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Analysis: SE Asia turns to Black Sea wheat as APW prices continue rally to new highs

Major Southeast Asian wheat buyers are turning to Black Sea milling wheat as Australian Premium White wheat prices continue rallying to fresh record highs.

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APW wheat prices had surged 23.5% over the past month to a new all-time high of $263/mt FOB Australia Wednesday, S&P Global Platts data showed. This was the highest since Platts started APW wheat assessments on November 9, 2015.

The jump in APW wheat prices had pushed buyers to seek out Black Sea milling wheat over the past two weeks in view of the widening price spread between APW and Black Sea wheat from a slower rise in Black Sea prices, possibly due to harvest pressure.

Black Sea 11.5% protein wheat was heard traded at $215-$220/mt CFR Indonesia for September and October loading over the past week, according to trade sources.

Southeast Asia turns to Black Sea wheat as APW prices continue to rally

Some Indonesian buyers had also earlier secured forward-month cargoes for loading up till October-November, when prices were at much lower levels of mid- to high-$190s/mt CFR in early May, Platts data showed.

The recent higher traded prices for new crop Black Sea 11.5% wheat at $195-$200/mt CFR Indonesia for shipments loading over September to November appear to reflect buyers' acceptance of the rising price trend despite ongoing harvesting and earlier expectations of a possible fallback in prices after harvesting is completed.



On Wednesday, Black Sea 11.5% protein milling wheat was offered at $225-$230/mt CFR into Indonesia, while APW wheat was offered at $285-$290/mt CFR.

Yet, several major Southeast Asian buyers, who conceded difficulties in obtaining competitively priced APW spot cargoes recently, were not keen to buy in the week citing high prices and ample time to await market clarity.

"Australian wheat is pricing itself out, no one would be willing to pay such a high premium [over Black Sea wheat]," commented a major Indonesia flour miller.

Offers for APW wheat have been on the rise, as traders had to bid from farmers at higher levels, given continuous limited availability of old stocks. Many farmers in Australia have been storing their old crop on farms due to concerns over extended dryness in the country's major crop areas, traders said, adding that with expectations of lower production for the upcoming 2017-2018 crop season (October-September), many sellers would now rather hold on to supply rather export.

The west coast of Western Australia, the Eyre Peninsula in South Australia, and western and southern Tasmania had experienced serious or severe rainfall deficiencies over the four-month period ended July 11, according to Australia's Bureau of Meteorology.

In view of the extended dryness, Australia's wheat production is now expected to reach 23 million-24 million mt in the 2017-2018 season, down by more than 30% from the record output of around 35 million mt in the 2016-2017 season, according to latest forecasts by National Australia Bank and Australian Bureau of Agricultural and Resource Economics and Sciences.

The US Department of Agriculture has made a downward revision to its forecast production for Australia to 23.5 million mt for the 2017-2018 season in its latest report released July 12, down 6% from its previous forecast last month.

Adding to this, high exports with record-breaking shipments of wheat over October-May estimated at 15 million-17 million mt by traders, also boosted sellers' expectations of a possible lower stock carry-over to the new season.

A bullish trend in the US Chicago wheat futures over the past month, amid concerns over dryness and lower production, also boosted sell sentiment among Australian farmers, with farmers continuing to hoard old crops despite the recent uptrend in prices.


BLACK SEA WHEAT UNLIKELY TO FULLY REPLACE APW


Still, sellers said Southeast Asian importers would not be able to fully substitute APW with Black Sea wheat in their blending ratios, unlike other lower grade wheat such as Australian Standard White, and that regional demand for APW is inelastic because of its unique characteristics for the making of noodles and steamed buns.

This means buyers would need to pay up for APW wheat, regardless of the $60-$70/mt price spread to Black Sea wheat, said a trader.

Adding to this, Australia's geographical proximity to key buyers in Southeast Asia over the Black Sea would give Australian wheat an edge in terms of logistics and wheat quality such as moisture level, which may increase over a long period of shipping time, other sellers said.

Southeast Asia accounted for about 15% of global wheat import volume in 2016-2017 (July-June), with Indonesia importing about 10 million mt of wheat in the same period.

"Australian wheat contains lower moisture which helps to increase flour extraction as it is softer than Black Sea wheat," a Singapore-based trader said.

--Alexis Gan, alexis.gan@spglobal.com
--Edited by Irene Tang, irene.tang@spglobal.com