Australian wheat riding on global price rally despite second-largest crop

Singapore — Australian wheat is currently priced at the elevated levels seen during the past drought years, even though it's wheat production is estimated to be the second-largest on record in 2020/21.

S&P Global Platts assessed Australian Premium White wheat reached an 8-month high Jan 7 at $279/mt FOB Kwinana, up 7.3% on the month.

The recent surge in wheat prices have been fueled by a combination of factors.

Firstly, tightness in shipping capacity coupled with a strong Australian dollar has pushed export prices up.

"There is plenty of grain but shipping capacity is the issue. Prices are highly dependent on slot availability and our export programs are running strong with majority of products; wheat, barley and canola pricing globally," said a trader in Australia.

The Australian dollar has appreciated strongly over the past two weeks, breaching the A$0.78 for 1 US dollar mark on Jan 6, a level not seen since April 2018, before retreating slightly to close at A$0.7766 for 1 US dollar Jan 7.

A strong Australian dollar exerts upward price pressure on FOB prices and makes exports less competitive in the international market.

Secondly, a spike in prices from adjacent markets, like Russian wheat as well as global corn and soybeans, has also provided strength to Australian wheat prices.

In an effort to curb rising food prices, the Russian government has imposed wheat export tax of $30.40/mt from Feb 15 to June 30 in addition to a grain export quota of 17.5 million mt for the same period. This has raised Russian 12.5% wheat prices by 10% since Dec 16 to $278/mt FOB Russia Jan 7, according to Platts data.

As a result, Black Sea wheat has become increasingly uncompetitive in the east Asian market, providing room for Australian wheat prices to rise in tandem.

The price spread on FOB basis between Ukrainian 11.5% wheat and APW wheat narrowed by $8.5/mt on the week to $6/mt, Platts data showed. The spread ranged between $42-$65/mt from April to August, before plunging as Australian new crop wheat started to price in.

"Wheat is following corn up to try and maintain the spread," said a trader in Singapore.

Asian buyers have moved to the sidelines given the recent bull-run, with market keeping a close eye on cargoes for March onward shipment periods.

At the same time, traders are reluctant to lower offers amid an overheated yet volatile market.

"It's scary actually to short anything," another trader said.

Consequent to the recent volatility in the grains market, the CME group, raised the maintenance margins to trade the 2021 wheat futures by $150 per contract and $100 per contract for 2022 and 2023 wheat futures, a company source said.

For 2021, March, May and July wheat futures margin rose to $1650, $1600 and $1500 per contract while September and December wheat futures margin increased to $1400 and $1350 per contract respectively. The margin requirements are raised when futures base prices rise and when markets become more volatile.