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Analysis: Australia to lead Asian wheat trade flows in 2021/22 amid global supply tightness

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Analysis: Australia to lead Asian wheat trade flows in 2021/22 amid global supply tightness

Highlights

APW price hits record high amid strong export demand, lack of competition

China scoops up Australian new crop wheat for food security

Australia is anticipating a second consecutive strong wheat export program in the 2021/22 (October-September) marketing year as other major origins grapple with government interventions and production cuts.

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The promising export outlook coincides with record high wheat prices, with the Australian Premium White wheat index reaching an all-time high of $332/mt FOB Kwinana Oct. 5.

The country is forecasted to produce the second largest wheat crop on record at 32.6 million mt in 2021/22, slightly under the previous year's estimate of 33.3 million mt, while exports are pegged at 23 million mt, according to Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES).

The Russian government's intervention on wheat exports and production cuts in north and south America due to adverse weather worked to the advantage of Australian suppliers, who were struggling to be price competitive amid a prolonged and severe drought just two years ago.

The market initially believed that it would be challenging for Australia to gain back its lost market share in 2020/21, following three consecutive years of drought between 2017-2019. During this time, flour millers in southeast Asia embraced the cheaper Black Sea wheat and were no longer willing to pay a $10-$15/mt premium for Australian milling wheat.

The poor crop in Argentina and export restrictions from Russia imposed from end-2020, which aligned with the start of the Australian marketing year, brought the Australian suppliers back in contention.

In the 2021/22 season, Australia is set to cater to both low and high quality wheat demand in Asia as the supply of high protein spring wheat fell on persistent dryness in North America and the weak supply of medium-to-lower quality wheat from the Black Sea, and Argentina is overpriced amid export restrictions.

Competition among Asian buyers

Australia's close proximity to Asian markets, trade relations with some of the southeast Asian countries, and inelastic noodle wheat demand in northeast Asia gives its producers a combination of freight and tax advantages relative to other major origins.

End-buyers in the region are all trying to secure supply from the most competitive origin, currently Australia, before export shipping slots tighten and prices rise further.

South Korea-based flour millers, for instance, covered their Australian milling wheat demand till mid-March shipment by early September, as opposed to end November for the same shipment in the previous year. This was partly due to fears of supply tightening and prices rising amid fierce competition from Chinese buyers, who were heard to have booked as much as 2 million mt of new crop Australian wheat.

While China's appetite for Australian wheat greatly aided the country's struggling export program in 2019/20, demand from other traditional buyers like Indonesia, which was lost during the drought years, rebounded from the start of the 2020/21 season.

As the export program for 2021/22 kicks off, Australian suppliers are confident there will be plenty of demand among not only buyers in Asia, but also the Middle East to hold a strong export pace throughout their marketing year.

"If it's not China, it's going to be someone else buying our wheat, so we don't really need to rely on any single importer," said a trader in Western Australia.

One-stop shop

Buyers in southeast Asia, perhaps the most price-sensitive region, have relied on Black Sea and Argentine wheat for feed usage or as filler wheat in the milling mix in the last couple of years until the end of 2020, when Australian wheat became the most competitive.

In recent years, these buyers have become highly efficient and flexible in switching between origins to minimize production cost.

Now, with Black Sea and Argentine wheat not aggressively priced, it opens up the door for Australia to cater to the low-to-medium protein wheat market in the region as well.

Australia is also expecting a higher proportion of low protein wheat, or Australian Standard White. This is because a record crop size naturally dilutes protein levels, and additionally, wet weather during the winter months prevented many growers from spraying nitrogen in the fields, which helps boost protein levels of the crop.

The country is also prepared to step in and fill part of the shortage in high protein wheat from a poor spring wheat crop in North America. Amid a global shortage in the high protein spectrum, China is heard to have booked some prime hard wheat from Australia's east coast while flour millers in South Korea was exploring the option too, Platts reported earlier.

Nonetheless, North American spring wheat cannot be fully substituted with Australian prime hard due to different properties and functionality in the end product being milled, sources said.