FEATURE: Southeast Asia's flour sales takes a beating from COVID-19; dents wheat imports

Sales of wheat flour in Southeast Asia was severely impacted by the coronavirus pandemic in April and there may be little respite soon as flour mill sources expect the weakness to extend into May and possibly June. The decline in wheat flour sales has in turn dented demand for imported wheat in the region.

Indonesia, the world's second largest wheat importer, is expected to import 10.8 million mt of wheat in 2019/2020, down 200,000 mt from the US Department of Agriculture's previous estimate released earlier this year.

"Running capacity of mills [in Indonesia] is estimated to decline to 60%-70% from 80% in 2018/2019. Due to the crisis, the industry is estimated to decline by approximately 5% in 2019/2020," USDA said in its latest report.

Governments' stringent social distancing measures across the region had put a strain on economic activity which were directly dependent on social interaction. This generally slowed hotel, restaurant and catering businesses, but in certain markets, these activities came to a grounding halt as governments pushed hard for consumers to stay and cook at home -- all in the name of eradicating COVID-19.

Although demand for necessities like food are unlikely to diminish even in a pandemic, a drop in household incomes has led to consumers spending lesser, even on the basic necessities.

In a recent report, S&P Global Ratings downgraded its growth forecast for Asia Pacific's 2020 real gross domestic product to 0.3%, a 4.5 percentage point decline from previous forecast.

Indonesia's 2020 real GDP is forecast to grow 1.8%, while GDP growth in the Philippines and Thailand is expected to be negative 0.2% and 4.2%, respectively.

With unemployment on the rise and household incomes shrinking, it is no surprise that medium to high quality flour has been hardest hit, while lower grade flour, such as those for making instant noodles, has seen an uptick as consumers shift to cheaper end-products.

"Last month was still normal, but this month we are seeing overall flour sales down by 35%-45% in Thailand, and we expect this to continue into May. Instant noodle sales have gone up 10%-20% though," a source at a flour mill said.

Given the sharp decline in flour sales, current wheat stocks, together with cargoes booked earlier for delivery in later months, are likely to be sufficient for the rest of the year, the buyer said.

"Now our headache is storage if flour sales don't pick up," he added.

Flour millers in Indonesia and Malaysia spoke of a similar trend in flour sales.

"We had a talk with an industrial-sized bakery, that usually sees a bulk of its demand from school students and office goers. They said that demand has been wiped out because no one is passing their bakery anymore as everyone is staying in," a source at an Indonesian flour mill said.

Moreover, an increase in home cooking has not translated into stable or a rise in flour consumption because of the limited options available for processing flour in a household.

"Wheat flour based products require processing. Baking bread or cookies at home is a hassle and a lot of households don't even have baking ovens. So, flour usage is limited to making batter for fried food," he added.

RISING RAW MATERIAL COST AND FOREX STRAINS FLOUR MARGINS

While flour millers battle a sharp downturn in sales, they are also facing a rise in the cost of raw material.

Platts wheat benchmarks have risen sharply since March 18, with the Australian Premium Wheat up 14% to be assessed at $283/mt FOB Kwinana and the FOB Black Sea 12.5% protein wheat up 12% to be at $228.75/mt on Monday.

The price spike was mainly led by the tightening in supply from the two origins, as export restrictions were placed in major Black Sea wheat exporting countries to ensure domestic food security during the pandemic.

Australia, on the other hand, has increased the rate at which wheat is exported in a low crop year, not seen in more than a decade, which has resulted in a considerable draw down on stocks half way through the October-September marketing year.

Russia's preliminary custom clearances indicated that the 7 million mt quota for grain exports had been reached over the weekend, while Ukraine had already exported 18 million mt of the allowed 20 million mt of wheat.

On April 1, Australian major grain handlers CBH and Viterra reported that their stock on hand stood at 3 million mt and 997,000 mt of wheat respectively, which together accounts for approximately a quarter of the overall wheat production for the 2019/2020 season.

At the same time, flour millers are not able to pass the higher cost to end-consumers as demand has weakened considerably.

"If we pass on the cost, they won't want to buy flour even more," a buyer said.

In addition, Indonesian flour millers, who are fully reliant on wheat imports to fulfill demand for flour-based food, are facing heightened foreign exchange risks following the dive in the Indonesian rupiah against the US dollar. Bank Indonesia's Jakarta Interspot Dollar Rate, or JISDOR, has declined 12% since the start of the year to reach Rupiah 15,488 to the US dollar on Tuesday.

The significantly weaker Rupiah has made imports more expensive for the flour millers in Indonesia.