Analysis: Ray of hope for Australian new crop wheat exports to Southeast Asia in 2020-21 marketing year

Australia has the potential to make a comeback in the Asian wheat market in the 2020-21 marketing year, which runs from October 2020 to September 2021, as production is anticipated to rebound on favorable weather conditions.

The wheat exporting country lost significant market share in Southeast Asia in the last couple of years due to price uncompetitiveness on three consecutive drought years.

Indonesia, which is traditionally Australia's largest wheat importer, used to buy about 4 million mt of milling wheat each year. But the volume has more than halved every consecutive year since 2017, declining to less than 1 million mt in 2019.

Since Southeast Asian flour millers have gained flexibility and learnt to juggle between different-origin wheat qualities, price has become the single most important factor in decision making.

Australian wheat suppliers' path to reclaim lost market share would be a challenging one. However, there are a few factors like freight and tax advantage, import competition, and export restrictions that may play to Australia's advantage.

Freight adds to price uncertainty

A recent uptick in freight rates have counteracted the harvest pressure in the Black Sea to some extent, minimizing the decline in CFR wheat prices.

S&P Global Platts assessed Supramax freight for grains from Yuzhny, Ukraine, to Cigading, Indonesia, at $26.25/mt June 25, up 25% from April 23 – the lowest point year to date.

Higher fuel prices coupled with strength in Panamax freight rates, from stronger iron ore demand in China, have been pushing up freight for Supramax cargoes.

The longest voyages on bigger ships typically face more freight volatility due to higher proportion of fuel cost being priced into the overall freight rate.

This is advantageous for Australia as it is located at a closer proximity to key buyers in Southeast Asia.

Evidently, while freight between Black Sea to Indonesia for August shipment rose by about $4/mt to date in June, the freight between Western Australia and Indonesia only rose by roughly $2/mt for the same time period.

The shorter voyage time also gives Australia a competitive edge at a time when flour millers continue to buy hand-to-mouth, given uncertainty around flour sales because of the ongoing coronavirus pandemic.

"With Australia, there is room to delay purchasing decision due to shorter travel time. But with Black Sea, there is less flexibility and requires better planning," said a source at a major flour mill in Southeast Asia.

If the freight rally is sustained till the end of the year, when Australian new crop wheat is available for shipment, it could boost the prospects of rebuilding supply pathways in key Southeast Asian markets.

Competition from other buyers

COVID-19 and drought has triggered food security concerns in the Middle East and North Africa. As a result, certain countries in those regions are relying more on wheat imports to meet domestic demand and build up their national reserves.

S&P Global Platts Analytics forecast overall wheat production to be down by 7.4 million mt in the Black Sea and the EU for the 2020-21 marketing year. With a lower crop size and increased import demand, buyers in Southeast Asia are likely to face more competition.

Furthermore, the possibility of export restrictions from the Black Sea for second half of the marketing year cannot be ruled out as countries are prioritizing food security amid the pandemic.

This could pave way for Australian wheat suppliers, which also have a tax advantage in some of the Southeast Asian markets, to fill a potential wheat supply gap from December onward.

Price is king

Though these are still early days, the market is expecting a higher proportion of feed wheat in the Black Sea relative to last season.

This means milling wheat prices are unlikely to feel upward pressure in the near term due to the availability of more feed-grade wheat coupled with harvest pressure.

There is also the question of the premium Southeast Asian flour millers are willing to pay for Australian Premium White wheat, or APW.

Indonesian flour millers have historically paid a $10-$15/mt premium for APW relative to Black Sea 11.5% protein wheat. But as the inelasticity of Australian milling wheat shrank in recent years, so has the willingness to pay a hefty premium.

Nowadays, some end-buyers look for a parity in prices while others are willing to pay a maximum of $10/mt premium for APW, depending on the end-product being milled.

The Australian new crop wheat is currently priced within $10/mt relative to Black Sea and Argentinian 11.5% protein wheat for December-January shipments.

On a CFR basis, indicative offers for APW were at $238-$239/mt while Argentinian and Black Sea 11.5% protein wheat were at around $230/mt for December shipment, June 26.

In conclusion, price competitiveness will be key but supply-demand dynamics are highly dependent on the evolving pandemic, Black Sea and Argentinian grain export policies, and weather conditions and crop development in the Southern Hemisphere.