New South Wales and southern Queensland which have affected the area planted to wheat in Australia, a spokesman of the Australian Bureau of Agricultural and Resource Economics told Platts.
Overall, planted area for winter wheat in Australia for 2019-20 is likely to be almost 12% lower than the five-year average of 11.7 million ha, according to the Rabobank report.