London — Argentinian wheat is likely to make bigger inroads into Southeast Asian markets in the coming years as millers looking for cheaper options to Australian wheat are snapping up low-protein cargoes from the South American supplier in an effort to cut costs and boost milling margins.
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Weather woes and tight supply from Australia this year have given an opportunity to the South American nation to boost its share in markets like Indonesia and Thailand. This trend is likely to continue as millers in the region are getting increasingly used to that variety of wheat.
"I do believe that Australia's exports slowdown (due to adverse weather) matched with a bigger production here made it possible for [Argentina] to increase its market share in countries as far as Southeast Asia," Emilce Terre, chief economist at Argentina's Rosario Board of Trade (BCR), told S&P Global Platts.
During Argentina's peak export period between December 2018 and March, its wheat was priced at an average of $232.75/mt, 15% cheaper than Australian Premium White wheat, and 1%cheaper than Black Sea-origin wheat, according to International Grains Council and Platts data.
"[It] is likely for [Southeast Asian] mills to continue to buy Argentine wheat as its price is more competitive to Australian [wheat] due to its lower quality, and the region is facing a higher demand for wheat by-products," Desire Sigaudo, analyst at BCR, told Platts.
The Southeast Asian milling industry is remarkably efficient and has been able to adapt to lower quality wheat, like from Argentina, Sigaudo added.
Global exporters like Australia, Ukraine, Russia, the US and Argentina have been racing to supply wheat to Southeast Asia amid growing demand from Indonesia and the Philippines, making the region the world's top wheat importing market.
CAPTURING DEMAND FROM SOUTHEAST ASIA'S LARGEST MARKET
Australia and Ukraine currently have 31% and 21% market share, respectively, in Indonesia, the world's second-largest wheat buyer after Egypt.
Australian wheat has been dominating the Southeast Asian market for a long time, with Indonesia buying the most since at least the 1997-98 fiscal year (July-June), data from the Australian Bureau of Statistics (ABS) showed.
Some parts in Australia have been facing drought-like conditions since 2017-18, impacting production and leading to lower availability of export volumes.
Australia has a geographic advantage in terms of proximity to consumers like Indonesia and Vietnam, but drought has caused domestic premiums to rise dramatically, making wheat exports unviable, especially from the east coast, said Andrew Whitelaw, manager at Australia-based analysis firm Mecardo.
ABS and Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) recently cut the country's 2018-19 wheat export estimates for Indonesia to 9.7 million mtfrom 12.9 million mt.
Although, Australia remains the largest wheat exporter to Indonesia, its shipments to the Asian nation have declined recently, analysts said.
ABS data shows that Australian wheat exports to Indonesia from October 2018 to May were 623,832 mt, down 76.9% from the five-year average export pace for the same period, JamesMaxwell, manager at Australian Crop Forecasters, said.
Meanwhile, Argentina has raised exports to Indonesia in recent seasons, as demand opened up due to absence of Australian wheat in the market, analysts said.
Argentina's exports in the first six months of its current season (December-November) more than tripled to 1.9 million mt from the same period a year earlier, data from Argentina's INDEC showed. Furthermore, Argentina's exports in 2017-18 saw a more than eightfold jump on the year to 611,953 mt.
"[Australian] wheat is going to struggle to get into Indonesia at the end of the day. Regardless of the long-standing relationships, the prices are important," Whitelaw said.
"It's definitely potential for Argentina to export [wheat to Southeast Asia] when the freight works," Whitelaw added.
In February, Argentina was marketing its wheat in Asia at $255-$265/mt, including cost and freight, compared to Australian wheat that traded at around $300/mt CFR, according tomedia reports.
DODGING DIRECT COMPETITION WITH AUSTRALIA, UKRAINE
Starting 2015, Ukraine, the world's fourth-largest wheat exporter, began shipping larger volumes to Indonesia.
In 2017-18 (July-June), Ukraine's wheat exports to Indonesia rose 43.8% from 2015-16 levels to 2.3 million mt, data from APK-Inform Agency showed. It has already shipped that much volume between July 2018 and April.
Argentina exports large amount of wheat during December through March, while Ukraine's peak export months to Southeast Asia are August to November.
Therefore, a first analysis of harvest and export data comparison shows that Argentinian and Ukrainian wheat exports to Southeast Asia do not compete due to their strong seasonality, Sigaudo said.
Quality of the crop and harvesting period can make Argentina very competitive in the world market, David Hughes, President at Argentina-based wheat association ArgenTrigo, said.
Moreover, while Argentinian wheat exports to Southeast Asia look cyclical, they are expected to remain high regardless of weather conditions in Australia or growth in shipmentsfrom Ukraine, analysts said.
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