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Australian wheat holds its ground amid Black Sea return to Asia

  • Featuring
  • Vivien Tang    Elizabeth Thang
  • Commodity
  • Agriculture Shipping
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  • United States
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  • War in Ukraine

Black Sea wheat and Australian crop traditionally compete for Asian demand when its marketing season begins every July. But the Russia-Ukraine war, which broke out in February 2022, halted wheat supplies from Black Sea into Asia.

Despite the inception of the Black Sea Grain Initiative in July 2022, buyers have largely avoided Black Sea supplies for most of last year due to concerns over financing, execution risk and inspection delays. The initiative was most recently extended on Mar. 18, though contention remains over the extension period.

A year since the start of the war, is there a recovery in sight for Black Sea wheat flows into Asia or will Australia continue to dominate wheat demand in the region?

Australia rejoices over another bumper wheat crop

Australia has reaped record wheat harvests for three years and running, as heavy showers due to La Niña periods boosted acreage expansion and yields.

The Australian Bureau of Agricultural and Resource Economics and Science, or ABARES, estimated wheat harvest in marketing year 2022-23 (October-September) at a record high of 39.2 million mt, up 7.7% on year.

Despite concerns of reduced protein content over relentless downpours and delayed harvests, this season's wheat crop has toppled initial market expectations on protein distribution.

Official producer harvest reports and ABARES figures reveal about 60% of the 2022-23 wheat crop in key wheat-exporting state Western Australia consists of Australian Standard White and feed grades, echoing the 2021-22 season distribution. In 2022-23, production of mid-protein grades such as Australian Premium White fell to just 20%, almost 40% lower on year.

On the contrary, wheat harvested on Australia's East Coast saw lower-than-anticipated downgrades despite flooding and showers. Sources have observed reduced production of low-protein grades such as ASW and stockfeed wheat in the region, slashing its exportable surplus of such grades for the 2022-23 season.

"Perhaps only 25% of the total Australian crop is ASW and below, and most of that is coming out of Western Australia," a Melbourne-based grains trader said.

Australian feed wheat takes center stage in Asia

Expectations of a bumper low-protein wheat crop out of Australia in the 2022-23 season had been a godsend to feed buyers in Asia struggling with rising corn prices.

Corn prices soared as a drying Mississippi River had crippled logistics for US corn in late 2022, while drought shrunk Argentina's production estimates by almost 20% year-on-year.

In Southeast Asia, fertilizer shortages hit yields and local production struggled to meet recovering feed demand, boosting local corn prices. Adverse weather conditions, especially in the typhoon-plagued Philippines, also hit output.

Asian buyers started to substitute corn with Australian feed wheat. Several Asian countries, including Thailand and South Korea, have purchased more Australian feed wheat until February 2023 in the ongoing season compared with the previous marketing year, S&P Global Commodity Insights trade records showed. ABARES expects Australia to export a bumper 28 million mt wheat in MY 2022-23, slightly higher on year.

In Thailand, local corn prices hit a high of $400/mt in February, and buyers were eager to consume largely unused feed wheat import quotas from 2022. S&P Global's trade records showed Australian feed wheat traded into Thailand up to February in the current season was at least $50/mt cheaper than local corn prices.

South Korea has booked nearly 1.2 million mt of Australian feed wheat in 2022-23 season crop up to Feb. 17 – virtually its usual annual demand, according to trade sources.

"Up to 2 million mt feed wheat could be imported if it continues to trade at similar levels or cheaper than feed corn," said a South Korean grains trader.

In the Philippines, feed buyers have been booking around 240,000 mt of Australian feed wheat a month as of mid-February, 30% more than the monthly average in the past year.

Even Indonesia, which typically bans feed wheat imports to support its domestic corn sector, is considering Australian feed wheat imports as local corn prices have surged more than 40% over the past five months to Rupiah 6,000/kg in late-February, according to local sources.

The consolidation of imported feed wheat demand is being led by Indonesia's state-owned livestock farming company Berdikari, with cargoes – if any – expected to dock in June.

Is Black Sea poised for a comeback into Asia?

A potential comeback of Black Sea wheat into Asia emerged in mid-February when a trade into Thailand concluded $7-$8/mt cheaper than Australian feed wheat for July shipment. Since then, Black Sea feed wheat – excluding Russian and Ukrainian origins – has been offered at parity or a discount to its Australian counterpart for July and August shipment.

While Black Sea wheat flows to Asia are resuming, there is a catch. Pre-war export volumes are unlikely, at least in 2023, as S&P Global analysts see smaller wheat harvests in the Black Sea region for 2023-24.

"In Romania, farmers are struggling to maintain the quantity and quality of inputs over drought and high energy price," Victoria Sinitsyna, S&P Global senior grains analyst, said.

"The fundamental issues with financing remain, curbing Southeast Asian buyers' appetite for Russian and Ukrainian wheat," added a Singapore-based grains trader.

Market participants believe there will continue to be a healthy demand for Australian feed wheat in Asian destinations despite competitive Black Sea wheat offers.

Australia may be better placed on potentially lower freight charges given its proximity to Asia. However, buyers will have to deal with tightening port capacity in Australia. As talks progress on the lifting of trade barriers for Australian goods entering China, including barley, there could be stiff competition for shipping slots, supporting Australian wheat prices for shipment in the latter half of 2023.

With reporting from Sampad Nandy