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ANALYSIS: Australian wheat stages comeback in SE Asia as Black Sea priced out

Highlights

Australian 2020-21 wheat output seen up 91%

Competition between Australian states, other origins likely to cap prices

Uncertainty over Black Sea wheat price trend

Singapore — Australia has finally regained the attention of end-users in Southeast Asia, following three consecutive years of drought, as Black Sea wheat prices have become uncompetitive.

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S&P Global Platts Black Sea 11.5% protein wheat assessment surged 18% between Aug. 17 and Sept. 29 to $231/mt FOB Ukraine.

Lower yields in Ukraine, France and Romania coupled with strong demand from Bangladesh, Egypt and Turkey have pushed up Black Sea prices.

Australian prices, on the other hand, have fallen as the market transitioned to new from old crop. S&P Global Platts Australian premium white and Australian standard white assessments slid by 6% and 9% between July 30 and Sept. 29 to $250/mt and $242.75/mt, respectively, FOB Kwinana,.

Australia is set for a 91% rebound in wheat production to 28.9 million mt in 2020-21 (October-September), according to the latest report from the Australian Bureau of Agricultural and Resource Economics and Sciences.

Crop prospects between the eastern and western states have, however, flipped from the last three years. New South Wales has the strongest prospects as a healthy start to the cropping season and favorable winter rainfall are expected to result in well above-average production.

On the other hand, some are trimming their production estimates for Western Australia, traditionally the biggest exporting state, after a drier start which hampered germination and early growth. There has also been below-average rainfall in June-July.

Competition capping Australian wheat prices

Unlike the last couple of years, South Australia, Victoria and New South Wales are expected to have a sizable exportable surplus in 2020-21.

Consequently, competition between the states as well as with other major origins such as the Black Sea and Argentina to win export business is likely to keep Australian wheat reasonably competitive in SE Asia.

Australian suppliers have already won a considerable amount of businesses in the region over the last couple of weeks. So far in September, six Australian feed wheat vessels, or about 330,000 mt, have been booked by Philippines and Thai buyers, according to S&P Global Platts trade data.

While Australia has a 7% tax advantage in the Philippines, the three trades to Thailand, where Australia has no tax advantage, is evidence of its competitiveness.

So far, most of the trades for shipment from December on have been by feed buyers as they generally tend to be ahead of SE Asian flour millers on forward purchases.

Flour millers in SE Asia, who have been buying hand-to-mouth, have yet to decide whether they will be switching back to their traditional trade partner Australia for shipments from December.

The decision will boil down to price as the region has adapted to quality differences in the last couple of years.

"We are still checking whether to switch origins, but at the moment it's pointing toward Australia," a source at a flour mill in SE Asia said, who is eying December-January cargoes.

Uncertainty on Black Sea price direction

Some believe Black Sea wheat prices may fall back in the coming month as the region starts to face competition from the southern hemisphere. Others said prices would be largely dictated by winter crop conditions, which have been challenging to date.

Due to the uncertainty in price direction, some suppliers in the Black Sea are reluctant to take forward positions and others are pricing in a risk premium to counteract a potential failed winter crop, sources said.

At the same time, shipping capacity out of Australia for December is filling up fast, sources say.

"In Western Australia between Dec 1-Mar 31, there is 486,000 mt space available of the 6.4 million mt that is allocated, or 7.5% availability left over four months," Andrew Woodhouse from broker and consultancy Advance Trading said.

Sources say availability at South Australian ports is about 96,000 mt over the same period. While some of the east coast ports, such as Carrington, Geelong Melbourne and Portland, appear to be fully booked from Jan. 1 to end-March 2021.

Back to traditional trade flows?

While uncertainty looms over fourth-quarter demand and prices, a return to traditional trade flows cannot be ruled out.

The wheat market is looking fairly balanced in the Black Sea region and Europe because of lower production in some countries and higher demand from building state reserves in others.

As a result, Black Sea suppliers may not feel the need to price actively into SE Asia if demand from the Middle East, North Africa and even South Asia is sufficient.

In this case, buyers in SE Asia may have to fall back to their traditional supplier, Australia, especially since Argentine wheat prices are also high due to expectations of a smaller crop of 17.5 million mt.